How Much Money Do I Need to Retire?

We’re all looking for a way to secure a future. It’s common to have dreams of a good retirement, with plenty of money to enjoy life. However, you can’t expect to just have enough money to live on if you want to be comfortable. You have to plan ahead.

A recent survey from the Employee Benefits Research Institute indicates that more than half of workers in the United States haven’t done a retirement needs assessment. It wouldn’t be unreasonable to assume that Canadians have similar results. This means that there is a good chance that you might not have figured out how much money you need to retire.

If you don’t know what you need to accomplish with your money, there is no way that you will be able to figure out how much you need in the end, or how much you need to set aside each month to reach your goal.

In order to live a comfortable retirement, you nee to ask yourself the following question: how much money do I need to retire?

The answer to that question will depend on a number of factors, including when you plan to retire and how much you will need to spend during retirement to maintain your desired lifestyle. Because of this, knowing what you need to retire in Canada is not a simple answer. However, there are a few simple calculations that might help to give you an idea.

The 4% Rule

The 4% rule says that you can withdraw 4% from your portfolio in the first year. Then in future years you withdraw the same amount plus the adjustment for inflation. This allows you to decide if you have saved up enough money to cover your desired income level in retirement.

If you use this rule of thumb as a starting point, you need to determine how much you need each year to live on. If you think that you can live on $40,000 a year, then you will need $1 million, since $40,000 is 4% of $1 million. However, you also have to consider inflation as well.

There are those who point out that the 4% rule doesn’t really work out anymore. However, it doesn’t make a bad starting point.

The Rule Of 20

The rule of 20 suggests that for every $1 of annual retirement income you would like, you’ll have to have $20 saved up. So if you’re looking for $20,000 over and above CPP and OAS, then you’ll want to have portfolio worth $400,000 by the time you retire. This is another rule that you need to be careful of. Just make sure that you accurately gauge your retirement needs.

The 10% Rule

While a little too simplified, the 10% rule tells us to save 10% of our gross income towards retirement. The idea being that it will give us a retirement income equal to what we’re used to now. My issue with this is the effect of this level of savings is dependent on what age someone starts saving towards retirement. The later you start, the higher percentage you might need to put away.

The 10% rule works well if you start in your 20s, but if you don’t start until your mid- to late-40s, just saving 10% of your income isn’t going to be enough. It won’t have time to grow. You need to adjust the amount you put aside depending on how much time you have to let it grow.

The Rule Of 72

You can find out how long it should take to double your money with the rule of 72. For this calculation, you divide 72 by your expected return. A 5% return would take 14.4 years to double your money.

Of course with this rule, you’ll need to have a realistic percentage you expect for a return, you can’t always expect double digits in every single year.

You also need to realize that it works better if you have a lump sum to invest. It’s easier to figure out how much money you’ll end up with if you’ve got a large amount of capital to invest for the future.

So, how much money do I need to retire?

Remember that these are just rules of thumb. You don’t want to base your entire strategy on these rules of thumb alone. Part of what you need to do is figure out how much money you think you will need during retirement, each year. You can use your current expenses as a starting point and try to figure out what your needs will be during retirement. Keep in mind that there might be tradeoffs. You might no longer have a mortgage payment, but you might travel more. Even though you might think that your expenses will be less during retirement, it doesn’t hurt to assume that your expenses will be similar, or perhaps even a little higher.

Hopefully these retirement calculations will help you see what you’ll need to save to have the retirement you’re looking forward to. Keep in mind that a couple that have worked most of their adult lives and retired at 65 can expect CPP and OAS to pay as much as $30,000 a year. Many people get discouraged about their retirement needs because they forget about CPP and OAS. Work those programs into your numbers and you’ll likely be pretty pleased with how easy it can be to retire comfortably with just a little planning!

How much money do you need to retire? These quick retirement calculations can help you find out what you need to retire in Canada as a start your planning.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

45 Responses to How Much Money Do I Need to Retire?

  1. All of the above! Kidding of course.
    The one part of retirement saving I am having issues with is how to evaluate our pensions (government based). Do we forgo bonds (at least for now) due to the stability of the pensions?

