One of the most frequently asked questions when meeting with prospective clients is, “How much do I need to retire?”  The simple answer is: it depends. Many varying factors are considered for each situation. The hope is that this article will remove some of the mystery around figuring out how much is enough to retire and provide some steps to answer this question for your situation.

Step 1: How much do you spend on average right now?

Boorrrriinnnggggg… Right?!?! This is a step most of us (me included) would like to avoid. The reasons vary, but I would estimate only 5% of clients actually budget. Tracking expenses…maybe another 5-10% could be added to that number. BUT this is the most crucial step to figuring out how much is needed to retire.

Trust me on how necessary determining your current spending is. Be honest with yourself and include all expenses. It can hurt, to be honest about how much we spend in a year, BUT if you’re not, the only one you are hiding it from is yourself. What have you got to lose?

Here is a quick way to help you determine your monthly spending:

• Look at your last three months’ credit card statements
• Add your outgoing funds from your last three months’ banking statements
• Divide your totals by 3 to get a monthly amount
• Add in annual costs: property tax, car insurance, house insurance, etc.
• Total your annual costs and divide by 12 for a monthly amount

Do this step and then move to Step 2.

Want a helpful spreadsheet to work with? Click HERE to download our Excel budget worksheet.

Step 2: What will change in your lifestyle when you retire?

Take the information gathered in Step 1. There may be things you may want to add or remove from your current lifestyle in retirement.

Remove: Look at your current spending and remove all the things that should be gone when you retire. Consider removing: RRSP contributions, savings, disability insurance, mortgage payments, etc.

Add: Include expenses that may increase. Consider increasing: travel, medical expenses, and gifts.

Step 3: How much will it all cost?

Look at the additions from the lifestyle change considerations in Step 2 and add in the new costs based on research and educational insight.

• For example, good medical insurance for a couple in their mid-60s could cost as much as $450/mo.
• Why do I say gifts in Step 2? Grandkids? (Supposedly, they are the real reason we have kids…or so I have been told). Helping your kids buy a home in an ever-increasing housing market?

Now total it all up (in today’s dollars).

The industry standard income assumption is typically 70% of pre-retirement income. However, we have found this oversimplifies the matter since several factors must be considered.

• Do you own your home or rent?
• Will your mortgage be paid for at retirement?
• Will you have dependent children at retirement?
• Do you have expensive hobbies and require a fair amount of capital?

The industry standard income will give you a ballpark, but working through the steps will give a more accurate picture.

Step 4: Factoring in the Details

This is where things can get a bit more complicated, and the help of a financial professional with software can help. They will want to know the following:

1. When do you want to retire (or have the option to)?
2. How old are you now?
3. How much do you have in retirement savings now? What types of accounts do you hold? (RRSP, TFSA, Non-Registered)
4. How much are you saving every month?
5. What is your current income?

If you want to play with the numbers without talking with a professional advisor, you can run a basic calculation with some online calculators. The Sunlife Retirement Savings Calculator (click the link and try it for yourself) is one example that discloses its assumptions and keeps it pretty simple to get a ballpark amount that you would need to retire.

Assumptions

This is a very important point. There are several assumptions that planners and online retirement calculators make to project the dollar amount needed to retire. Financial Planning Standards set these assumptions each year, and you will want to know what these assumptions are. The FP Canada Standards Council publishes an annual Projection Assumptions Guide (click here to view the 2023 assumptions) to help financial planners make realistic financial projections.

Some of the important assumptions to look for are:

• Your CPP amount: (For example, most Canadians do NOT receive the maximum CPP). The average Canadian receives $600/mo, while the maximum is over $1,300.
• Inflation %: Currently, inflation in Canada is over 4%, and the going assumption is 2.1%. This is a material difference. To give you a sense of the impact of this assumption:
  • Suppose you are 50 years old and want $50,000 income (in today’s dollars) at age 65. The difference between a 2.1% inflation rate and, say 4% inflation rate is:
• Rate of Return %: What are the return assumptions being made? Guaranteed returns (GICs) are around 4.4% when writing this blog. Are the return assumptions above or below this?

Assumptions can make a plan look great or brutal, so know the assumptions!