Retirement: Three magic numbers

by David Aston, MoneySense Magazine
Monday, January 18, 2010provided by

Nothing is more frustrating than trying to figure out how much to save for retirement. You know the amount you’ll need to save depends on what kind of retirement lifestyle you want. But how can you decide that without having some idea of how much it will cost? Is dreaming of endless vacations and a 44-ft yacht realistic? Or should you be aiming for walks in the park and the occasional meal out? Many people have no idea what they’re aiming for—and after a lot of sweating and calculating, they end up right back where they started.

We can help. While many retirement plans use complex formulas to calculate what you’ll need, we find that many Canadians just want a ballpark to aim for. If your retirement is still quite a ways off, it’s often good enough just to know what you’ll need to save to achieve each of three levels of potential retirement: a bare-bones basic retirement; a middle-class retirement with two cars, some restaurant meals and vacations every year; and finally, a deluxe retirement complete with a vacation home or regular jaunts around the world. Interested to know what kind of dent each of these three scenarios will make on your nest egg? Read on and we’ll price them out for you.

No-frills retirement

This is the worst-case scenario, but it’s good to know what you’ll need if you just want to scrape by, if only because it gives you a starting point to build from. For this scenario, the costing has already been done for us in a recent study, called Basic Living Expenses for the Canadian Elderly, by three University of Waterloo researchers. The study describes a no-frills retirement as one in which a couple rents (rather than owns), has no vehicles (so they take public transit), and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol. This is not the stuff of most people’s retirement dreams, but the study does budget for three nutritious home-prepared meals a day, a one-bedroom apartment plus utilities, along with typical health-care costs and other essentials like clothing and personal-care products.

How much do you need?

The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. Here’s the good news: to achieve this bare-bones scenario you don’t have to save a penny. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors pretty much covers all your basic needs, at least outside the highest-rent cities. If you and your spouse are at least 65, those government programs would provide you with a combined $22,750 a year if you have no other income. “We’ve kind of made sure the Canadian elderly don’t live in poverty but we’ve given them, like, 50 cents more than the poverty line,” says study co-author Robert Brown.

Canadians who have worked most of their lives can also usually count on substantial Canada Pension Plan payouts in retirement. A couple which receives the average CPP payout, plus maximum OAS, and maybe a little bit of GIS, can expect to receive almost $30,000 a year. So you can relax about the worst-case scenario: Even if you don’t save at all, you’re not going to have to live off cat food.

Middle-class retirement

Most Canadians, of course, hope to do better than bare-bones. Bill VanGorder, 66, the Nova Scotia chair of CARP, a group representing older Canadians, says he wants the same level of comfort he enjoyed while he was working—maybe even a bit better. He finds that increasingly seniors want to travel, pursue sometimes pricey hobbies like golf, eat out at restaurants, and maintain cottages or second homes in warm places. For the most part, this lifestyle is about having experiences and being active, rather than having more possessions. In fact, some seniors are downsizing to smaller homes to help finance their active lifestyle, he says. Active senior couples with different interests are more likely to want to keep two cars to allow both spouses to stay mobile. And VanGorder himself aspires to do more traveling, including an Alaska cruise, seeing the British Isles, visiting his sister in Australia, and seeing the rest of Canada. He’s also interested in woodworking and was surprised to find the hobby is much more expensive than he anticipated.

According to Statistics Canada, median spending by a couple over 65 is about $40,000 a year, and average spending is about $51,000. But VanGorder says to enjoy the type of retirement he wants, you might spend as much as $60,000 a year.

How much do you need?

Assuming you receive about $30,000 a year from CPP and OAS and have no employer pension, you’ll need a nest egg that can support an additional $10,000 to $30,000 a year in extra spending, plus inflation adjustments. Financial planning research suggests that you need retirement savings that amount to 25 times your annual retirement spend (not including CPP and OAS) if you want to keep spending that much for the rest of your life. So for a typical middle-class retirement, you need a nest egg of $250,000 if you just want to spend the median amount, but if you want a higher-end retirement of the kind VanGorder describes, you’ll need to save up $750,000.

