How much do you need to save to retire?

[CanadianCapitalist]

There are two schools of thought on how much money is needed for retirement. One school, pushed typically by the money management business and based on rather shaky foundation, is that most people need about 70 percent or more of their pre-retirement incomes to enjoy a comfortable retirement.

• Fidelity's Retirement Math
• Are Canadians Saving Enough For Retirement?
• Are Canadians Saving Enough For Retirement? Part 2
• Fidelity’s ‘Scary’ Retirement Findings

The other school, the most prominent of which is Malcolm Hamilton, argues that there is little data to support the notion that most Canadians need nest eggs of $1 million or more to retire at the traditional age of 65.

• Research on Financial Circumstances of Retirees
• Spending Patterns in Retirement

I think the latter school has a sounder argument. Most Canadians retiring at the traditional age of 65 will probably find OAS and CPP will provide most of their required income. A modest nest egg of a few hundred thousand dollars should suffice for the rest. Whether most Canadians of working age who don't have traditional pensions are on track to save up even modest nest eggs is a different story.

[Sampson]

I've always thought that the requirement for 70% of current income was ridiculous. Maybe we're TOO frugal - but I know if our housing is paid for - we could live off 35% of our current income.

I think the problem stems with the fact that most Canadians don't give enough forethought to retirement - and get themselves in trouble.

I suppose the other contributing factor is that since most Canadians have well below average returns on their investments - they have to aim for a nest egg that will give them 70% of their current income, but after fees and expenses to the financial industry - their nest egg will only provide 40-50% of current income.

[FrugalTrader]

Originally Posted by Sampson

I've always thought that the requirement for 70% of current income was ridiculous. Maybe we're TOO frugal - but I know if our housing is paid for - we could live off 35% of our current income.

I think the problem stems with the fact that most Canadians don't give enough forethought to retirement - and get themselves in trouble.

I suppose the other contributing factor is that since most Canadians have well below average returns on their investments - they have to aim for a nest egg that will give them 70% of their current income, but after fees and expenses to the financial industry - their nest egg will only provide 40-50% of current income.

The thing about the set percentage is that the retirement requirement is a moving target as wages tend to increase with age. Instead, I like to look at it in the "Why Swim with the Sharks" perspective. Basically calculate your retirement expenses that you expect to have, and aim to have your portfolio/cash flow cover that. You'd be surprised as to how much you really need when you take away RRSP contributions/savings/work clothes/cars etc.

[stephenheath]

To me the biggest factor was not what % of my income, but how many years I expect to live. Most of my family has been active and healthy well into their mid to late 90's. Assuming I retire at 65, that's 25 years if I'm as lucky that I would need... and as medical advances continue that might even increase.

Once you start living on your income, even if you aren't depleting your principal, your principal is now no longer keeping up with inflation. Let's say right now you wanted $50,000 a year to live on, being conservative and assuming a 4% return on your principal, you would need 1.25 million dollars. That's great for year one. But year two comes along and there's been 2% inflation. Your principal is now still 1.25 million dollars, and it still gets you $50,000, but in today's dollars that's only $49,020. And in 25 years, because each year you've spent the income, you still have that 1.25 million, but that's got the purchasing power of $30,475.

To compensate for that (assuming you don't want principal depletion due to worries about long life) you actually need $75,000 per year... $25,000 to increase the value of your principal, and $50,000 to live on.... and for me, that's the main reason I'm targetting returns equal to 75% of our current income, even though I only expect to spend 40-50% in the early years (I realize that number may go down as I get closer to 90, but at least while insurance is still cheap I want to travel a fair bit).

[mfd]

Rough estimates put me at needing 1.5 to 2.5 million future dollars 25 years from now. Like I said this is rough and only looks RRSP savings and a little of the cpp. I haven't fully account for the fiances pension and non-rrsp investments. I'm in the process of mapping the actually total requirement for my retirement

[Jon Chevreau]

$2 million invested at 5% = $100,000 a year.

Seems like reasonable target to shoot for. If you don't aim high, you won't get close. Overshooting wouldn't be tragic, particularly if you love your work.

This assumes, of course, no Defined Benefit plans, which are becoming an endangered species, particularly for the younger generation. It also doesn't factor in government income sources like CPP and OAS. Many financial planners I talk to view CPP/OAS as a bonus but it's a worthwhile exercise to calculate how much capital you'd need to generate a reasonable retirement income, and not counting on DB or government pension incomes.

Book:

www.financialpost.com/fd

Blog:

www.wealthyboomer.ca

[Hazelnut]

I just roughly calculated my pension, CPP and OAS & personal savings and if I live to age 98 (my grandmother lived to 94 and her mother to 106) then I will have live on 1.9 million. Being the frugal person I am I think this will be more than enough.

[Retireat50]

As noted by others, you really need to account for lifestyle, debt, company pensions, indexed or not all play a huge factor in the selection of the right number. I think if you do not have a company pension you will need anywhere between 50 to 70 percent of pre retirement income not taking into account cpp/oas.

[2 yen]

I tend to work backwards....calculate all expenses on a monthly basis and multiply by 12 for a year. That's what I need in retirement. CPP / OAS are certainly not a bonus as a previous poster's advisor implied. For a working couple, with full careers, that's over $32000. As a non-resident, planning a return to Canada, we won't have much of either CPP or OAS, so the monthly expense method seems best for us. Our answer is blue chip dividend paying stocks. They should, and it's a big should, cover inflation.

[archanfel]

$0. OAS+GIS should be more than enough.