Calculating How Much Money Youll Need At Retirement
By David Aston on January 15, 2020
Use these simple formulas to set your own savings goal, starting with how much youll want to spend each month once your mortgage and other large debts are behind you.
Youve probably heard lots of big numbers bandied around about how much you need to save in order to retire. Since the numbers that get discussed are often so different, how do you know what figure to use?
The smart thing to do is get a handle on figuring it out for yourself, based on your individual situation and preferences. In what follows, we show you the basics of how to set your own savings goal. Basic high-level calculations are shown in the accompanying table with an example. The key elements that determine the size of nest egg youll need are:
- retirement spending
- government benefits and employer pension payouts
- and the rate at which you draw from your nest egg.
The example in the table below uses very basic middle-class-level spending to demonstrate how the calculations work. It shows how a frugal but still potentially fulfilling retirement is possible if you end up with limited savings. Of course, most Canadians will aspire to a more expansive lifestyle with higher spending, which, in turn, will require greater savings.
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S To Retiring Comfortably
What Is The Average Canadian Retirement Income
Without statistical research on savings and pension plans, we need to go by the Canadian Pension Plan data. As such, the average Canadian Pension Plan retirement pension hovers around $8,500 per year.
In 2021, the average monthly payout for CPP is $736.58, whereas the maximum account that could be earned monthly is $1,203.75. To achieve the maximum, you need to meet the CPP criteria found here.
In the end, the average CPP is useful but not enough. Plan without it and use it as a buffer to your plan in case it doenst go according to plan.
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How Much Does A Couple Need To Retire
Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to live when they retire. Many experts maintain that retirement income should be about 80% of a couples final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by age 67.
What Lifestyle Do You Want In Retirement
People have different ideas of how they might live when theyve finished working.
The Pensions and Lifetime Savings Association broadly categorises these into 3 retirement living standards:
Minimum geared towards paying for essentials with all your needs covered.
Moderate gives financial security and some flexibility.
Comfortable provides more financial freedom and some luxuries.
How many holidays do you see yourself taking a year? Would you have a car? If so, how often would you want to replace it? And how much home maintenance do you think youll need to do?
Take the quick quiz in our retirement calculator to work out which of these 3 retirement lifestyles would suit you best.
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Factor No : How Much Will You Spend
The rule of thumb is that you’ll need about 80 percent of your pre-retirement income when you leave your job, although that rule requires a pretty flexible thumb. The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security , and you won’t be shoveling money into your 401 or other savings plan. In addition, you’ll save on the usual costs of going to work the pandemic won’t keep everyone at home forever such as new clothing, dry cleaning bills, commuting expenses and the like.
You also need to factor in any pension or Social Security income you’ll be getting. If your annual pre-retirement expenses are $50,000, for example, you’d want retirement income of $40,000 if you followed the 80 percent rule of thumb. If you and your spouse will collect $2,000 a month from Social Security, or $24,000 a year, you’d need about $16,000 a year from your savings. Bear in mind, however, that any withdrawals from a tax-deferred savings account, such as a traditional IRA or a 401 plan, would be reduced by the amount of taxes you pay.
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How To Contribute To Your Rrsp
There are two approaches to planning your RRSP contributions: Short term and long term.
With the short-term approach, you contribute as much to your RRSP as possible every year in order to get the biggest tax deduction you can. This may benefit you now, but in retirement it could cost you.
Once you turn 71 or sooner, if you decide youll need to convert your RRSP into a Registered Retirement Income Fund . At that point, youll be forced to withdraw a minimum amount from your RRIF each year as income. The more money you contribute towards your RRSP today, the more youll have to withdraw later.
Keep in mind, if your minimum withdrawal amount ends up being more than you actually need to maintain your lifestyle in retirement, that extra income will put you in a higher tax bracket, so a bigger chunk of your savings will go to taxes.
The long-term approach looks at your needs now, and your needs after retirement. That means figuring out what your living expenses will be after retirement, and saving enough in order to meet them no more, no less. .
Any savings in excess of that should go into a TFSA. When you withdraw the money from a TFSA, it wont be taxed meaning youll remain in a lower tax bracket after retirement.
Its better not to get overtaxed in the first place. Thats where automatic deposits come in.
