Canada | Personal Finance

Starting to save for retirement? Track your spending first

When it comes to retirement planning, ignore the traditional rule of thumb, says personal finance author David Trahair: ‘Your financial situation is as unique as your fingerprint.’

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 Young female doing her finances and home budgeting on laptop“It all needs to begin with your current spending,” says Trahair. “So you project what your spending is going to look like in retirement, and then calculate how much income you’re going to need.” (Shutterstock/shurkin_son)

Whether you’re 25 or 55, saving for retirement is a wise financial strategy. But as this year’s deadline draws closer, many begin to ask themselves just how much money they’ll need to finance their post-work life.

The general rule of thumb, in terms of a replacement ratio, says you will need approximately 70 per cent of your pre-retirement earnings to maintain your standard of living after you retire. The problem with that number, says personal finance expert David Trahair, is that it’s basically a guess. 

“That number may be the right percentage for you, but it might be totally wrong,” says Trahair, who authored The Procrastinator’s Guide to Retirement: How to Retire in 10 Years or Less. “Basing how much you’re going to need to finance retirement on some arbitrary percentage of your income is dangerous.”

TRACK YOUR SPENDING

Instead of using a number based on your current income, Trahair recommends people track their current expenses to see how much they’re spending now. 

“Everybody’s personal financial information is as individual as their fingerprint,” he says. “The general rule of thumb assumes that about 30 per cent of your expenses are going to go away in retirement—but that may be totally wrong.”

To keep an eye on bills and other expenses, he points to free financial tracking websites, like Mint. However, check with your financial institution before choosing to use a third-party application. Providing the latter with your PIN or other information may void the contract with your bank. In fact, many banks also offer similar resources, including RBC’s myFinanceTracker and TD’s MySpend app. 

Another of Trahair’s books, Smoke and Mirrors, comes with a spreadsheet called The Retirement Optimizer, which asks for details like your age, when you want to retire, what’s in your RRSP and more. It will project into the future, adjusted for inflation, whether you’re saving enough or even too much. The idea is that when variables like spending and savings change, you can update the spreadsheet and get an updated number of how much you need to save. 

“It all needs to begin with your current spending,” he says. “So you project what your spending is going to look like in retirement, and then calculate how much income you’re going to need.”

FOCUS ON DEBT

Trahair says many people make the mistake of solely focusing on their investments, like how much money is in their RRSP. 

“When everybody plans for retirement, they seem to key in on RRSP or their retirement savings,” he says. “Just as important—and I would argue even more important—is your debt situation.” [See Time to set the record straight about these 5 RRSP myths]

According to the Canadian Bankers Association, only 58 per cent of Canadians pay their credit card balance in full each month. That means nearly half the population can’t even afford to pay off their credit card, Trahair points out, and that’s while they’re working.

“Because credit cards are very high interest, I would say forget everything else and pay off that credit card. It doesn’t make sense to make an RRSP contribution or invest in a tax-free savings account that might make three or four per cent, when you’re being drained on the other end with credit card debt at 18 per cent.”

GET STARTED ON RETIREMENT PLANNING

Participate in CPA Canada’s financial literacy sessions, including how to effectively plan for the kind of retirement you desire, and how to manage your finances during that time. Or read more about retirement planning from David Trahair’s book, The Procrastinator’s Guide to Retirement: How to Retire in 10 Years or Less.