How Much Money Do I Need To Retire

Financial Health

Retirement—we all know we need to save for it. But we usually don’t want to think about how to save and when to do it. Plus, retirement feels so far away (sometimes torturously far away).  

At first, saving for retirement seems simple enough. You open an RRSP and put money in it every year. But then you hear how someone else is doing it better. Or you panic that you’re not saving enough. And before you know it, all that confidence goes down the drain like the money you spent on premium tickets for a terrible farewell tour concert. 

The good news? This article is written exactly with that confusion and lack of confidence in mind. It helps you brush up on some basic retirement savings terms and tells you where to look next for more information. This way, you’ll feel more confident about what the retirement landscape looks like in Canada and how to prepare for it.

When should I start saving for retirement?

We all know you should start saving for retirement as soon as you can. That’s why most experts recommend starting when you’re 25 years old. But that may not be feasible for you if you’re still in school at that age or you have other things that are higher on your list of priorities at the time.

The important thing is to start as soon as you can, regardless of how much money you can put aside. Retirement, like life insurance, is a long-term strategy that’s meant to protect you and those you care about. Even a little goes a long way. And although finding the right information to make an informed decision can often feel overwhelming, we hope this article gives you a strong foundation.

What determines how much I need to save in retirement?

It always starts with this question: “How much will I need, really?"

Start by envisioning the kind of life you want to lead when you’re retired. Do you want to live in the city, go to art shows, and buy the best there is? Or do you want to live in your hometown, surrounded by family, and travel once in a while? 

Here’s a list of the things you should factor into this decision: 

Your lifestyle

It’s important to consider your current lifestyle. Don’t try to achieve a lifestyle in your retirement that you currently haven’t achieved. After all, it’s a lot harder to take your lifestyle up a notch when you’re living off your savings instead of working (unless you’re prepared to change things up, which may include moving countries).

Your health

You should also consider your health. Where do you stand now? And how might this change in the future? 

A good standard of reference is your family history. Do people in your family have diabetes or high cholesterol? 

No, we’re not trying to scare you. And the reality is that you aren’t destined to develop a health condition just because your parent or grandparent had it. But considering your family history can help you set your expectations about what might happen to your health down the road.

If it helps to think of it this way, we’ve always felt that being prepared means looking for the good and the bad and setting yourself up for both but always hoping for the best. 

How to calculate how much you’ll need in retirement

With this in mind, you can calculate how much income you’d need to maintain this lifestyle during your retirement. 

The 80% rule 

Still unsure about the amount of money you’ll need? Experts say that your retirement income should be 80% of your final pre-retirement salary. This may be hard to figure out if you’re just starting your career and making around $40,000/year—you’ve got to start somewhere, right? However, knowing the kind of lifestyle you want to lead and whether it’s feasible to maintain with your current salary gives you the amount you can start with. 

You can also see this as a positive unknown. Because your final pre-retirement salary will be greater than your current one, you’ll be able to put more money aside for your retirement later on in your career. This reinforces the idea that the earlier you start, the better—as long as you keep putting some money aside regularly.

The 4% rule 

There’s also a 4% rule in retirement savings. This strategy assumes that you’ll get a 4% return on investments if you have no additional income, like OAS or CPP.

Based on this rule, if you want to have a retirement income of $60,000/year, then you’d need at least $1.5 million ($60,000/0.04) saved by the time you hit retirement age (usually age 65). In other words, $1.5 million would give you a post-retirement income of $60,000/year for 25 years.

Online Retirement Calculators

Now, if you’re into the specifics (because you know us insurance nerds are), there are plenty of calculators online that you can use to determine how much you need to save for your specific circumstances.

The Canadian government has a handy one, although it’s quite lengthy. It takes 30 minutes to complete, and you can find it here.

Just don’t get overwhelmed by the amount they’re telling you to save each month starting now or how far away you are from achieving your goals. Your current financial situation won’t be your financial situation for your entire working life. It may not allow you to put as much aside if you’re paying off school loans or a mortgage right now. But things may change in the next 10–20 years. Yes, there are some benefits of aging. 

What else should you be thinking about at this stage? Don’t forget about life insurance!

Whether it’s the fear of realizing and acknowledging our own mortality or the fact that it’s nearly impossible to sift through a sea of life insurance quotes, there’s no shortage of barriers that stop us from buying insurance.

That’s why at PolicyMe, we’re making life insurance a whole lot easier to understand and purchase. Find out everything you need to know about life insurance in Canada by checking out our guide to life insurance here