How much do I need to retire?
Now that my adult kids have moved out, my husband and I have found there’s more time to do things WE want to do but also we’re saving more money. We can enjoy spending it on special vacation trips but we are also keeping in mind our retirement. We tend to be cautious in nature when it comes to money – saving rather than spending… for those emergencies or unplanned events. Did you know that only 60% of Canadians are actively saving for retirement? The question for us and that many people ask is “How much do you need to retire?”
To answer this question, you really need to ask yourself three questions:
- How much will you spend in retirement?
- How long will you live?
- How much have you already saved?
I think it’s easier to answer these questions in reverse order.
For question 3, look at all your statements for your various investment accounts. Track them all in a spreadsheet, keeping separate the RRSP, TFSA and general savings. For this exercise we won’t include assets like your house or cars. You need somewhere to live so leave the house out of the mix for this exercise.
The answer to question 2 is more challenging. Nobody can know how long they will live. This is very difficult to calculate, but you can make some assumptions and try to extrapolate. Look at your parents – how long did they live? If you are not sure then use average lifespan in your calculations.
The answer to question 1 requires some tracking and calculations. The amount of money you will need in retirement depends on what lifestyle you expect. If you want to maintain the big house and two cars, take several trips each year and eat out on a regular basis, then you’ll need more. If you plan to downsize, go to one car, budget for one trip per year and watch what you spend, then obviously you’ll need less. The first step is to make a budget to track your expenses. Track exactly what you spend right now and include absolutely everything – leave nothing out. Include groceries, personal care items, car expenses, gas, insurance, rent/mortgage, property insurance, utilities (heat, hydro, water, phone, internet, cable, property taxes), house repairs/furniture, clothes, medical/dental, entertainment, vacation, gifts, misc. and any other expenses you have. I use an Excel spreadsheet and have tracked our daily spending for several years. I find it helpful to budget for big expenses like travel and to help track savings from year to year. We tend not to eat out very often – I like to cook! But we do treat ourselves occasionally and it is so much easier to predict expense patterns when it’s all written down.
To calculate and estimate your goals for retirement use a retirement calculator that includes your expense budget information along with all your savings together with retirement age. A good simple retirement calculator you can try is from the Bank of Montreal (BMO). It’s simple, but takes into account current savings in RRSP, TFSA and general savings. The only thing it doesn’t account for is any increase in salary. But most people using this program are closer to retirement already, so that point becomes less relevant.
Here is a fictitious example of one couple and a retirement scenario:
John & Mary live in Eastern Ontario and are 50 and 48 years of age respectively. John earns $135,000 annually. Mary earns $60,000 annually. Neither will earn a pension but John does pay into a Defined Contribution Pension Plan (DCPP). He pays 5% of his salary and his employer matches with another 5% so he gets 10% total each pay period. John & Mary want to know if they can retire from their full-time positions as early as age 55 and 53. They estimate they will need $60,000 total per year to live in retirement. They plan to work contract or part-time to pay for extra things like vacations.
Using BMO’s Retirement Savings Calculator you can punch in some numbers and play around with retirement age, salary, monthly savings, investment risk and even additional lump sum savings.
|Annual Salary (before tax)||$135,000||$60,000|
|RRSP monthly contributions||$1,125||$500|
|TFSA monthly contributions||$458||$458|
|Joint monthly contributions||$3,000|
Using the BMO Retirement Savings Calculator, and assuming a medium investment risk of 6% return, by ages 55 and 53 they will have 80% of their retirement funded. If they delay their retirement from full-time work when John will be 56 and Mary will be 54, they will be 100% funded for retirement.
Using a 4% low risk investment mix, the calculator estimates their retirement age of 58 and 56. So depending on how aggressive they are with their savings and investing, they could potentially accelerate their retirement.
Try out BMO’s Retirement Savings Calculator with your own numbers!
At what age will you be retiring?
Let me know which retirement calculator you prefer in the comments section below…