    • Sustainable PF, that’s a very astute questions. In theory, if you have the discipline to evaluate your asset mix on the basis of your entire net worth (i.e. pensions, real estate, probability-weighted contingent assets such as inheritences, etc.), then a pension income stream could be capitalized in order to arrive at its lump-sum value. Essentially, this means applying a “capitalization rate” to the income stream.

      On a government pension that is indexed to inflation, 5% is a good ballpark number to use. So the math goes something like this: $10000 per year in CPP income divided by 5% equals $200,000. It would be reasonable to consider this $200,000 as part of your long-term (i.e. 20+ year) bond holdings. But again, because including this “asset” in your fixed income allocation will likely result in you allocating more to equity in your investment portfolio, you should really only do this if you can stomach the increased volatility that having that additional equity position, whose value you can track by the minute these days, would bring.

  2. Although I do not live in Canada, your question is still relevant. Most of my retirement income will be fixed (social security and pension), I will supplement with various tax deferred and other savings. My theory is to replace my current income adjusted for cost of living.

  3. If you’re young ,don’t count on CPP and OAS too much as no one knows where things will be 30-40 years from now. Work out your retirement as if these programs did not exist and you will do just fine by then.

    • I totally agree. Specially now that the USA government is re-thinking the retirement plan. I wouldn’t count on gov help too much.

    • That might be a potential valid point for OAS but considering workers contribute to CPP via their earnings there would be major hell to pay if they didn’t get CPP benefits. And if I’m not mistaken, the latest actuary assessment in 2010 was that CPP was on solid footing for 75 years.

  4. Take the final calculation of each of the above, add them together, and viola! That’s what I think I need. Ha-ha. Just kidding. Thanks for putting all these equations in one place! 🙂

  5. Keep in mind all these amounts are pretax. The $30k from CPP/OAS will have tax deducted, and so will your withdrawals from whatever savings you accumulate. If you figure you’ll need $50k/yr NET for expenses in retirement, you’ll need to save more to have that left after taxes.

    In my own case travel will be a big component of an otherwise very frugal retirement budget. Initially I was budgetting for $10k/yr endlessly through a retirement that could last 30-40yrs depending when I start and if I live to 95. Then I decided we were likely to do most of my travelling in the first 10-15yrs and less as time passed. Instead I’ve decided to only assume a very basic annual amount in my regular retirement budget for a couple of car trips to visit family or go away for a weekend. To cover the expensive international travel I hope to do in the early part of retirement, I’m setting up an entirely separate pool of money specifically for travelling. At this point I’m targetting $150k ($15k/yr for 10yrs). I figure we may spend more some years, less others, and maybe won’t travel every year, but it’s money that’s completely separate from our daily budgeting. To accomplish this we’ve decided that the $5k we each put annually into our TFSAs will cover this after ~12yrs of contributions depending on our investment returns. We have 2yrs in and 10 to go on that.

    Using the 4% rule (basically multiply what you need pretax x 25) we’ve already saved what we need for the basics of retirement at 65 plus a little more. We’ll continue to do $10k annually to our TFSAs for travel, and then any extra we have goes toward paying off the mortgage early and building up excess in our RRSPs so we can retire earlier, before CPP & OAS kick in. Those years where we have to fund it completely on our own are a lot harder to fund that the ones after the goverment money starts rolling in. We’re 47/50 now and if all goes according to plan…we hope to retire in December 2020 at 57/60. We may fall short, but if we don’t set a goal to work towards, we’re far less likely to get there. My only regret is that we didn’t get our act together a couple of decades sooner. We could have been retiring or at least shifting to PT now. Hindsight’s always 20/20.

    • @Jenn – saving up to travel in retirement is great, and you are most likely correct to assume that you will want to do it in your early retirement years. I know my aunt and uncle (now in their mid and late eighties) no longer enjoy traveling but they were very keen on it for 50 years.

      Don’t neglect to have adventures before retirement as well!

