Ultimately, you are going to have to figure out how much money you are spending per year now, honestly answer some self-assessment questions about lifestyle, make some assumptions about the future, and use an online retirement calculator that spits out a personalized number. So what factors do you need to consider?
1. Retirement expenses: What is your day-to-day life in retirement going to look like? For a more sedate lifestyle, you may need to spend as little as 40% of your current yearly expenses, since you may have paid off your home and debts, and will spend less on commuting, buying lunch, updating your wardrobe, etc. However, if you are planning a more active retirement with lots of travel, 70% may be a more realistic number. Consider how many dependents you need to account for; you may have school-age children who will (hopefully) ‘come off the payroll’ as they leave home and generate their own income.
2. Retirement age: Decide at what age you plan to retire. The earlier you leave work, the more money you will need to save to support a potentially longer retirement period. According to a 2017 CMAJ study, the average age at retirement for Canadian physicians was 65.1 years old (with a standard deviation of 7.8 years)1.
3. Estimate life expectancy: While it’s impossible to predict precisely how long you will live, estimating your life expectancy can help plan for the number of years you’ll need your savings to last. Life expectancy is influenced by genetics, lifestyle choices, and healthcare access. Especially if you are in good health and have multiple relatives that lived a long time, picking a number like 95 or 100 years old gives a more conservative estimate.
4. Source of income in retirement: Consider other sources of income you may have coming in such as registered investment returns (like RRSPs and TFSAs), non-registered investments, rental properties, and side hustle businesses. These can supplement your retirement savings and reduce the amount you need to save upfront. Downsizing your home can also release equity. Seek professional advice on the most tax-efficient withdrawal strategies to minimize tax burden. A commonly assumed rate of return for your investments is between 3% and 6% (I use 4% to be on the safer side).
5. How much you want to leave behind: Decide if you wish to leave behind a legacy for family or a worthy charity (and how much).
6. Adjust for unforeseen circumstances: It is essential to build flexibility into your retirement plan to account for unexpected expenses or changes in your health. Having an emergency fund and appropriate insurance coverage can help mitigate financial risks. Reducing the risk tolerance of your investments (more fixed income, bonds, GICs; less stocks) can help you sleep at night. Healthcare expenses tend to increase with age, so factor them into your retirement budget.
7. Plan for inflation: When I was a kid, the price of a Big Mac from McDonald’s was 99 cents; not so much anymore. The cost of things goes up over time. Inflation erodes the purchasing power of your money over time, meaning that the same amount of money will buy less in the future. A comprehensive retirement calculator will ask for an inflation rate. A reasonable assumption is 2.13%, which is the Statistics Canada historical average inflation rate for the 25-year period from 1994 to 2022. If you want to build in a bit more of a safety net, you could use 2.5-3%.
Armed with these values, you can now plug them into one of the many online retirement calculators to generate your target amount of money you need to retire. While there is no magic number that guarantees a worry-free retirement, careful planning can put you on the path to financial security in your golden years. It’s essential to review your retirement plan periodically (something like every 3 years), or after any major life change (like having triplets) and be prepared to make changes.
Author: Dr. Krishna Sharma, Director of Physician Engagement, Specialty Medical Partners
Reference:
1. Hedden L, Lavergne MR, McGrail KM, et al. Patterns of physician retirement and pre-retirement activity: a population-based cohort study. CMAJ Dec 11, 2017; 189(49): E1517-E1523.
