The question of how much retirement savings you will need is personal to everyone. However, there are some key questions that you need to ask yourself as you are planning for retirement.
What are your retirement plans?
Are you planning to have a similar life to the one that you have now, or are you thinking about retiring early? travelling more? Starting your own business? Do you want to retain your current living standards or are you prepared to accept a lower standard? All these things and others have to be an important part of budgeting for your retirement.
How much money are you making today?
Your current salary is a good starting point for calculating what your retirement savings should be. It’s a good guess that the more money that you make today, the higher your retirement savings should be because like most people you want to retain your current lifestyle.
How much can you expect to receive from Old Age Security, Canada Pension Plan and other private pension plans.
Figuring out a good estimate of your monthly income from pensions and benefits that you will receive during your retirement will subtract substantially from the amount that you need to have saved.
When do you want to retire?
The younger you are when you retire, the longer you can expect to live in retirement and the more money you will need to have saved. If you retire when you are older you will be retired for a shorter time and will also have worked more years, enabling you to save more. In addition, postponing receiving your Canada Pension Plan benefits means that you will get 0.7% more for each month after age 65 that you delay, up to a maximum of 42% more at age 70 than at age 65. If you defer your Old Age Security pension your monthly payment will increase by 0.6% for each month up to a maximum of 36% at age 70.
How many years will you spend in retirement?
This is really asking the question how long do you expect to live? If you are in good health, you could expect to live 30 years more in retirement. Your life expectation will help you to calculate how much money you will need to withdraw from your savings each year.
How are you going to invest your money?
If you invest aggressively you should expect a higher rate of return on your investments compared to someone who keeps all their investments in a savings account.
How much have you saved already and how old are you now?
The younger you start saving and the more that you have saved means that you will have to save less in the future to achieve the same standard of living in retirement. For early retirement savers, most financial planners suggest saving between 10 and 15% of your income. If you start saving later then 20% of your income might be a more realistic figure. One rule of thumb is to determine how much you will need to live on during retirement and multiply it by 25. For example, if you need $40,000 per year then you will need to save $1,000,000 to retire comfortably. However, if you will receive $20,000 a year from pensions and benefits and will only withdraw $20,000 a year out of your savings then you will need to have saved $500,000 by the time that you retire.
Overall, the amount you will need really depends on your personal circumstances, but it is always a good idea to save more than you think you will need rather than less.
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