Hello;
How much do we really need to retire? Perhaps you have concerns that, at your savings rate, you won’t have enough money saved to retire without having to dramatically lower your standard of living. Are these fears justified? Or could it be that we’re being too hard on ourselves when it comes to the retirement savings expectations we place on ourselves? Here is how to calculate your own retirement savings:1 (Fidelity : Maximize your retirement savings)
How much money do you need to retire comfortably?
What is the rule of thumb? Will you need 70% to 80% of your pre-retirement income after you retire? So, if you made an average of $75,000 per year during your working years, you may need only $52,500 to $60,000 in retirement. This 70% to 80% estimate is based on the likelihood that your expenses will be lower in retirement than during other phases of life. But it’s important to understand that your personal retirement income needs could be different than these estimates.
How much do you need to save to achieve your retirement income goals?
Once you estimated your retirement income needs, its time to calculate how much money you need to save to achieve that number. You could use an age based retirement savings factor. For example, aim to save 1x your income by age 30. By age 50, aim to save 6x your income and by age 60, aim to save 8x your income.
What additional income will you receive in retirement?
Besides your RRSPs, RRIFs, LIRAs and TFSAs to draw income from, you’ll want to consider government sources such as CPP and OAS. In Oct. 2020, the average monthly amount of CPP was $614. Your situation will determine how much you’ll receive up to the maximum. In 2020, the maximum OAS monthly payment was $614. If we take these as examples, that’s $14,736 per year that the average person doesn’t need to pull from their retirement savings. That means if you required $60,000 of income per year, you would only need to take $45,264 from your retirement savings as the difference is coming from government sources.
How much of your retirement income will be taxable?
Income from RRSPs, RRIFs, LIFs, are fully taxable. Also, OAS and CPP will count toward your income. TFSA’s are not taxable when you take the money out to help fund your retirement. Based on this, it is good to know how taxation is handled with each type of plan. This can make a difference in how much you need to save to enjoy a comfortable retirement.
Retirement savings are one of the hardest goals to set because there are many unknowable’s such as your health, how long you will keep working, and how long you will live past retirement.
The decision to retire is not always based on meeting a “financial target.” You could consider several prudent strategies such as working a bit longer, reducing your standard of living, or investing a bit better. Everyone’s retirement income needs will be slightly different. To calculate your own retirement savings number, carefully think through your anticipated expenses and potential income streams.
Please let us know if you require additional information.
Sincerely,
Mike Busby (22-Mar-2021)
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