      • Another thing to remember – by the time you hit 75 or 80, travel insurance for international travel becomes either expensive or impossible to get – if you have health issues it’s impossible, but even if you’re healthy it’ll be increasingly expensive.

  6. It depends how you have lived before retirement. Times are tough. Many folks are still paying monthly mortgage in retirement.

  7. Tom, I’m familiar with all of the metrics. The reality is that no matter how much money one has, there is a degree of uncertainty. I’m glad you raised the question and gave some solid recommendations. But there really is no easy answer! There’s definitely a psychological component as well.

    • The psychological component is the most important of all and it is the fact that we will spend up to (and often beyond) the income we have, regardless of how much it is.

      The essential problem is the lack of clarity each of us deliberately has about needs vs. wants. For example, too many people think they need to get away to somewhere warm each year, when in fact they just want it.

      How much money do we need for a retirement? Not much, really. How much do we want in our retirement? More than we’ll ever have. It’s that simple.

  8. Surely there’s not a 100 per cent way to determine how much money you need to retire, but I think some of these “rules” may give you a clue. In any case, better save some more money if you can – just for sure.

  9. It’s actually that easy isnt it… Just set some aside but many can’t get around doing it…. Even $50 bucks a month goes a long way but that lovely dinner out is just too hard to resist

  10. All these rules of thumbs are good places to start, but I plan on simply being rich. I know, I know, a little easier said than done, but really, when it comes down to it, I feel as if I’ll always be working on something that will net me some income on the side, plus working on a career that whole time, and having my investments grow all the while. Then again, I really don’t think I’ll ever want to traditionally “retire”, or at least not at the age of 65. But who knows what the future holds.

  11. Some interesting options, personally i have now planned it on the basis that my requirements for retirement are X. From X i deduct state and private pensions estimated income giving a shortfall of Y and then use the 4% rule to work out what i need to make up the deficit. Once the 4% has been attained each extra X saved allows early retirement.

  12. All of us want to lead a comfortable old age. None of us would like to spend the last phase of our life full of problems and poverty. So we need to plan accordingly and make some savings for the autumn of our Life.

  13. I like how you have consolidated these into one post–I’ve known about most of them, but when you put them side by side you can compare much better.

    I am in the US, and my husband and I each have Roth IRAs that we max out, then he has a 401(K) that he puts 3% into to get a company match of 3%, and then I have a pension that I pay into (I put 6% into it and my agency matches that…vested in 5 years and I am almost at 3 years of service).

  14. I think the amount one needs to retire depends a lot on the lifestyle they want to live when they retire, what their investment strategy is, and whether or not they are able to park sufficient funds towards their retirement along the way.

    If you own your home and it’s paid off at a fairly young age, the path to retirement could be a lot quicker depending on how you allocate your hard-earned dollars.

    Some people also have to make changes to their retirement plans along the way. Not everyone will be able to avail of a good company or gov’t pension and finding ways to come out on top will require extra work.

    Nice post

  15. Thanks for the numbers Tom, “The Wealthy Canadian” above comments has made a very good point, how you retire depends on lifestyle choices.

    As already noted most Canadian can expect about $30,000.00 in government benefits. All most people need to do is have a part time job that makes them some extra cash. A job also provides a sense of purpose and give you something to do when you retire.

    Retirement is supposed to be a time in a persons life to do different things, but too many people think they just sit at home and do nothing, time to change some lifestyles.

    • If you are retired and plan to live let say 20 years and will make 5% on your money, $30,000 will pay you $1500 per month. Not enough in my opinion.

      • The $30,000 quoted above is an annual income for a couple who have worked and lived in Canada for about 40 years making a good income along the way. It is NOT a one time benefit paid out upon retirement.

  16. Such a nice post. Very helpful. I do agree with you regarding these rules that these will help to people for sure. But I think that there cannot be any rule that can specify or tell how much to save on an average. I think it is the financial goal that is most important. Depending upon the financial goal you can decide as to much save.

  17. It largely depends on your current financial assets, as well as their projected evolution in the mid to long term. There is also the question of the lifestyle, what it is like today, and if it can be maintained tomorrow through your savings. Based on those factors, the answer to this question will largely vary.