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What About A Moderate Lifestyle
The comfortable standard of living is the highest echelon, according to the PLSA, but a “moderate” lifestyle would still be enough for a holiday in Europe for two weeks a year and eating out a few times a month.
This would require an income of £20,800 a year for a single person or an additional £11,000 in personal pension money once the state pension age is reached.
According to Brewin Dolphin, a saver would need £410,429 in their pension by age 55 to be able to afford this standard of living without running out of money before 91.
A 50-year-old earning £40,000 would need to have already saved £300,000 and start contributing 20pc into their pension each year. They would also need a £25,000 Isa.
Ms Morris said: For those with larger pension pots, retiring earlier can of course be possible, but you should bear in mind that for someone to retire at 55, they would need a £150,000 pension pot at 40 and making 12pc pension contributions to ensure they didnt run out of money until 91, while drawing an annual retirement income of £20,800.
A phased retirement could offer a good compromise, she added, and working part time can reduce some of the pressure on pensions, which would only need to top up a lower income level rather than immediately replace all earnings.
This guide is kept updated with the latest advice.
How Much Do You Need To Retire Comfortably In Australia
Calculate how much money you might have, how long it will last and how much youll need in retirement, with our retirement calculators
Working out how much is enough for retirement depends on many factors, such as your lifestyle, plans for the future, and the number of years youll spend retired. Additionally, estimating how much youll have when you plan to retire depends on factors such as your current salary, super balance and assets. With so many factors, its easy to see why you might need a retirement calculator to get an idea of your retirement savings needs.
By using our helpful retirement calculators, you can get an indication of whether theres a shortfall between how much you are estimated to have and how much youll need in retirement, and put a plan in place to address the situation.
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How Much Should You Save Into Your Pension
Heres a quick way of calculating how much to save: at the time you start saving for your pension, halve your age, then use that number as the percentage of your salary you should aim to save each year.
Many experts recommend this rule of thumb. It would mean if you start at 20, you should aim to be saving 10% of your annual income towards your pension. If you start when you turn 30, this would rise to 15% and so on.
For most people, your pension income will come from 3 sources:
your State Pension
Compare Your Current Spending With Expected Retirement Spending
Look at how much you spend now. Then, figure out how those expenses will change when you’re retired.
For example, you wont need to spend money on getting to work, but you might decide to spend more on hobbies or on travel.
You may save money by taking advantage of seniors discounts.
Low-fee bank accounts for seniors
Many financial institutions offer low-fee bank accounts for seniors. They usually offer these accounts to people 60 years old and older. Speak to somebody at your financial institution to find out if they have accounts for seniors.
Seniors who have a low income can get special no-cost bank accounts. Find out if you’re eligible to get a no-cost bank account.
Discounts on goods and services
Many businesses offer discounts to seniors on a wide range of goods and services including:
- groceries or household supplies
Always ask about seniors discounts. It could save you money.
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What Are The Standards
The PLSA has proposed three living standards: minimum, moderate and comfortable. For a single person to reach a minimum standard of living they would need a yearly income of £10,900. A couple would need £16,700. This amount would allow for some social occasions, but means you wouldnt be able to afford a holiday abroad or the cost of running a car.
To reach a moderate lifestyle a single person would need an annual income of £20,800 and a couple would need £30,600. This standard will allow you to spend more money on any nice-to-haves. Youd be able to afford a two-week holiday in Europe every year, and run a car.
At the comfortable living standard youd be able to enjoy a more lavish retirement. This includes taking an extended trip abroad, running a newer car that can be replaced regularly and spending more on weekly food shops and personal items like clothing.
|Single person yearly income*|
|£10 for each birthday present||£30 for each birthday present||£50 for each birthday present|
Source: PLSA, October 2021. *These figures could fund this lifestyle for people living outside London.
The figures provide a rule of thumb and everyones financial circumstances are different. You may need to add other costs depending on your circumstances such as mortgage, rent, social care costs and income tax.
Most people dream of a comfortable living standard when they finish work, but are savers putting away enough money to reach this?
How Can I Work Out My Retirement Income Budget
Here are some questions to ask yourself or discuss with your financial advisor:
What is the minimum income I need to cover my outgoings? Consider everything from your mortgage/rent payments and utility bills to transport and grocery shopping. These are the absolute basics that you need to be able to comfortably cover in retirement.
