Recently I wrote an article about how you need less than you think for retirement which turned out to be a very popular topic. There was a lot of discussion in that post specifically about taxes and inflation. Personally, I like to keep things simple. To summarize on how to calculate “you number”:

- Work out a budget of expected expenses during retirement. Don’t forget to include income taxes, albeit reduced, as an expense. Here is an example budget.
- Calculate how much the Government will provide you during your retirement years. You can use the Canadian government calculator here.
- The difference between 1 and 2 is how much income from savings (and/or company pension) that you will need.
- Take the number calculated in step 3, and multiply by 25. That is the amount you will need to have saved (in todays dollars). If you have other sources of income, like from company pensions or rental properties, then reduce step 3 by the other income amounts, then multiply by 25.

### The Retirement Expenses

In the article I wrote that many debt-free middle class couples would be able to comfortably retire at 65 on an income of $50k per year in today’s dollars. While $50k may not seem like a lot of money, it works out to be quite a bit when you don’t have debt servicing payments, RRSP and other retirement contributions, childcare costs (assuming the kids have left the nest), work related expenses (commuting, work clothes, lunches etc), and CPP/EI contributions.

While $50k is a nice round figure, *it’s best to work out your own budget number*. Calculate what you are spending now on a monthly basis, add in any extras you expect during retirement (travel, medical etc), then subtract the pre-retirement expenses mentioned above. I did this calculation back in 2007 and I worked out that we would need around $45k annually during retirement (including 10% contingency). However, this does not include larger items like significant home repair, large gifts, or large trips (only $6k/year for travel budgeted).

More recently however (2013), I did a calculation of our recurring expenses which worked out to be around $58k annually. While we currently don’t have a mortgage payment, traditional retirement would reduce our expenses in vehicles, groceries, insurance (we have medical insurance through small pensions), and the kids (hopefully). This would bring our total recurring expenses to approximately $35k a year, add in $15k a year in other costs such as travel, home renovations, helping out with weddings etc, and $50k a year should do the trick – at least for us.

### The Retirement Income

Once expenses are calculated, the next big question is where the income sources come from. If you are retiring in the relatively near future, then government programs are likely safe. The average Canada Pension Plan (CPP) and Old Age Security (OAS) payout for a couple is $28,000 but could be more or less depending on your circumstance. If you expect a defined benefit pension, then add the annual payout to the government benefit number (note that some pensions include CPP in the payout). If you have a few decades left before retirement, you may want to be a bit more conservative as government programs may not be as generous as they are today.

In the case of requiring $50k annually, assuming $28k/year in CPP/OAS and no pension, $22k is the remaining annual income to be covered by savings (RRSP, TFSA, non-reg, etc). Using the 4% withdrawal rule results in $550,000 in savings required at age 65 ($22k * 25 or $22k/4%). Note that the 4% withdrawals can increase with inflation (ie. 4% the first year, 4.12% the 2nd year and so on..), but you will need to keep at least 50% of your portfolio in equities.

### How Much Do You Need to Save Today?

The question remains, if you need to generate $22k annually from savings in todays dollars, how much do you need to save today? The answer is that it depends on the assumptions that you make. Where some get confused is that the $22k is in todays dollars, but realizing that they’ll need more in the future due to inflation. The simplest way around it is to make your portfolio growth rate assumption *after* inflation, in other words, the real return rate.

For instance, instead of using the a long term return of 7% or 8% on your portfolio, use an after inflation growth rate of 4% which is slightly lower than the lowest S&P500 return over any 30 year period since 1950. Using an online savings goal calculator (like this one), with a $550,000 goal in 30 years and using a 4% after inflation growth rate, results in saving about $800/month or $9,600/year in today’s dollars. In this scenario, it’s a little less than maxing out two TFSA’s.

I created a table to give you an idea on what you would need to save monthly to reach your “number”. Note that the numbers below assume a reasonable 4% after inflation portfolio growth rate. It’s also a good idea to increase your savings annually as much as you can but at least the rate of inflation. What’s the best way to invest to achieve this return rate? That topic is for a later article, but I’ll give you a hint… index.

**Monthly Savings Required to Reach Your Number (Assuming 4% real-return growth rate)**

Required Savings |
Monthly Savings (retire in 25 yrs) |
Monthly Savings (30 years) |
Monthly Savings (35 yrs) |
Monthly Savings (40 yrs) |

$200,000 | $389 | $288 | $219 | $169 |

$300,000 | $583 | $432 | $328 | $254 |

$400,000 | $778 | $577 | $438 | $339 |

$500,000 | $973 | $721 | $578 | $423 |

$600,000 | $1167 | $865 | $657 | $508 |

$700,000 | $1362 | $1009 | $766 | $593 |

$800,000 | $1556 | $1153 | $876 | $677 |

$900,000 | $1751 | $1297 | $985 | $762 |

$1,000,000 | $1945 | $1441 | $1095 | $846 |

Another option is to buy your own defined benefit pension by purchasing an annuity. How does an annuity work? An annuity is where an retiree gives an insurance company a lump sum, and in return, the company gives the retiree a monthly cheque until his/her last breath. While an annuity may not be a great deal at today’s low interest rates, they may be more favourable in the future.

