I swear I’ve developed *OCD! Since I turned 40, I’m obsessed with my retirement plans. Maybe it’s because my parents never planned for retirement or it could even be that I’m already envious of the snow birds and hope to be able to do the same when I retire. It might also be the fact that I need to start practicing what I preach (true story). It could also be the fear of the unknown, the fact that I left my teaching job and commuted my pension to a plan of my design, that I’ll manage myself, with the help of my mentor and colleague. Whatever the reason, I’ve been investing plenty of time and thought in preparation for something that will probably only happen in 20 years. So unless we win the lottery or a genie appears to grant us three wishes, I’ve outlined our retirement plan for 2037. I know that things change rapidly, but I’m 99% confident that we can handle anything that life throws our way because we started young and because we have a plan…do you? *(no offense to those living with this actual OCD, I truly feel for you!)
RED ALERT! I would never recommend that anyone create a retirement plan without the help and counsel of a licensed Financial Security Advisor. If you believe you can manage just fine, please spend a few dollars and talk to a fee-for-service advisor. You pay these people directly, just like you would an accountant or lawyer, so they don’t have any hidden agendas. If you don’t want the hassles of managing everything yourself, find a good independent Broker that has contracts with most companies. Golden rule: Be skeptical of everyone, even me! Ask a lot of questions, especially about qualifications, compensation/bonuses and absolutely no DSC fees. (don’t get locked into an investment for seven years. see lesson #6 Part2) If you are unsure or have a bad feeling… run! Find someone else who is a better fit for you. Please, for the love of GOD, Stay away from Agent-00-Who? (see lesson #8).
Some fun facts (see lesson #2 for more info)
*The average Canadian will receive approximately $648 a month or $7776 annually from CPP @ 65 years old or $415 a month or $5000 annually from CPP @ 60 years old.
**The average Canadian will receive $583 monthly or $7000 annually from OAS @ 65 years old unless they do not qualify.
So basically, the average couple should have a combined CPP income of $10 000 starting at age 60 and an additional $14 000 a year at 65. That’s a total of $24 000 a year. That begs the question: Will that be enough to survive?
Here are the big expenses you need to plan for. I like to divide things into two categories:
The needs: (you cannot hide from these recurring expenses)
Housing Transportation Food Health Care
The wants: (the wish list)
Fun/Leisure Surprises Monthly expenses (ike the internet, cell phone & cable)
*Every situation is different, but most of the needs you’ll know before you retire. Some people cook healthy meals, others cook processed food, while some eat out all the time. Either way, your retirement plan must include a list of your monthly expenses, debt, obligations and lifestyle choices.
The first question you’re asking is: How much should I be contributing every month to fund my future retirement? I’m glad you asked.
No matter what income category you find yourself, this is the minimum you should be contributing to your retirement fund. Now if you started late, that’s ok! Better late than never!
The sooner you start, the quicker it becomes part of your monthly budget. A 25-year-old could get away with investing only 8%-10% of their annual salary, but if you start in your 40’s, be prepared to put 25% away for retirement. (Ouch!) Here’s a little chart (I saw this somewhere so I can’t take the credit). By following these slow and steady increases over the years, you should be able to remain on target.
Chart above shows the recommended percentage of annual income for retirement
Chart below used to calculate the actual retirement amount that someone should have saved according to their age and household income.*4% rule basically, you can withdraw 4% per year out of your retirement savings, without ever running out of money.
** The actual percentage you’ll have of your present household income (less CPP & OAS)
IE: if you have a household income of $75000 a year, by the age of 40 you should have $165000 in your retirement account to stay the course. (Calculations: 75 000 x 2.2 = 165 000) If you are below that threshold, you should increase your monthly contributions to make up the difference.
Even if you are in the low-income bracket, your responsibilities are the same. Everyone must live within their means, but everyone must also plan for retirement.
Let’s recap, in today’s lesson I learned:
- Retirement planning starts as soon as you start earning income.
- The older you are, the more you have to contribute annually to hit the same goal.
- There is no substitute for professional advice!
- If you make a plan, stick to it! Retirement comes sooner than you think!
*over the next few weeks, I’ll post a few examples on how to maximize retirement contributions, without dishing out more after tax dollars. If you’re really good and post a few comments below, I might even be swayed to post our actual retirement plan and how we’ve been doing so far. Stay tuned!
See although I think I have a good plan now, I know that It will have to tweak it along the way, but we are definitely on track for our retirement. A good plan can be tailored to every person’s needs and wants and for every income and risk tolerance. We are considered low to medium risk investors. It is good to have a cellphone, and it’s great to be able to pick up coffee every day on your way to work. If you are putting those things ahead of your retirement, you are doing yourself a disservice. Even those of you who think you have great Pension plans thru work need a wake-up call. My plan works because I was able to withdraw my pension and invest it myself. Had I stayed with the Teachers’ pension, I would have had a stable income for life, taxed at a much higher tax bracket. Our actual net monthly income would be less than what I planned for. I’m also in complete control of my money and should something happen to us before we spend every last penny, the rest will be handed down to our loved ones, and the money won’t just get reabsorbed into a pension plan. See just a few variables can change the outcome. Every situation is different, but EVERYONE needs a plan!
I’ll learn ya!
Broke-A$$-teacher (I am Legend!)