Retirement planning can be a fun, cathartic experience for many people, but that doesn’t mean it’s an easy task.
Proper retirement planning takes more than lazily selecting a magic budget number and sticking with it. Below, we’ll look closely at what goes into a well-constructed retirement plan and three essential things to remember when establishing your budget.
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Remember Taxes and Inflation
Even if you know exactly how much money you need to live comfortably now, that number will change during retirement with taxes and inflation.
The average cost of essential goods in Canada increases roughly 3% yearly due to inflation; healthcare items like prescription medication and doctor visits can increase by as much as 5%. So, remember while you’re retirement planning that the money you have now won’t be as valuable by the time you stop working.
Not only will your money not be as valuable after you stop working, but you won’t have as much of it. Retired life comes with a long list of taxes, and while carefully planning your tax deductions will help you save money, you’ll lose a healthy chunk of your retirement budget each year during tax season.
As a rule of thumb while retirement planning, it’s better to overbudget than underbudget. You won’t know how much inflation will dent your budget, so it’s best to be cautious and prepare extra funds rather than come up short decades after you’ve finished working.
Be Skeptical and Realistic
Budgeting for what you “can” live on rather than what you need to live without compromise is a mistake many people make when retirement planning. Of course, you can go through retirement without eating out or making expensive purchases for luxury vehicles or aesthetic home renovations. That will lower the number you need to hit to retire, but you shouldn’t plan for a life with no luxury just to retire quicker.
When setting a retirement savings goal, try to remain realistic about what outside expenses you’ll encounter. For example, even if you’re not a car enthusiast, your current vehicle likely won’t last through decades of retirement, and you’ll need to account for repair costs or upgrades in your retirement plan. Remember to think about every possible expense you’ll face, whether frivolous or necessary, and have a financial answer for all of them.
You can’t underestimate the cost of living a comfortable life when retirement planning, nor can you overestimate the income your retirement benefits and assets will provide. For example, Canadian Social Security programs like the CPP can give retirees up to $14,000 annually, and many assume they’ll receive that. However, that’s a best-case scenario figure, and most people get less than $1,500 yearly from federal retirement programs.
Another wishful thinking mistake retirees make is planning their budgets around selling their homes. And while it’s true that real estate value is booming and will likely climb higher, the profits you will get from trading your property for retirement savings will likely be offset by the cost of your next house.
So, when budget planning, remember to set aside enough funds for more than the bare living essentials and stay skeptical about the value of your outside revenue. Overcompensating for both will ensure you have enough money to live comfortably through retirement.
Think About What You Want from Retirement
“Magic retirement numbers” are traps many novice retirement planners fall for when setting their budgets. It’s common to hear people talk about how they would quit their job and live happy, fulfilling lives if they had one benchmark amount of money. But it’s vital to remember when retirement planning that there isn’t a universal retirement budget that works for everyone.
Your retirement goal will fluctuate by hundreds of thousands of dollars depending on what you want after you’ve finished working. For example, if you own a home, don’t have family or friends you need to care for, and have no interest in travelling, you probably don’t need more in your savings to retire than the national average of $787,000.
On the other hand, if you’re planning on seeing the world and buying and constantly renovating property, you’ll likely need a couple of million dollars to live comfortably. So, when working toward a retirement goal and establishing annual budgets, think about how you’ll spend your time and money.
What Ideal Retirement Planning Looks Like
Now that you know what not to do when retirement planning, we can implement those lessons and establish an expert budget with these three simple tips.
Careful Budgeting with Extra Funds
Though many people want to race into retired life, you must be careful not to get hasty and leave your job before you’re confident you have enough funds. Between inflation, taxes, and extra expenses, it’s better to be safe and give yourself extra cash than skate through retirement on a shoestring budget.
The best way to ensure you have extra cash is to follow the “10 percent rule” and save at least 10% of your overall income annually. Of course, setting aside more than 10% will get you to your goal quicker, but following this simple method helps retirees leave the workforce with enough capital and on a decent timeline.
Multiple Revenue Sources
As we mentioned, you should remain skeptical about your Social Security benefits and property value. However, that doesn’t mean you shouldn’t weave multiple revenue streams into your retirement plan.
Selling property is a great way to boost your overall retirement savings, and CPP, careful investments, and renting property are strong methods to add cash to your personal savings monthly and annually.
Diversifying your retirement portfolio with as many cash boosts as possible will also give you peace of mind knowing that the money you’ve saved isn’t your only means of living.
A Watchful Eye
The amount of money going into your retirement savings changes constantly. The value of your investments and property will rise and fall, while your net income will evolve with annual pay raises, which changes how much you put into savings if you follow the 10 percent rule.
With all those changes, reviewing your savings yearly is crucial to ensure you’re on track for retirement. You can adjust your revenue streams and the amount you save when you check on your retirement fund, but if you set it and forget it, you’ll have no idea how far away you are.
Learn about the changes to group benefits costs and what they cover when employees choose to delay retirement.
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