I’m interested in hearing about your expected (or real) expenses during retirement. If you are comfortable, it would be very helpful if you would share your “number” in the comments.

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If I had worked out how much money I thought I needed per year in retirement when I was 25, the number would have been small, even after adjusting for inflation to today’s dollars. If I had repeated the exercise at age 35, I would have come out with a bigger number (once again, even after inflating the amounts to today’s dollars). Today, I come up with an even bigger number.

I’m skeptical of the retirement spending projections of anyone under 40, maybe even under 50. You may be right about spending little, but this may be forced on you instead of by choice.

Trying to use your calculations:

According to your formula the amount I need to retire is $1,616,000, based on projected normalized annual spending (for retirement – no mortgage) of $64,649. I guess if I were to rely on CPP & OAS (which I don’t beleive in), that would reduce my number by $28,000 * 25 or $700,000? So my real number I need is $916,000? I just turned 32 years old and I’ve got a net worth (not including net home equity) of $526,000. I’d like to retire in 25 years @ 57 so I need to fill $390,000 or approximately $780/month (according to the chart above).

Did I do it right?

In my quick and rough example in a recent post, I figure I need $54,000 per year AFTER taxes in today’s dollars to fund my retirement. This includes house repairs and renos, travel, increasing healthcare costs, and potentially nursing home costs in my 80s and 90s if I live that long.

Factoring in an inflation rate of 2% between now and over the next 17 years (if I was to make 2030 as my first full year of retirement) that $54,000 really costs about $73,000 in the future, again after tax.

This means I need a retirement income of around $100k.

Some of this money needed (and wanted) will eventually come from government programs like the Canada Pension Plan (CPP) and Old Age Security (OAS). The rest will come from non-reg. dividends and TFSA dividends ($30k), my pension plan, my wife’s pension and our RRSPs.

I hope to retire with a portfolio value of over $1 M excluding pensions in 15 years. No mortgage or any debt.

I’ve determined that once we are mortgage and debt free, we can live on about half of what we take home now. Currently we take home $54,000/year between us. Once we are debt free, we can live off about $27,000/year, although in my financial plan, I am targetting for $35,000/year since once we don’t have our debt obligations, our fun money can loosen up.

I used the goverment calculator on just my own income and pensions to come and came to $27,000 before tax. This is also assuming keeping the same retirement contributions to my DCPP and my RRSP and similar income levels keeping my CPP contributions consistent. Of course once we are debt free, we will be increasing our retirment savings. I project we will be consumer debt free in about 5-6 years and mortgage free within 12 years.

I have not run these same numbers from the goverment calculator for my husband because he’s not nearly as excited about projections as I am and getting him to do this will take some time. But, based on just my income for the family unit, at our current state, as long as we continue on the debt free path and stay there, we’re going to do okay. We won’t be rich, but we’ll be comfortable.

Although I don’t know my “number” since the calculator came so close to my desired retirement income number using conservative return on my DCPP and RRSP of 4%.

If you wanted to get really detailed about your future expenses you could always itemize the relevant CPI components for long-term inflation instead of using a blanket 30-yr 4% rate, as some components have a low or even negative correlation to general CPI.

Interesting chart….although I’ve seen the comparison many times, its always amazing to see how much advantage one has when they start at an early age. And this chart is very conservative with the 4% growth rate. I’ve seen charts with higher growth rates and the advantage is magnified, especially in the final years!

Our savings goal is $1.3 million in investments (we are currently at $1.2) and we also have $1 million in paid off real estate, no debts. We are estimating expenses of $50,000 per year and my husband will start receiving $24,000 a year in social security in the fall. I plan to work for another 2-3 years to save the last $100,000 and then retire as well. When my social security kicks in that will bring in another $12-15,000 per year. We feel comfortable with this plan and the amount of assets we have.

I think that it is kind of a moving target, till you get closer to your retirement age. Maybe at 5 years out and then at 3 years out you can get a more concrete number but the key is to start saving early, with some number in mind.

I’m not planning on Social Security in my calculations, but I believe *something* will be there in 20 years when I hit full retirement age. It will just be gravy.

@Joel, the CPP/OAS assumptions are based on the average amounts paid out by the gov. So this also assumes that you are retiring around the age of 65. If you retire earlier, you will need to save more.