Once you have an understanding of how much money you need for retirement and what tools you can use to achieve your retirement goals, you’ll have peace of mind for your future. The earlier you can start estimating what you’ll need, the easier it will be to reach your retirement goals.
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How much do you need to save for your retirement?
Each of us has a different retirement savings goal, because the amount each person needs to save depends on many factors. These include cost of living, the amount of disposable income required upon retirement, the financial tools available to you, your spouse, and more.
Financial decisions and things to consider
When it comes to how much money you will need to save for retirement there are a number of things to think about. You may just need a little guidance to get started. So, here are a few things to consider when preparing yourself financially for retirement:
Pre-retirement income
To start, it’s wise to consider your current income’s present value and its future value, or what it will likely grow to as you near retirement. Salaries typically increase slightly each year, as does the cost of living and inflation. For some people in relatively stable lines of work, like public sector employees, it is easier to get a more accurate idea of your future income. For others that are self-employed or in the private sector, it may not be known where you’ll be in 10-20 years. Either way, even a rough idea will help you move forward in your planning.
Avoid the mistake of simply calculating your income, subtracting your living expenses and assuming the leftovers are what you should put towards your retirement. It is a bit more complicated than that. Those who are living below their means could be unnecessarily stringent in their budgeting by following this advice, where others may not put enough away for retirement. Instead, you need to work backwards, by first determining how much you’ll need in retirement and then plotting a savings course that will help you achieve your goal.
Lifestyle in retirement
The kind of lifestyle will you want to maintain in your retirement is an important consideration when planning for retirement. Many investment planners and sources suggest that people typically need to have 70% of their pre-retirement income to maintain the same lifestyle in retirement that they did while working. In retirement, your costs should decrease as ideally you will not have to make mortgage payments, you won’t have to put money away for retirement, and you shouldn’t have debt.
On the other hand, for this 70% rule those that are at the beginning of their working lives may have to consider their future earnings as a baseline to calculate their retirement income requirements. 70% of your current income might be too low to live on and may not reflect your expectations for retirement later in life. If you’re in your 20’s, it’s a good idea to estimate the salary you are likely to have in your 40’s or 50’s, and then use that figure as a base for your retirement lifestyle. Try this personal retirement calculator. 1
If you are likely to reduce your costs in retirement, you can plan for a smaller nest egg. A few common ways people reduce their costs include:
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- Moving: Living requirements and costs can change in retirement, and you may be in a position to downsize to a smaller house with lower carrying costs or consider a different area where you may be able to get more for less. That said, don’t plan on moving too far away from hospitals or your family. Most retirees need access to medical care and choose to stay near their family for further support later in life.
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- Selling a vehicle: For couples with 2 cars, some decide to drop down to a single vehicle in retirement. While you should not expect a windfall from the sale of a second car, selling one does help reduce your costs in gas, maintenance and insurance.
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- Independent children: The money that you currently spend supporting your children or saving for their education shouldn’t be included in your projections for your lifestyle in retirement. However, some people who had children later in life may find themselves supporting teens in their retirement, so plan for your specific circumstances.
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- Future health care needs: If you are currently covered with a health insurance plan through your employer this may change. You may want to consider this when calculating expenses.
Years of retirement
Once you’ve determined how much you’ll spend per year in retirement, you need to estimate how many years of retirement you need to fund. For this calculation, start by subtracting your planned retirement age from the average life expectancy for a Canadian male/female.2 Next, multiply that number by your yearly cost of living (how much money you will need to afford basic expenses, such as a food, housing, taxes, etc.) in retirement, keeping in mind inflation. Inflation is the continual rise in the average price of goods and services which means as inflation rises the power of your dollar decreases. As a result, the money you save for retirement may be worth less when you decide to use it in retirement, meaning you can buy fewer goods and services for the same amount of money. It’s important to plan for inflation when calculating how much money you will need in retirement since you may need more money to beat the impact of inflation. It can be difficult to predict inflation, to help you determine the right estimates look at rates of inflation in past years as a benchmark for future performance.3
A few other things to consider are the types of benefits and payouts you can receive from your employer / the government, and any assets you may have acquired and are planning to liquidate closer to retirement, as these can amount to significant portions of your retirement savings. Developing a plan including all monies coming in, and considering all of your retirement expenses will help in determining what your desired nest egg should be for retirement.
What about life insurance?
Life insurance should be taken into account when making a financial plan for retirement. Some may choose to include their burial and funeral costs, or would like to ensure that family members will be provided for and not left with any outstanding expenses. Life insurance is often an overlooked tool when it comes to retirement planning.
How does life insurance work?
Life insurance can cover the costs your loved one’s face after your death, and leave them with a nest egg so that they are protected.
Try our life insurance calculator to determine your insurance needs, and consult with an advisor who can walk you through the process and advise along the way.
Planning for retirement is a very personal and important subject. In these cases, it’s best to seek expert advice about how much money you need to save for retirement and what tools are best to help you meet your goals.
To figure out how much life insurance coverage you may need, try Canada Protection Plan’s life insurance calculator.
