Before you worry about running out of money during your retirement years, you need to spend some time calculating what you'll actually need.
4 ways to calculate what you'll need for retirement
1. Evaluate your expenses
In order to come up with a good estimate of how much money you'll need, you should add up your estimated future living expenses. These include:
- Housing
- Transportation
- Food
- Travel
- Discretionary spending
It's important to understand that many of your large expenditures during your working years will be gone or significantly reduced once you retire.
- For example, your mortgage may be paid off, you will no longer be spending money on clothes for work and work-related activities, and you won't have to pay for childcare or college for the kids.
2. Consider relocation
When you no longer have to go to work, you can relocate anywhere.
- Whether you decide to downsize to reduce your housing expenses or move to a different province to be closer to family, you might be able to save a lot of money each month.
- The upside to downsizing is that you won't have to clean as much either.
3. Think about your family
If you're single during your retirement years, then you may need a higher monthly income. That's because two people can take advantage of economies of scale when it comes to the big expenses, such as housing.
- You also need to consider other family members who need your help.
- If you have a loved one with special needs, then you might still have to provide for that person when you retire.
4. Remember that some expenses decrease during retirement
Some expenses actually decrease during your retirement years. For example, you'll probably pay fewer income taxes because you'll have a lower income.
- Discretionary spending also goes down after you stop working. Whether it's the fact that you're not out and about every day or less concerned about keeping up with your colleagues at work, retirees often find new activities to do instead of new things to buy.
- In the end, you may need less than 60 to 70 per cent of your pre-retirement income.
- While having seven figures in the bank would be nice, most people don't need that much money to retire happily.
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