Retirement deluxe

Once you get beyond the typical middle-class retirement, costs tend to skyrocket. Norbert Schlenker, a fee-only financial planner with Libra Investment Management on Salt Spring Island, B.C., says that at this level the fundamentals don’t change—people still typically have a house, two cars, restaurant meals and vacations—it’s just that the house is bigger, the cars are fancier, the restaurants are more exclusive, and the vacations more exotic. Here you are more likely to find the trophy kitchen, memberships in a golf or boating club, professionally designed and maintained gardens, and, says Schlenker, perhaps “the boat their brother-in-law saw.” Such retirees are more likely to own a vacation home, and there is more money available for spoiling the kids and grandkids. There’s no hard and fast cutoff for the deluxe life, but if you’re spending $100,000 or more each year per couple, you’re well into the realm of truly disposable income.

How much do you need?

If you don’t have an employer pension, you’ll need to be a millionaire to afford it. Assuming you get $30,000 a year from CPP and OAS, you’ll need retirement savings that can provide you with an additional $70,000 a year, which means a $1.75-million nest egg. If that sounds outrageously high, welcome to the club. Schlenker says that when he does similar calculations for his clients, invariably they’re “just shocked.”

There’s an interesting exception here though. If you and your spouse both had long careers as public employees, your public sector indexed pensions might be the ticket to the high life. For instance if you and your spouse earned an annual salary of $63,000 each working in the public sector, and you both retired at age 65 after working for 35 years, you can expect to live like royalty when you retire. Your combined pensions plus OAS will typically pay about $100,000 a year plus inflation adjustments—the equivalent to saving up a $1.75 million nest egg. That’s why many public sector workers discover that they actually have a much higher standard of living in retirement than they did when they were working.

Keep the dream alive

In the end you have to match wants to means. If you’re no millionaire, there’s no need to give up on your retirement dreams, says Schlenker. Instead try to find a lower-cost version of what you’re looking for that fits your budget. For example, if you planned on owning a luxury beach front condo in a swanky part of Florida, but you’re worried you won’t be able to afford it, you could try renting a condo away from the beach in a less sought-after locale. Or you could do what VanGorder is doing. After retiring he decided to go back to work for three days a week as business development manager for HiringSmart, a systems software and services provider. The extra cash is helping him live the good life, and he loves the work too. “I’m meeting a financial need in a way that, fortunately, turns out to be very enjoyable for me.”

TAXES

Year-end tax tips

The familiar and the not-so-familiar

Last Updated: Friday, December 18, 2009 | 5:03 PM ET Comments0Recommend2

CBC News

(iStock)

With the end of the calendar year drawing near, people's thoughts turn to the festive season — food, gifts, a brief respite from work. Accountants also think of the things that must be done by Dec. 31 to claim extra tax breaks.

While those year-end lists contain the familiar — reminders to make that charitable contribution or perhaps to sell that losing stock — they sometimes contain some unexpected nuggets of advice you might not have considered. We cherry-picked some of the best year-end tips that may just put a few extra dollars in your pocket:

Consider making withdrawals from your Tax-Free Savings Account by Dec. 31.

"If you have set up a TFSA and you're planning a withdrawal, consider doing so before the end of 2009 rather than early 2010," KPMG advises. Why is that? The firm points out that amounts withdrawn aren't added to your TFSA contribution room until the start of the year after the withdrawal. So if you have $5,000 in your TFSA and want to take out $4,000, do it in December. That way, you could re-contribute that $4,000 along with your new 2010 contribution limit of $5,000 as early as January 2010. If, on the other hand, you withdraw that $4,000 in January, you won't be able to re-contribute it until 2011.

Be aware that the Home Renovation Tax Credit is about to expire.

Payments due by Dec. 31
Charitable contributions
Political donations
Union and professional dues
Investment counsel fees
Safety deposit box charges
Payments for children's fitness tax credit
Payments for transit pass tax credit
Medical expenses
Alimony and child-care expenses

The HRTC is a 15 per cent tax credit that was unveiled in the January 2009 federal budget. It applies to any amount spent over $1,000 up to a maximum of $10,000. Materials must be bought by Jan. 31, 2010, but labour expenses will qualify only if the work is completed by that date.

Jamie Golombek, the manager of tax and estate planning at CIBC Private Wealth Management, points out that "in the nine months or so since the credit was first introduced, the Canada Revenue Agency has released numerous technical interpretations over exactly which types of renovation expenses qualify." He says some of the recent additions to the list include the sanding and refinishing of hardwood floors, permanently wired or installed home security systems (but not the monthly monitoring), the cost of installing a small outdoor sauna building on your qualifying property, driveways, permanent air conditioners and heat pumps, and solar panels (even if you received other government tax credits or grants).

