If you’re starting to look into the realm of retirement planning, you might’ve already heard about the “80% rule”, which indicates that you should aim to replace 80% of your pre-retirement income.

However, market shifts of 2008 challenged this more traditional perspective, leading to a new approach that may be more suitable for your needs. 

If you’re someone who doesn’t want a lavish lifestyle when you retire, you’re not alone. Nowadays, there are many individuals who’re seeking a simpler, less costly retirement lifestyle. That’s why retirement planning has begun to prioritize setting up a practical retirement budget and developing an investment and savings plan tailored to your specific needs.

In this blog, we’ll help you understand what you need to consider when you’re thinking about costs and income when you retire.

Important Considerations for Expenses in Retirement

Change Your Mindset: Income vs. Expenses

Many people worry about how their income will decrease in retirement. However, let’s consider a change in mindset! Rather than worrying about mirroring your pre-retirement income, your focus should be on anticipating future expenses. 

What will it cost to live comfortably during retirement? By understanding what retirement will likely cost, you're better equipped to plan your financial needs. 

This approach to retirement allows you to identify expenditures that could decrease or disappear during your golden years. And if you know that some of your living costs could decrease, then you may feel less stressed about your retirement income.

How to Analyze Your Current and Future Costs Consideration: Mortgage-Free Living

So how do you start to figure these numbers out?

Your journey towards retirement planning should begin by listing your current living expenses. This should include your fundamental monthly household and living costs, such as:

• Mortgage, rent payment, and property taxes
• Utilities (electricity, water, gas)
• Internet, subscriptions, phone plans
• Groceries and household supplies
• Transportation expenses (car payments, fuel, insurance)
• Personal care expenses (haircuts, grooming, etc.)
• Clothing and accessories

By making a list, you can find an excellent baseline for estimating your expenses during retirement. Many of these expenses remain fairly consistent before and after retirement.

Nonetheless, long-term factors like inflation, which can potentially double household costs within 30 years, shouldn't be overlooked. Investments that match inflation, as well as indexed retirement income from government programs like the Canada Pension Plan, can help manage these costs. 

It’s also important that you consider new expenses that might arise, such as employer-uncovered medical costs, travel plans, and other lifestyle considerations. This analysis can highlight areas where costs and expenses might decrease during retirement.

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Consideration: Mortgage-Free Living

One significant way to reduce retirement costs is to own a mortgage-free home. This major accomplishment can considerably lower your living costs during retirement and free up a significant portion of your budget previously allocated towards family savings, investment contributions, and household expenses.

Building Your Retirement Income Stream

Now you’re more aware of estimating your living costs during retirement. You’ve considered whether they’re going to decrease, stay consistent, or even possibly increase.

By understanding your projected cost of living in retirement, you’ll be able to determine your future cash needs and how much you should save and invest to generate the required income. But what are some of the best retirement resources that can help provide a steady stream of income?

Canada Pension Plan and Old Age Security

The Canada Pension Plan and Old Age Security are vital pillars of the Canadian retirement income system. They're funded through your payroll deductions throughout your working years.

So how do they work? The CPP provides a monthly benefit designed to replace about 25% of your earnings up to a maximum limit. Meanwhile, OAS provides a more modest, flat-rate monthly payment to eligible seniors. Both programs' payouts are taxable and adjusted annually for inflation to maintain their purchasing power.

Registered Retirement Savings Plans (RRSPs)

RRSPs are another big part of retirement savings for many Canadians. You contribute to an RRSP with pre-tax dollars, meaning contributions are tax-deductible, which allows for potential significant tax savings in your high-income years. 

However, once you turn 71, you must convert your RRSPs into either annuities or Registered Retirement Income Funds (RRIFs). These new instruments require minimum mandatory annual withdrawals that are fully taxable as income in the year of withdrawal. This conversion can provide a steady stream of retirement income.

Non-Registered Savings and Investments

Non-registered accounts offer more flexibility but fewer tax benefits than registered accounts like RRSPs or TFSAs. Any income generated in these accounts - whether it's interest, dividends, or capital gains - is taxable.

That being said, only 50% of capital gains are included in income for tax purposes, and Canadian dividends may be eligible for a tax credit, depending on your overall tax situation.

Tax-Free Savings Accounts (TFSAs)

The Tax-Free Savings Account is a powerful savings tool that allows you to invest in a wide range of securities.

The real beauty of TFSAs lies in their tax-free status: any investment growth occurs tax-free, and withdrawals aren't counted as taxable income. This means you can use your TFSA to grow your savings and access them at any time, for any reason, without a tax penalty.

Annuities

Annuities are insurance products that provide a guaranteed income stream for a specified period or for life. When you buy an annuity, you're essentially buying a stream of future payments.

These payments can be fixed or variable and are often used to provide a steady income during retirement. Some annuities also offer features that allow for investment growth, and the income may come with certain tax advantages, depending on how the annuity is structured.

Benefits of Working With a Professional

Figuring out your retirement savings needs is a critical component of savings and investment planning. 

Given the variety of options available, asking for professional advice can provide important direction.

Looking to strengthen your retirement plan? 

Consult with a financial expert from the Insightful Wealth team. We’ll help you navigate your retirement planning journey with confidence and ease.

Disclaimer: The information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.