Aim for two-thirds of your retirement income to be guaranteed

There’s a new rule of thumb for retirement planners, reports Nicole Spector, writing for Yahoo! Finance.

While you would need a lot of hands to cover off all the various retirement rules of thumb out there, this one is refreshingly simple. It’s called the “two-thirds retirement plan.”

“With the two-thirds retirement plan, guaranteed retirement income (i.e., Social Security, pensions and annuities) is used to pay for two-thirds of living expenses during retirement. The additional third of living expenses is funded via non-fixed income (e.g., investments and retirement savings),” she writes.

Let’s Canadianize this. With this plan, your guaranteed income, such as money from the Canada Pension Plan (CPP), Old Age Security (OAS) or other government benefits — along with workplace pension income and any annuities you buy — is used to pay two-thirds of your retirement living expenses. The rest comes from other retirement savings, such as money from a registered retirement income fund (RRIF), your Tax Free Savings Account (TFSA) or non-registered investments and savings.

The article encourages readers to “do the math” to see how this idea would work for them.

“Add up the total amount of guaranteed income you expect to receive in a month,” suggests financial coach Michael Ryan in the article. “Next, estimate your monthly living expenses, including everything from housing to food… (and) leisure activities. Multiply your total monthly expenses by two-thirds.”

This sort of estimate, the article explains, is relatively easy to do if you are already retired, but harder to estimate if your golden handshake is years or decades away.

“I tell every person I work with to pretend that tomorrow is their retirement day,” Robert Massa of Qualified Plan Advisors tells Yahoo! Finance.

“If they want to live just like they are living now, they need to pay themselves at least 80 per cent of their regular paycheque in order to maintain their standard of living,” he states.

“From there, they have a basis to work with and then they can start to ask themselves what else they want from retirement and add those costs in. Then you can project forward using inflation and come up with a monthly and annual income goal and work from there,” he adds.

If, after doing the math, you don’t think government benefits will cover off two-thirds of your retirement living expenses, you need to consider finding other sources of guaranteed retirement income, the article adds. This can be done, the article notes, through converting some of your retirement savings to a lifetime annuity when you retire.

The article concludes by recommending that everyone have a good financial plan in the present — this will make us more aware of how and where our income is being spent and what we will need in the future, when we retire. And while two-thirds is a target, the closer you can get to a plan where guaranteed income covers off all of your expenses, the better, the article concludes.

An additional benefit of guaranteed fixed income — you can never run out of it, as it is paid to you for as long as you live.

Having fixed retirement income is an option for any member of the Saskatchewan Pension Plan. When it comes time to convert your savings into income, SPP’s stable of annuities is among your options. You can convert some or all of your savings to an annuity, which will land in your bank account on the first of every month for the rest of your life. Check out SPP today!

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