How much would I like to be able to spend on non-essentials? Whether you want to travel, indulge in eating out a bit more or take the grandchildren for days out, it’s important to plan for non-essential spending too.
Am I entitled to state benefits? As long as you’ve made 35 years of National Insurance contributions , you’ll be entitled to claim a state pension from the age of 66. The maximum amount you can receive is £179.60 per week, adding up to £9,339.20 a year per person far below even the essential level of income if it’s your way to fund retirement.
How much am I saving, or can I save towards retirement? It’s best to start saving for retirement as early as you can. Whether you’ve already started or want to begin building up your pension pots, tools like Unbiased’s pension calculator work out how far your money will go.
If you’d like more information on when you may be able to retire, check out our previous article on retirement age.
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When You Shouldnt Contribute To An Rrsp
There are a few instances when you may be better off not contributing to your RRSP, and instead putting your money elsewhere. Here are a few examples:
If you have high interest debt, such as a credit card balance. Paying down that debt should take priority.
If your tax bracket is the same or lower than the tax bracket youre expecting to be in during retirement. In that case, your money may be better off saved in a TFSA until youre in a higher tax bracket.
If youre in a lower tax bracket now, but expect it to increase in the short-term. Say youre expecting a big raise next year, you might want to use a TFSA for the time being.
We have a great article that compares RRSPs vs TFSAs, and when you should choose one account over the other.
Spending Drives How Much Money You Need To Save To Retire At 60
Estimating expenses in retirement is difficult. Some outflows contributions) will stop while others , appear. While some investors overestimate retirement spending needs, others underestimate at least one major category: housing. As indicated by the Chase data below, the majority of retirees pay housing costs throughout life as a major expense.
Before getting consumed with your travel budget, recognize that where youll spend money will change throughout retirement. As some costs increase , other expenses decrease.
While expenses will ebb and flow over the years, its most important to monitor spending just before and after retirement. This period is pivotal because retirement savings are generally at their highest levels, making you most vulnerable to stock market volatility.
If retiring at 60 is your main priority, reducing your spending assumptions during retirement might be an acceptable trade-off to make the numbers work.
Longevity is also a major concern for anyone looking to retire early. According to J.P. Morgan, married couples have an 89% chance at least one spouse will live until 80 and almost a 50% probability that one person will live until 90. Keeping fixed costs low and spending in check can help ensure retiring at 60 doesnt leave you destitute later on.
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How Much Money Do You Need To Retire Comfortably
Assume you will need about 80% of your current income to maintain a similar standard of living after retirement.
The 4% Rule withdrawal strategydoes not work for everyone, and you might need to adjust based on expected expenses and your desired type of retirement. The rule is a flawed method.
Instead, utilize a combination of annuities and Social Security Income to layer a monthly income stream that is guaranteed not to run out.
The key to this strategy is analyzing the perfect age to retire comfortably.
What It Is Going To Be Like Living Here
It is good to have an idea of what living here is going to cost you, but what even is the island like? Is it going to be a good fit for you?
Without a question, PEI is one of Canadas most breathtakingly gorgeous provinces. The main island lies 200 kilometers to the north of Halifax, Nova Scotia, and about 600 KM east of Québec City. Prince Edward Island contains two main urban districts and they are Charlottetown and the harbor of Summer side. For the rest of the island, youll find lush hills, beautiful beaches, and woodlands.
Here is a general idea of what its going to be like living on Prince Edward Island.
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How Much To Retire In Your 50s
Early retirement is possible but not a last minute decision. It has to be planned in order to be achieved and in many cases sacrifices have to be made.
So how do you achieve Freedom 55? If you go back to the TFSA table above, there are 3 factors helping you reach the $1 million mark.
In the case of a TFSA, assuming you contribute the maximum, you only have control over the rate of return in way. For other accounts, you also control the contributions but in general, you will need time to reach your goals.
When working towards Freedom 55, you need to realized you have less working years to save and more years to live from your portfolio. It means you need to save more in your 30s and 40s than someone willing to retire at 65.
There are a few simple rules that can help give you an idea instead of trying to assess your life expectency and future cost of living.