Budgeting for Retirement When Living Costs Are High
(Hint: Don’t Drive a New Car)
By Julie Jaggernath
With the soaring cost of living due to fall out from the pandemic and the war in Ukraine, it can be easy to let saving for retirement slip from your budget. However, to avoid drastic financial solutions later on, it’s important to find ways to stay on track with your savings goals. One way to find extra money in your household expenses is to limit debt tied to assets that drain your savings. Car loans for new vehicles is one such example.
There are many options to make lifestyle choices that benefit your family now, as well as help you plan for your future. In fact, retiring comfortably is as much about what you don’t do – even years before retiring, as what you do.
Check out these tips for what you can do well ahead of retirement to set yourself up to retire comfortably:
Decide If Always Driving a New Car Is Worth $2.5 Million
Reduce Debt Payments & Increase Contributions to Savings
Deliberately not having monthly debt payments – or keeping payments as small as possible – is a really smart strategy for setting yourself up to retire comfortably. It’s a good habit to get into during your working year because it will help you accomplish your financial goals.
Consider this: the average Canadian car loan payment is about $570 per month. If someone invests this money from age 25 to 65 in mutual funds or an index fund and receives an average rate of return of 9.4% (what the S&P 500 has done over the past 50 years), they will have over $2.57 million by the time they reach age 65.
Think about buying a quality used car whenever you need a vehicle and investing the difference. Given the above scenario, if you saved $300 each month, spending no more than $270 a month for a payment on a good used car, you’d still have saved more than $1.35 million over the 40 years.
And if you start saving your $300/month later, like when you’re 40, and save for 30 years, you’d still end up with over $528,000. It’s never too late to start because even starting late, still leaves you with more than if you didn’t save at all.
New Car Offers & Financing Incentives Could End Up Costing You More
Help Children Become Financially Self-Sufficient Adults
Over the last decade, it has become almost normal for parents to help their adult children financially. Some will even take on debt, like a home equity line of credit (HELOC), to do it. Whether it’s gifting a down-payment for a house, paying for post secondary education, allowing working adult kids to live at home rent free, or helping with other lifestyle costs, once parents are retired and their income has gone down, helping can lead to financial trouble.
Look out for your whole family’s financial future by encouraging your children to learn smart money management skills while they still live under your roof.
If you’ve got teens and post-secondary students at home who work part-time jobs, encourage them to save at least half of each pay cheque. Some of that savings should be for their long-term goals, the other part for shorter-term goals like buying a car or saving for education costs. Saving this much of each pay cheque, also known as “paying yourself first,” and budgeting carefully with the rest teaches them to live well below their means, a skill even many adults find extremely difficult to master.
Adjust Lifestyle Choices With a Realistic Spending Plan
If you’re not sure what effect various lifestyle choices and changes will have on your spending plan, try out our interactive budgeting calculator. It can even help you see what your lifestyle will look like on the income you anticipate having once you retire.
Making wise lifestyle choices means spending on what’s truly important to you, rather than on “stuff” to keep up with the Joneses. Living according to a budget is not all about deprivation and limitations. It’s about allocating your money in ways that you want to spend it to achieve your goals. It means checking in with your banker or financial advisor to balance savings between spouses and with the various types of savings accounts available to Canadians, e.g. RRSPs, spousal RRSPs, TFSAs, and various types of non-registered investment types.
Tips to Retire Comfortably and Without Money Worries
There’s no magic trick to retiring comfortably; it’s a series of small steps and wise choices that add up to not worrying about money when we’re no longer working. Here are some tips to get you started:
- Start planning as early as you can, even if that just means starting your RRSP and having automatic transfers go into it each payday. Increase the amount as you are able to. Take advantage of employer-sponsored top ups for your contributions. That’s the same as earning an immediate 100% return on your money!
- Stop refinancing your mortgage to pay off other debt. Instead, plan to pay your mortgage off. Making mortgage or HELOC payments late in life means delaying retirement or selling your home. Remain in control of your circumstances by paying off your mortgage as soon as you realistically can.
- Seek help with your debts if you need it. There are many debt relief options available in Canada that you might not even know about.
- Anticipate health care costs as part of your overall planning, including what your living arrangement will be when the time comes that you no longer can live on your own. Discuss plans with your family so that they are aware of your goals and plans, and why you are choosing to live within your means.
- Pay off debt before you retire. You will not be in a position to scale back your income if you need the pay cheques for your household bills.
- Learn about personal finances and investing. Start by reading books or blogs from reputable Canadian sources. Ask questions and start informing yourself. It will help you make decisions that are in line with your goals.
Budgeting to Retire Without Debt – Remain In Control of Your Financial Decisions
If you’ve chosen your retirement date, be flexible as you evaluate your situation and plan how to retire comfortably and without debt. No one anticipated the economic storm we’d all be facing as countries recover from the pandemic. The reality is that people are living longer and are healthier and active longer than ever before. This means that there is no longer a typical retired person. Many even work part time at something personally satisfying and which supplements their income. Do what works best for you at each of your life stages, but plan carefully to avoid the unenviable circumstance of having to work longer or being forced to sell your home when it comes time to supplement your government pension.