Investors often look to heuristics and mental shortcuts to guide their decisions. Unfortunately, there aren’t many good rules of thumb to help you decide how much to spend in retirement.
The 4% safe withdrawal rule is a good starting point, but not very useful. First, investors aren’t withdrawing just one piece of money labeled “retirement income.” We have RRSP and RRIF, LIRA and LIF, TFSA, unregistered savings and investments, each with different withdrawal rules and taxation. In addition to CPP and OAS benefits, pension income may also need to be considered.
Besides, life isn’t just linear. Whether it’s buying a new car, remodeling your home, gifts for your kids, or spending time on your retirement to-do list, one-time expenses often add up.
Also, the order of withdrawals is important. It’s how all these puzzle pieces fit together over the years to produce a tax-efficient retirement income that lasts a lifetime. In other words, a strategy that targets a specific number in savings and investment, say $1 million, and expects to pay exactly $40,000 annually (increasing with inflation each year) will not meet your retirement spending needs. It means that there may not be
Next, there is the income percentage rule for retirement income. Commonly quoted as 70% of final average salary. This rule assumes your retirement savings are gone, your kids have moved out, and your mortgage has been paid off. But what about single Canadians? A couple without children? Lifetime renter?
Retirees who had high savings rates throughout their careers may only spend 40-50% of their average final salary in retirement to maintain their standard of living. That’s because they may save 20% or more of their income, pay high average tax rates, and be debt-free. Assume they are no longer saving, paying off mortgages, or spending on their children, and will be able to benefit from income splits and lower overall tax rates in retirement.
On the other hand, low-income life renters may not have saved as much over their careers, but could easily spend 80% or more of their average final salary just to maintain their current standard of living. there is a possibility. The tax rate may not change much, so your expenses will be about the same, except you won’t be paying CPP/EI.
Finally, you should consider your human capital and how long you plan to earn income from your employment (full-time or part-time after retirement).
All of these nuances mean that it’s imperative to craft a retirement plan that considers your unique circumstances, rather than blindly following the rules of thumb.
Having worked with hundreds of retirees, I can tell you that the best predictor of future spending is how much you are spending today. In fact, most of my retired clients would like to maintain their current standard of living, even if they can’t raise it slightly to spend extra on travel and hobbies. An added bonus is the ability to leave unspoiled money for unplanned expense shocks, one-time expenses, and medical challenges (often TFSA, but mostly undeveloped home equity). in case.
Another useful piece of information I’ve found is that many retirees who have the ability to significantly improve their lifestyles are reluctant to do so. Call it scarcity thinking, or decades of thrift practices, but it’s nearly impossible to turn the spending spigot on full blast after a lifetime of savings.
This is useful for people who are currently saving because they are thinking of living less today in order to live better tomorrow, but are unlikely to be willing to actually do so. Allow yourself some changes in your lifestyle now and throughout your career to enjoy your journey.
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why these investors I want to lower my portfolio?
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Have a nice weekend everyone!