May 2022 – 15 min read
You should create a retirement budget with estimated income and expenses
Many retirees find that life in retirement costs less than they thought it might
What’s a typical retirement budget?
There really isn’t a typical budget. It all depends on the lifestyle you expect to live in retirement. To determine how much you’ll need, you may wish to create a personal retirement budget.
How do you budget for retirement?
Creating a budget for retirement is much like creating a spending plan pre-retirement. First, determine how much income per month you’ll have in retirement from all sources. Then add up all your monthly expenses.
If you have more income than expenses, you’re all set. If it’s the other way around, you’ll need to make adjustments like cutting expenses or finding more income such as a part-time job.
Retirement income sources
Add up all your retirement savings including registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and non-registered accounts. Your retirement savings may also include assets from the sale of a business if you’re a business owner. Divide your savings by the number of years you expect your retirement to be to get an estimated annual income amount from your savings. Now divide that number by 12 to get an estimated monthly amount.
Add up all your sources of monthly retirement income from company pension plans, government benefits such as Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Old Age Security and Guaranteed Income Supplement (GIS).
Now add your estimated monthly amount from your retirement savings to your monthly amount from pension and government plans to get your estimated total monthly income. Use this handy retirement income worksheetOpens a new website in a new window - Opens in a new window.
Note: This estimate doesn’t consider someone living off dividends or a similar constant income stream.
Retirement expenses budget
Chances are your retirement living expenses will fall under 4 headings:
Essential or must-have expenses – Things you can’t live without like mortgage or rent, car payments, health care expenses, food, insurance, utilities
Discretionary or optional expenses – things that are nice to have but that you could live without if you had to like entertainment, dining out, hobbies, education, travel/vacations, charitable donations, gifts, professional/social dues and gym memberships
1-time expenses – Things that happen infrequently like an emergency, home or vehicle purchase, a child’s wedding, etc.
Taxes – Although your income may be lower than when you were working, you’re still likely to pay income tax and property tax if you own your home.
Once you’ve budgeted accurate monthly amounts for all the things you want to include under each heading, add them all together to get a monthly retirement spending estimate. Use this handy budget worksheet.Opens a new website in a new window - Opens in a new window
You may find it helps to start tracking expenses while you’re still working. And, if you’re calculating expenses for the future, you’ll also want to consider inflation by increasing your annual expenses by 2 to 4% per year.
Now that you know more about budgeting in retirement, you may want to contact your advisor to:
Determine how much retirement income you can expect from the government
Calculate your total retirement savings
Learn about options for drawing an income from your savings that may help you have enough money to last through your entire retirement
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.