Now that January has arrived, many Canadians are meeting with their advisors to make RRSP contributions. The problem is that many investors have not determined what their retirement income needs are, and therefore do not know what their saving requirements are. A rising trend is for Canadians to work well into retirement, either for personal fulfillment or for economic reasons. Regardless of what your goals are, a retirement plan will provide a framework to guide you.

To begin, one needs to determine the amount of income required during retirement. The accepted industry practice is to assume 60-80% of pre-retirement income. A simple way to estimate what your requirements will be, at a minimum is to track your current expenses. Look at what your essential expenses are. Remember, certain expenses will be eliminated: your mortgage will be paid off, one car is usually enough to get by on, you’re done saving for retirement and, hopefully the kids are out of the house. Once you have determined what your base living expenses are, now look at your variable expenses, the wants and dreams. Are you planning on travelling the world, working on your bucket list or spending winters in Arizona golfing? Initially your expenses will be higher during active retirement, but as time progresses these expenses will decrease. Consider that there will be some expenses that increase over time such as drug and medical expenses.

Now that you have determined your income requirements, factor in government pensions, work pension and RRSP savings. If you have a defined benefit plan at work, retirement planning will be less stressful as there is a guaranteed income for life once the employee retires. Prudent planning is required for all of us, specifically those of us without a Defined Benefit plan. Retirement income will come from a number of different sources like, Old Age Security (OAS), Canada Pension Plan (CPP), savings in RRSPs, Tax-Free Savings Accounts (TFSA) and non-registered accounts. Each source will likely not support retirement on its own, but aggregating the sources will.

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