Retirement planning: How to make sure you have enough money

When people picture retirement, they may envision lying on a sandy beach with a mojito in hand or teeing off on a breathtaking golf course in Hawaii. They usually don't consider the alternative: being broke and struggling to pay the bills.

When people picture retirement, they may envision lying on a sandy beach with a mojito in hand or teeing off on a breathtaking golf course in Hawaii.

What they usually don't consider is the alternative: being broke and struggling to pay the bills.

So how do you ensure you have enough money saved for the retirement of your dreams when you don't know how long you will live?

The wisest advice, according to financial experts, is to budget conservatively because it's always better to have some money when you die than no money while you're still alive.

"Most people are living longer than their parents and their grandparents did," said John De Goey, a certified financial planner and portfolio manager at Industrial Alliance Securities.

"A good baseline is that you need to plan to live until age 90."

Income replacement debate

There are several factors that could also affect a life expectancy, including whether there is a family history of health problems and one's gender. On average, women tend to live longer than men so they should plan on living a few years past 90, whereas men might be able to get away with planning on living a few years less.

But how much money do people actually need to save for retirement?

In the past, the general industry standard was that retirees should have about 70 per cent of their annual income for every year in retirement. Some say that figure is now too much.

De Goey says retirees should look at saving about 50 per cent of their annual income in their final year of work, with the funds coming from a variety of sources including cash, investments, Old Age Security, pensions. Another thing to keep in mind is retirees will likely find themselves in a smaller tax bracket.

That means if someone has an annual salary of $80,000 a year while working, they should aim to have $40,000 a year for every year of retirement. If they retire at age 65, and live until 90, then they should have a nest egg of $1 million.

Of course, that goal can vary due to a number of factors. Is there still a mortgage or rent to pay? Do you plan on a lot of travelling? Eating out? Or do you picture a retirement filled with staying put and gardening?

De Goey says the easiest way to ensure people have enough money for whatever retirement they plan for is to work longer.

"There are two benefits of working longer. Number one, you're hopefully able to save a proportion of what you earn, and two, because you're working, you're not drawing on your savings," he said.

"So even if you are saving only five to 10 per cent of your salary in your mid-'60s, you're also foregoing withdrawing that money from your nest egg. The combination of those two things greatly enhances the likelihood that you'll still have money left when your life is still in the bottom years."

Most of his clients balk at the idea of having to stay at their jobs in their senior years. But De Goey notes that because general life expectancy is rising, the amount of retirement years can remain the same.

Start early

He suggests to his clients to consider working until the second digit of their age in their 60s corresponds with the decade in which they were born. For example, if they were born in the 1970s, they should continue working until they're 67; if they were born in the 1980s, they should keep working until 68.

Another way to ensure there is enough money left over for retirement is to start socking away money as early as possible.

"Be a very persistent, steady, regular saver," said De Goey. "It's not the sort of thing with the tortoise and the hare, that you can wait, and give it the gas at the end and you can win the race. You're going to run out of runway."

Toronto certified financial planner Rona Birenbaum says retirement should be a priority for everyone.

"Being old and broke is not a pretty picture," said Birenbaum from the firm Caring for Clients.

Some of the mistakes she often sees is that people count on an inheritance that might never come or plan to leave aside money for their children when they don't have enough for themselves.

"Always, always a word of caution," said Birenbaum. "You should not count on money that is not in your hands."