This is a great question and of course, the professionals will tell you that you should be prepared to live on about 70% of what you currently make. Calculating the amount of savings needed to retire is not necessarily simple or straightforward.
There are general “rules of thumb,” such as saving 10 to 15 percent of income – which is one of the first things a Google search for “how much should I save for retirement” would suggest –which is better than no saving or planning guidelines at all. But relying solely on such maxims, particularly for a highly personalized process such as retirement planning, risks glossing over critical aspects. Health care expenses, for example, will be highly variable based on health status and lifestyle factors.
On average, Boomers believe expenses for health care will consume 23 percent of their income in retirement, significantly lower than the 33 percent of income those aged 60 and older currently spend on health care. Of even greater concern, an increasing number of Boomer's estimate costs at the low end of the scale, as 30 percent believe they will need less than 10 percent of income for health care.
Besides health care costs Boomers have to figure out how long they will live, the longer you live, the more money you need to save. One way to think about how much money you will need is to examine what Boomers who are already retired are spending. This will give you a starting point.
Boomers have a sense of what they think they will need when they retire, and that number is about $35,000 a year. This is close but the actual amount being spent by people already retired is $46,757 according to the Bureau of Labor Statistics Consumer Expenditure Survey, 2013.
We have three pillars of safety in Canada for people as they approach retirement. The first is the Old Age Security Income, the second is the Canada Pension Plan, the third is Personal Registered Retirement Savings Programs and finally, we have Employer Pension Plans. Employer Pension plans are either a defined benefit plan or a defined contribution plan.
Boomers are spending about $47,000 a year in retirement, where do they get that money?
Here is a very simple example:
Old Age Security is about $6,480 a year
Canada Pension is about $8, 800 a year—This is based on the average payout in 2017 and individual rates will differ widely.
Between OAS and CPP in Canada, a retiree will receive about $15,280 a year. If this is the only income you receive then you may be eligible to receive the Income supplement of between $500 and $800 if you qualify. So that adds another $6,000 to $8,400 and could bring your income up to approximately $22,000 a year.
The rest of the money needed will come from either your employer pension plan if you are lucky to have one or your own savings. Most Canadians do not have an Employer Pension Plan so they will have to save money in their Registered Retirement Saving Plan.
Most Canadians will be short about $23,00 a year if we continue to spend like those already retired. How much do you have to have to generate an income of $23,000 a year? You may need to buy an annuity of $500,000 or other investments to generate that income when you turn 65.
To save $500,000 at age 45 you will need to save about $1,450 a month. Or if you were 35 you would need to save about $800 a month for retirement.
Retirement savings becomes complex really quickly and most people do not understand the math involved. It is important that you sit down, (the earlier the better) with a qualified retirement specialist who can chart your own path to retirement.
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