So … you’re thinking about retiring. Someday, anyway. To prepare, you’ve been saving to your Registered Retirement Savings Plan (RRSP) and your Tax-Free Savings Account (TFSA). Maybe you’ve got a pension at work, and have been calculating what to expect from the government.

This is all to provide you with an income when you stop working. But what about planning for the other end of the equation: What should you expect to spend if you want to at least maintain, if not improve your standard of living in retirement?

Since almost everyone wants to retire someday, there’s a bounty of familiar adages, rules of thumb and popular perceptions on what it’s going to take. One of the most common ones I hear is this: I probably won’t need to spend as much once I retire.

Lower income taxes, shorter commutes, homemade meals, etc. At one point or another, you’ve probably been told there are lots of ways to live well for less in retirement. There may be. But have you actually run the numbers based on your own expectations? If you’re simply assuming a bounty of savings will fall into place, just because, I’m afraid you’ve got more planning to do. Let’s break the process into three digestible bites.

 

1. Who Are You, Really?

As I mentioned, there are plenty of ways many people can lower their cost of living in retirement. But retirement isn’t a magic wand. It won’t change who you are, nor will one size fit all.

So, first things first. Take some time to think through which potential cost savings actually align with your personal preferences. Out of all the costs you could reduce …

  1. Which are the costs you’d be happy to cut? Income taxes, for example. Who would miss those?
  2. Which are the cost cuts that wouldn’t bother you much, if at all? Little things can add up, especially if you won’t miss them anyway.
  3. Which are the cuts you could make, but when push comes to shove, you’d rather not? You may want to list and prioritize these, so you can decide where to draw the line.
  4. Which potential cost savings aren’t even realistic for you? Be honest with yourself about what you can and cannot do without.

In other words, be sure to make your spending planning about you … not some fantasy “you” who you wish you could be. Potential cost savings in retirement may look great on paper. But think through how you’ll really feel about them. If you’re a couple, that goes for both of you! I’ve seen too many families become overly optimistic about how much of their spending they’ll be willing to jettison in retirement. That’s no good if you find yourself either not up to the challenge or awfully unhappy with the results.

 

2. What Are Your Numbers?

Once you’ve got a sense of the actual lifestyle you’d like to achieve, it’s time to get a solid grip on the numbers involved. What expenses are really going to change, and which will probably remain about the same? Are you supporting your kids, your parents, or both? Have you paid off your mortgage? What other expenses might show up, or go away? Again, this involves a healthy dose of realism.

For example, what if one of your grand plans is to downsize from your gigantic, family-sized home into a place more fitting for your retirement lifestyle? If you’re hoping this will also free up a big chunk of change to fund your new lifestyle, be sure to carefully quantify the costs involved. There can be costs to prepare your property for sale, real estate commissions, legal fees, and moving expenses. You’ll also need to buy or lease your next residence, where you’ll probably have a new wish list of upgrades or renovations you’d like to make.

You may still want to downsize even if it’s not going to be the screaming deal you were hoping for, but it’s a good idea to proceed with your financial eyes wide open.

Tax planning is also important. While your taxable income may drop when you first retire, it can creep back up over time, as pension payments, retirement benefits, and required minimum Registered Retirement Income Fund (RIF) distributions kick in. Without going into painful detail, sensible tax planning may warrant intentionally incurring extra taxable income in early retirement, with an eye toward paying less income tax overall.

In other words: That huge tax cut you were anticipating? It may end up being less than you expected.

 

3. Has Anything Changed?

This brings me to my final point. Retirement planning isn’t a single event; it’s an ongoing process. If all goes well, you may be retired for decades. The standard of living you’re planning for in early retirement is unlikely to be the same one you’ll prepare for later on.

Initially, you may want to travel, volunteer, improve your golf swing, and spend more time with the grandkids. You may be called on to take care of your parents. You may want or need to keep working off and on.

Over time, you may become less active. Medical expenses might increase. As I touched on earlier, you might desire or be required to take taxable income from your tax-sheltered accounts. You may have legacy goals to formalize. If you survive your spouse, their Old Age Security (OAS) income goes away, and your Canada Pension Plan (CPP) survivor benefits may not be what you were expecting. (I’ll be talking more about that last one in an upcoming post.)

For all these reasons and more – the more realistic you are about your true costs in retirement, the more likely you’ll be able to maintain your lifestyle. And, the more personalized numbers you factor into the equation, the more realistic you can be. For that, we employ something known as Monte Carlo analysis to help people plan. I’ve covered this subject before. Plus, in my next post, I’ll take a closer look at how Monte Carlo works.

So, stick around. Better yet – subscribe to my YouTube channel or follow me on LinkedIn. I’ll offer more ideas on how to properly prep for your ideal retirement.