  18. Very informative post! Thanks for the tips. The biggest thing I think is to not be too conservative with your investments when planning for retirement at an early age. Since most really safe investments don’t keep up with inflation, you will have to save more if you don’t want to take any investment risks. Also, it’s important to factor in what you actually want to do in retirement, as others mentioned, this is key in deciding how much you really will need.

  19. did anyone factor in rising medical bills and the risk of having to be in private homes and things like that
    I would be interested to know. I was also following a thread on this on
    If you are interested to get another perspective you can try to read there as well

    but I personnally think it depends big time on the style of life and comfort you want to have and your risk level

    since in planning just the 4% rule you are taking some risk that you would be living as per your life now without any complications.

  20. I keep our finances in Quicken and use the retirement planning software to estimate retirement income and expenses. Hopefully I will retire at 58 and do something else, like blog hopefully! I reduced the social security benefit by 10% due to uncertainty about changes in the entitlement program. Bottom line is we don’t really know what is going to happen and that is why living within your means, and saving are more important now than ever.
    Thanks for your words of wisdom Tom!

  21. Well if we do have 4% rule and 7% average income….the money will last forever and ever…

    You can call it retirement or financial independence, I would be conservative. Whatever you are spending now – you will need 33 times more.

    So if it is 50,000 a year, you will need 1,650,000 to retire. If think you need less, try to leave on less – prove it before you retire.

  22. Interesting. I never heard of most of those rules before. I find saving for retirement the easy part, it is putting that money into the right investment vehicle now a days that is scary and difficult.

  23. Great article, these days it is getting harder and harder unfortunately for younger generations to save for retirement. Solid investment strategies and budgeting are to easy to put aside especially when dealing with higher debt loads.

  24. My wife and I are 35 yrs old, and currently have approx $120K in RSP and pension savings. Currently, when you combine our ongoing RSP and pension savings, we are putting approx $24k away per year. Assuming we continue this for the next 20 years, will this be enough to retire at 55?

  25. Using the ‘4% Rule’ and expenditure data, the average Canadian retiree household currently has a portfolio of ~$300,000.

    Assuming a two-person household, a future retiree would only need save $275 per month over the course of 45 years (ages 20-65). This could be held in cash or low-risk inflation-indexed securities; no need to put anything into the stock market or mutual funds.

  26. You know I think the amount is subjective. While I have seen many people in my organization staying put for life basically (working full time until they pass away). This might be because they didn’t save or they were just afraid to “take the leap” from something they have been doing for so long. Anyway, there must be enough to factor in the kind of lifestyle you want. For some it will be $500k for others it might mean $5m.

  27. Most of advice here is based on two incomes..More than 50% of retirees are single.,Maybe two can live as cheap as one..But trust me.It takes a lot more for a single to live alone…However I find that the secret to a secure retirement is to have your accommodation paid in full..Paying rent makes retiring harder..Of course everything really depends on the amount you have managed to save..But circumstances such as illness and or Divorce are a factor also.

  28. “As already noted most Canadian can expect about $30,000.00 in government benefits. ”

    Nonsense. Unfortunately too many financial advisers and writers throw this dud out there as if it were a truism. The average CPP benefit is just a little over $550/month and not the $1038/month maximum.

  29. Thanks for all your advice. The key to a happy retirement is good health, a sense of purpose and of course enough money to support your lifestyle. The later two we have control over by the decisions we make about spending and what we do with our time, but the good health part we sometimes can not control. I read once that the average Canadian spends the last 10 years of their life in failing or poor health. I really like the previous recommendation to start living on what your retirement income will be prior to retirement. If you can happily do that for a sustained period, say 2 or 3 years, then you shouldn’t have a problem. And keep in mind that during that sustained period of 2 or 3 years you may have saved as much as 50%of your net income during this period that could be spent on some great travelling when you do retire!

  30. Most people have control over their health too but it is a low priority for them and so they neglect proper nutrition and regular exercise throughout their lives. It all comes back to haunt them when they hit their 50s and 60s.

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