As you crest Highway 97C approaching West Kelowna, the first glimpse of Okanagan Lake will take your breath away. The Sonora Desert, that originates in Mexico and streams through California, peaks just south of the Okanagan, bringing with it the perfect climate for growing wine grapes, lush tree fruits and a lifestyle full of outdoor activities. Boasting one of the longest golf seasons in Canada, Kelowna is a place of envy for pre-retirees and retirees alike, and the 2000 hours of sunshine each year certainly helps!
With a world-class hospital and international airport, there isn't anything that this city doesn't have to offer. The Okanagan Valley hosts a robust arts and culture scene with plentiful, free outdoor concerts all summer. And if you're a powder-hound, you have your choice of snow-covered vertical terrain as close as 40km from downtown.
With real estate prices soaring in the Lower Mainland of Vancouver, many Baby Boomers are now considering the opportunity to pocket the extra cash value in their homes, allowing them to move to a dream lifestyle-community, like Kelowna, Penticton or Vernon, years sooner than they had expected. The question is, "How much do I need for this plan to work?"
The decision to pull the trigger on a retirement plan, or to move to a new community is never easy. Nevertheless, you can eliminate most of the uncertainty with a few simple planning steps. Here are four key steps to determine how much you can afford to spend on a new home while ensuring that you have the resources to adequately fund your future retirement years ahead.
STEP ONE:
Determine the income you will need in retirement by first understanding what you spend today. This is easy - it's just numbers and we're good at those. The budget worksheet below will help you to organize and estimate your current and future cost of living, which will be used to determine the amount of income you'll need to live the lifestyle you've dreamed of. Start by filling in the blanks from your current banking statements.
It's surprising how the cost of living can vary among cities and understanding what life in the Okanagan costs is an important aspect of a well-crafted plan. For example, if you're used to crossing bridges in rush hour traffic, your new transportation budget may be substantially reduced. Don't forget that gas, groceries and even ticketed events are surprisingly different prices among various cities in Canada.
To provide insight, the Province of B.C. has developed an interactive website demonstrating the cost of living across various cities. By assessing your current expenses and comparing them to the average costs in the new community, you can better gauge how much you can expect to spend in your retirement years.
Once you've determined your current spending, you can estimate what your expenses will be once you're retired. Consider whether you will have paid off your current debts or not, if you anticipate traveling or a new hobby, if you want to leave additional funds aside for healthcare surprises and other personal expenses that are possible in the future. Price all of those expenses in today's dollars for consistency, and then you can increase the costs by the rate of inflation each year.
STEP TWO:
Next, establish how much income you will receive from pension plans. If your employer offers a pension plan, contact your human resources department to provide an estimate of your retirement benefits at various retirement dates. Employees often have a choice to receive a string of future payments, with options for to provide for your survivor spouse or in the event of early retirement, increased bridging benefits until Old Age Security (OAS) payments kick in.
Similarly, the public pension plan estimates each Canadian's expected benefits at various retirement ages. Canada Revenue Agency (CRA) outlines your anticipated Canada Pension Plan (CPP) and Old Age Security (OAS) payments on their 'My Service Canada' website. Sign up on their page with the link provided, to receive your secure online access by mail.
If you elect to begin collecting your CPP benefits at age 60, your monthly payments are reduced by 36% compared to waiting until you reach age 65. By deferring it to age 70, your payments increase by 42%. In all cases, CPP benefits rise annually by the increased costs of living.
Deciding on the ideal time to begin your CPP benefits isn't always an easy answer but the decision can have a dramatic effect on your long-term financial security. For example, if you elect to begin collecting your CPP benefits at age 60, your monthly payments are reduced by 36% compared to waiting until you reach age 65. By deferring it to age 70, your payments increase by 42%. In all cases, CPP benefits rise annually by the increased costs of living. If you aren't sure about the best option, a certified financial planner can be a lifesaver.
STEP THREE:
Once you've determined how much you'll be spending and how much pension income you can expect to receive, the next step becomes much easier with a little mathematics. Of course you can call on us to do this for you but for do-it-yourselfers, the process is as follows:
For each year, increase your costs but the expected inflation rate. If inflation is 2% (the Bank of Canada target inflation rate), $10,000 of expenses today will cost almost 30% more in 25 years from now. Remember that the increased cost of goods and services are compounded each year, which means that the 2% more you have to pay next year, is actually 4.04% more in 2 years, 6.12% in 3 years, and so on.
Subtract these projected retirement living expenses from all of your pension benefits to determine the income-shortfall if any, that you will need to fund from your savings and other resources. A software program is useful for this since some years you will have higher pension payments than others, and you may also want to project higher or lower costs during different periods during retirement to allow for a more active lifestyle or medical costs.
In 15 years from now, every $100,000 that you have invested in a Registered Retirement Savings Plan (RRSP) today without making any further contributions, will provide inflation-adjusted income of approximately $10,000 per year for 25 years, assuming 7% return and 2% inflation and an average 25% tax rate during retirement. In this case, if you have $500,000 in your RRSP by the time you're 45, you'd have roughly $1,380,000 by age 60 from which you could draw $50,000 annual after-tax, inflation adjusted income until age 85, from your savings plan alone.
STEP FOUR:
The last step is to list the details of your assets, savings and tax-sheltered accounts, and evaluate your current liabilities. Once you've determined how much of your resources are needed to meet your retirement income needs, you can selected which of your sources is the most strategic to use up first. What you're left with is an amount for immediate expenses, including the purchase of your new home or relocations costs, and emergencies now or in the future.
This is particularly important if you're planning on buying a new home. By understanding your current and future financial needs, the ideal amount to spend on the house purchase and related costs simplifies the process dramatically. All that's left is to locating the perfect neighbourhood with a view of Okanagan Lake or one of our famous golf courses.
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