You have certainly heard that in order to enjoy a comfortable retirement, you will need 70% of your average gross income over the last three of your working years. Does this rule of thumb still apply in 2019?

The rule of the thumb

Calculation of defined benefit pension plan annuities (government employees), which are for all useful purposes life annuities: the annuity is calculated by averaging  the gross earnings of the last 3 or 5 working years multiplied by the number years of contributions to the plan, times 2%, with a maximum of 35 years. 35 times 2% = 70% is the maximum of the pension.

The 70% tends to justify the method of calculating the needed income for everyone come retirement time. But do you think someone who earns $ 20,000 a year can retire on $ 12,000 ($14 000 minus taxes)?

A family of 4 will see it’s cost of living decrease significantly come retirement time: the children will have left the nest, the house will probably be mortgage free, earning an income expenses will be eliminated, less clothes to buy … But those six months in Florida …

On the other hand, a single person will not see his cost of living decrease by the same amount, but will probably have saved much more for his retirement.

If the 70% rule of thumb is dropped, what rule should we use?

A differential budget!

Establish a budget using two columns.

The left column represents the current year’s expenses. The right column, those of your first year of retirement. Some lines will be higher and some others, lower.

Once this exercise is completed as honestly as possible, schedule a meeting with your financial security advisor. With him, you will be able to discuss subjects such as: at age 75, I will not have the same needs or the same ability to travel, what about inflation in all of this, selling of the house, my life expectancy …

Analysing of your retirement income

During this meeting, you will tackle the thorny subject: “how much will I need to save to enjoy a comfortable retirement? ”

In conclusion: “One never starts too early to save for retirement! “

Among the devastations caused by Covid-19 beyond the pandemic aspect, no one can ignore those inflicted on your retirement planning. If you had to use your RRSPs to meet your budget requirements, you lost your job and stopped contributing; the value of your RRSP has decreased significantly? How are you going to get back on your feet when it comes to your retirement strategy?

Retirement strategy

Remember that a retirement strategy is a backdrop, a guideline, not a plan set in stone. Generally, we can easily adjust this strategy together. If you didn’t have a strategy, it might be worthwhile to establish one.

Life expectancy in good health

Here is a new concept one should introduce into his retirement planning. How many healthy years do you hope to have from the date you retire? Since 1994, Statistics Canada has published a comparative study every 4 years between life expectancy and health-adjusted life expectancy. Here is the 2015 data released in 2018. For a man retiring at 65: his life expectancy is 19.2 years and his healthy life expectancy is 14.4 years. For a woman it is 22 years and 15.3 years. This concept could influence your retirement strategy.

Adjusting your retirement strategy

The further away you are from retirement, the easier it is to adjust your strategy. Here are some ideas to consider when revisiting your strategy.

• Your retirement philosophy. Has Covid-19 made you envision your retirement differently?
• Your retirement income needs.
• Your retirement age.
• Your ability to increase your savings.
• The decrease (or the fear of it) of your retirement capital following the Covid-19.
• Your life expectancy in good health.
• ……

It’s important to review our strategy periodically.  I encourage everyone to take an appointment with me to review and adjust if necessary your retirement & savings plan.