The 70% rule
The rule of thumb has long been that the average investor will need 70% of his or her working income each year in retirement. The idea is that you spend less in those years in large part because, by then, your mortgage is likely paid off and you’re no longer supporting your kids. You’re also spending less on commuting and other work expenses such as meals away from home and office attire. And you’re not saving for your retirement.
While this income guidance is helpful, the reality is different for everyone. According to the 2016 Sun Life Retirement Now Report, retirees are typically living on 62% of what they earned before retirement.
Inflation is another consideration
Assuming that inflation is 2% per year, a retirement income goal of $80,000 per year balloons to about $97,500 in 10 years, $118,000 in 20 years and $145,000 in 30 years, Adrian Mastracci, a portfolio manager at Vancouver-based Lycos Asset Management, says.
Once retired, investors will need to consider how they’ll replace their pay cheques and draw income from their investments. That usually means staying invested even when you’ve stopped working. “It’s important that your money still has the opportunity to grow, to hedge against inflation and protect against longevity risk,” Banham says, adding that income and protection are both key in a retirement portfolio. Products with guarantees, such as annuities, can help protect against unforeseen circumstances and market downturns, Banham says. The life insurance benefits of segregated fund contracts can also help transfer an inheritance to named beneficiaries, bypassing the time-consuming and often costly probate process.