Simulating Your Retirement: An Essential Step!

While spending money today brings immediate satisfaction, it's harder to see the benefits of saving for retirement. But many people still dream of retiring young. Is this realistic?

Financial institutions have developed a variety of simulators to help you make sure your retirement plan is solid. You can also use CompuPension, an online retirement simulator provided by Retraite Québec that calculates your income based on your situation. 

Gather Your Records First!

To use Retraite Québec and financial institution simulators, you'll need the following information:

  • Statements for all of your registered plans (RRSPs, TFSAs, DPSPs, defined contribution SPPs, etc.)
  • Statements for all of of your unregistered investments
  • Your annual statement for your supplemental pension plan
  • Your Statement of Participation in the Québec Pension Plan (QPP)
  • Your pay slip and notice of assessment from the Canada Revenue Agency (for RRSP deductions)

Depending on the simulator, you may need other information to accurately estimate your retirement income. 

For Realistic Results...

  • Think carefully about what expenses you'll have once you retire

    There's always a risk of underestimating or overestimating your retirement expenses. Drawing up a thorough budget and using it to determine your retirement expenses is a good way to avoid the problem. The rule of thumb is that you'll need 70% of your current gross income to live comfortably after you retire, but the best indicator is your estimate of your expenses (net of tax). Remember to account for healthcare and leisure expenses.
  • Estimate your investment returns and inflation

    Before you put together your estimate, you should obtain information from your financial institution or a recognized organization like the Institut québécois de planification financière. Your financial planner or advisor can help you set realistic rates of inflation and expected returns.

    You'll need to subtract the amount of your investment management fees from the expected returns on your stocks and fixed-income investments (bonds).

    If you put most of your savings in guaranteed investment certificates, you should estimate your returns at about 4%. The results are very sensitive, and overstating your yields by 2% could change your results by 60% to 80%! It's generally real return (return minus inflation) that most affects the results.

    Some investors consider loading their portfolios with stocks for a higher rate of return. You should never consider this option if it doesn't fit your investor profile.
  • Consider your life expectancy

    According to the actuarial valuation of the Québec Pension Plan as at December 31, 2018, the average life expectancy is 80,9 for men and 84,5 for women. But these statistics don't mean a thing when you reach retirement! You'll have to recalculate based on your age, since for each year of life, you can expect to live another quarter of a year. But don't just base your calculations on what the average life expectancy will be when you reach 60 or 65, because close to 50% of people will live longer. Out of 100 sixty-year-old women, for example, about 47 will still be alive at age 90!

    You can find a survival probability table in the Projection Assumption Standards of the Institut québécois de planification financière.

    Don't underestimate your lifespan, because when your money's gone, it's gone for good.

Simulation Results and Your Action Plan

Depending on your results, you may decide to...

  • Put off your retirement to a later age
  • Accept a lower standard of living in retirement than you had planned for

If these options seem unthinkable, you'll have to start saving more immediately—and that means scaling back your lifestyle. However, you can always try to strike a healthy balance.

In Conclusion

These simulators provide a rough estimate only. Ideally, you should do a new simulation if a major change takes place in your life and revise your simulation every year when you're getting close to retirement.

Your financial planner or advisor can use your simulation to give you valuable advice, help you determine whether your forecast is realistic, interpret the results, and come up with solutions. But before you can work with the results, you'll have to figure out where you stand today by reviewing your budget, your investment statements, your Statement of Participation in the QPP, and any SPP statements.

If you set realistic objectives, you'll see your dreams start to take form—and that will make it much easier to keep saving for retirement.

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