According to JPMorgan Asset Management’s 2016 Guide to Retirement, someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.
Fidelity Investments calculate that at age 30, investors should have the equivalent of a year’s income stashed away, three times their annual income at age 40, seven times at 55 and 10 times at 67.
Then there’s the 70 percent rule: assume you need 70 percent of your working income when you reach retirement.
Shirley Payne, who has worked with accountants, farmers and small businesses in the Kelvington, Sask., area for much of her working life, agrees with financial experts who say when it comes to retirement planning, the first thing to do is throw all the rules out the door.
“Basically, consider what you need to live on,” she says. “Don’t give it all to your kids but give some. If you’re going to be in a higher tax bracket, think about giving it to your kids when it would benefit you rather than saving it till you die. I think it’s better to give it away, it would be wiser to help the kids get out of debt and reduce your own income tax consequences. That’s the biggest thing for farmers to look at. If they hold it all till they die, their kids could end up paying the capital gains.”
Every situation is different and farmers might be facing the challenge of creating a retirement income from largely illiquid assets such as farmland and machinery and determining how much of a salary the farm can afford to pay the retirees and still remain viable as the next generation takes over.
Depending on your lifestyle, your cost of living might be higher or lower in retirement, but at the same time basic expenses such as food will likely edge upward.
“Most people when they retire, that’s when they want to go on a winter holiday or go to the U.S. for six months,” says Payne. “You have to consider the cost of that.”
Another consideration she pointed out is the possibility that one spouse or the other will have to go into a long-term care facility.
“The other person has to be able to live on whatever is there.”
Long-term care can cost $2,000 to $7,000 a month. Then, there’s the cost of drugs and other medical expenses not covered or only partially covered by Medicare. In Saskatchewan, for example, this would include prescription drugs, medical supplies and appliances, dental and optical services and emergency medical transportation.
Lifespan has always been a stumbling block for people planning their retirement. How many years should you plan for?
“Most people assume that life expectancy is the same as lifespan,” says Clay Gillespie, financial advisor, portfolio manager and managing director of Rogers Group Financial in Vancouver in a Globe and Mail article from February 2016 titled, How much do I need to retire?
“This is not correct. Instead, life expectancy is a median number of years — such that 50 percent of a particular age group will die before this number of years, and the other 50 percent will die after this period.”
He offered the example of a 58-year-old woman. Her life expectancy is another 30 years, but 50 percent of all 58-year-old women will live beyond life expectancy, he says. He reasoned that 95 would be a better number to use.
“If someone had the full OAS (Old Age Security) entitlement and received the average Canada Pension Plan of $640 a month, he or she would need at least $470,000 in Registered Retirement Savings Plan savings to generate a net spendable income of $35,000 if retiring at 60 and approximately $410,000 if retiring at 65,” he says.
“If you saved for retirement only using Registered Retirement Savings Plan (RRSP), you will need a larger account balance, as every dollar that you redeem from an RRSP is fully taxable while funds withdrawn from a tax-free savings account (TFSA) are free of tax. And if you were lucky enough to save funds outside these structures (non-registered investments, real estate, bank accounts and so on), only the earnings on these funds are taxable.”
The Estate Planning Checklist for Farm Families by Derek J. Fryer, which has been modified and re-published by the Saskatchewan Ministry of Agriculture, offers this advice:
- Estimate what your monthly living needs will be immediately after retirement and what they might be in 10 years time.
- Make sure there is a cushion for unexpected expenditures. Your security and comfort should be your foremost concern.
- Remember that if the annual rate of inflation is two percent, your income needs 10 years in the future will be about 22 percent higher than they are today. If the inflation rate is four percent, your income needs will be about 50 percent higher.
- The payments you need from your farm child, as calculated above, represent the amount after deducting income tax on all of your income.
The document, available at publications.gov.sk.ca/documents/20/85826-Estate%20Planning%20Checklist.pdf, also provides an outline to figure out what the farm can afford to pay you.