Golombek also advises that if you're thinking of buying your first home in early 2010 with RRSP funds withdrawn through the Home Buyers' Plan, "consider delaying your HPB withdrawal until 2010 to allow you one additional year before repayments must begin."

Taxpayers who collected employment insurance this year should review their tax obligations.

H&R Block says the more than 800,000 Canadians who collected EI this year should gather up their receipts, look at how much tax was withheld, and prepare accordingly so they won't be hit with a nasty surprise in April. "In most cases, EI only withholds 10 per cent back for tax purposes, which is less than the lowest tax bracket," the firm says. "If the taxpayer collecting EI earned any other income in 2009, they could be facing a tax bill when they prepare their return next year."

Delay the purchase of any GICs until January.

Ernst & Young advises that you "push your purchases of long-term fixed investments until January 2010 to defer the related tax by one year."

Time those dividend payments.

KPMG notes that the tax rates on eligible dividends go up Jan. 1 in every province except New Brunswick. "If you can arrange to receive eligible dividends in 2009 rather than 2010, you could save up to three per cent in tax depending on which province you live in," KPMG says.

Consider donating stock to charity.

CIBC's Golombek notes that donating stock to charity can be doubly rewarding. "Gifting publicly traded securities with accrued capital gains … not only entitles you to a tax receipt for the fair market value of the security being donated but eliminates any capital gains tax as well," he says.

Wind up your RRSP by Dec. 31 if you turn 71 this year.

This is the last year to have an RRSP for those whose 71st birthday occurred in 2009. Those people must convert it into either a Registered Retirement Income Fund (RRIF) or registered annuity by year's end. They must also make their last RRSP contribution before they wind it up (not the March 1, 2010, deadline that others face).

However, "you can continue making deductible contributions to a spousal RRSP until the end of the year in which your spouse turns 71, as long as you have earned income in the previous year or unused RRSP contribution room carried forward from prior years," KPMG says.

Contribute to a Registered Education Savings Plan.

Contributions to an RESP aren't tax deductible. But if you make that contribution by Dec. 31, you'll get the Canadian Education Savings Grant (20 per cent of the first $2,500 of RESP contributions — or up to $500) into the RESP in 2010.

For children who turn 15 in 2009 and have never participated as a beneficiary in an RESP, the deadline is doubly important because that contribution will create CESG eligibility for 2010 and 2011. "If you miss the deadline, the child or grandchild will not be eligible for any grants in the future," CIBC's Golombek writes.

Consider selling your loser stocks.

If some of your investments took a dive in the last market crash and aren't likely to recover, you may want to sell them, claim a loss and apply it against taxable capital gains. "The more capital gains tax you paid in the last three years, the more you should consider the tax advantages of tax-loss selling," KPMG advises.

Because trades take three business days to settle, Ernst & Young says trades must take place by Dec. 24 for Canadian exchanges and Dec. 28 for U.S. exchanges to qualify as 2009 trades for tax purposes.

Split income by locking in family loans.

The Canada Revenue Agency's current prescribed interest rate for loans to a spouse is just one per cent. "So if the loan is made before Dec. 31 … any investment returns above the one per cent rate can be taxed in the hands of the lower-income spouse," CIBC's Golombek says. Furthermore, "even though the prescribed rate varies quarterly, you need only use the rate in effect at the time the loan was originally extended," he notes.

Consider delaying or speeding up your out-of-province move.

"Check the provincial tax rates before deciding the moving day," H&R Block advises. The provincial tax rate you pay for all of 2009 depends on where you are living on Dec. 31. "So if there is a substantial difference in the tax rates, you may want to either speed up or defer the move." Alberta's provincial tax rate, for instance, is 10 per cent at all income levels. Quebec's rate starts at 16 per cent and rises to 24 per cent on income above $76,770.

Contribute to Registered Disability Savings Plans.

These relatively new vehicles allow people to put a lifetime limit of up to $200,000 into a tax-sheltered RDSP. Contributions are not tax-deductible. But to qualify for 2009 government matching grants and bonds worth up to $4,500, the contribution must be made by Dec. 31.

If you're thinking of getting married soon, it could be worth it to tie the knot this month.

H&R Block points out that you file your taxes based on your marital status on Dec. 31. "So if you want to claim your new spouse as a dependent on your 2009 return, you can claim them for the full year even if you are married on New Year's Eve," the tax preparation firm says. "Just make sure you say your vows before midnight."