e are frequently presented with this dilemma from our clients. The answer to this question is complex and distinct for everyone. In this short article we will try to give you a slight nudge and offer you a direction to get started. The initial process is quite rudimentary. However, you may have unique circumstances where the services of a professional planner would be necessary to come up with a realistic and workable plan.
Prior to estimating your realistic target retirement date, you must set yourself some life goals. This is where you can dream a little. Determine how many years you would like to work before you would consider retirement. Then forecast the number of years that you will be in retirement mode. If your goal is to retire at the age of 60, you may have 20 to 30 years to live on your savings and pensions. This is based on your average life expectancy, and adding a few years to err on the side of caution.
You then want to select a retirement income goal. As a guide you can look at the income you would need if you were to retire today. Consider that you may have paid off your mortgage and your children would be independent. Dream about your retirement lifestyle and decide how much income you would need if you were retired tomorrow. Next you must project your income need into the future. The average inflation rate for the past forty years has been about 3.5%. A net income of $35,000 today will be worth $70,000 to $80,000 in twenty to twenty-five years.
If you are fortunate to have a private employer pension plan, ask your employer to provide you a pension projection at your assumed retirement age. Then integrate this projection along with assumed government pensions into your calculations. The difference between pensions and your income goal is the amount that you must fund from savings.
Finally, you should decide how much money you are able to save before your retirement years. Assume a rate of return, we usually recommend 8%, and forecast the future value of your private savings. It is this fund that you must draw upon to make up your retirement income shortfall. Once you know these facts, and anything else that may be unique to your situation, you can then determine whether you have to save more money, defer your retirement date, or maybe retire a few years earlier.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, R.F.P. with your topics of interest at 798-2421 or e-mail at rick@invested-interest.ca