Retirement Income

I frequently see the question “How much do you need for retirement?” It is a legitimate question that has no correct answer. I know that there are many people who want certainty and will be disappointed in the answer I have, and many others give.

When a person retires the assumption that is made is that they have three sources of income to draw on to support themselves. The first is their savings. The second is their pension and the third is their government pension. So how much income do you need?

I have heard several ways to calculate what you will need. Some experts tell us that you will need 70% of your pre-retirement income, others say you will need 80% of your pre-retirement income. Take you pick and once you have decided about what you think you need, then budget for it. I am living well on 60% of my pre-retirement income.

Everyone is different and has their unique situations so it is hard to give a good answer, but we can calculate out a retirement income for the average worker in Canada. Let's say you consider yourself the average retiree, here is how you can calculate your needs in retirement. I have heard it said that you will need over a million dollars to live comfortably in retirement.

As of January 2020, the average Canadian salary in 2020 was $1,050.59 per week for employees across the country – which means that the annual average salary for full-time employees is $54,630.68 per year. If you require 70% you need (the math is as follows $54,630.68 * .70=) $38,241.48. So, if you require 80% of your income you need, (the math is as follows ($54,630.68 * .80=) $43,704.54. 

The idea is that once you retire, you'll be able to eliminate certain expenses. You'll no longer have to save for retirement (obviously), and you might spend less on commuting expenses and other costs related to going to work. Your lifestyle will also help determine how much you will need. For example, if you plan to travel frequently in retirement, you may want to aim for 80% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 70%.

So, in my example, you may need between $38,241.48 and $43,704.54 a year to fund your retirement. The next question is, where will this money come from.

As said earlier you have three sources to draw on to help you.

Savings, is where we should start, and if you have no other sources of income then the question becomes how much income from my savings do I need to generate the retirement income that I need? 

The experts tell us that we should only withdraw 4% a year from our savings to fund retirement. So how much will you need in savings to generate an income of between $38,000 and $43,000 a year if you withdraw 4% a year? You would need between $625,000 and $705,000. That is a lot of money to save, but nowhere near the million-plus, the experts tell us we need. But remember in Canada we have two other sources of income when we retire.

The first is your Canada Pension Plan income. The amount of your CPP retirement pension depends on different factors, such as:

• the age you decide to start your pension

• how much and for how long you contributed to the CPP

• your average earnings throughout your working life

For 2021, the maximum monthly amount you could receive as a new recipient starting the pension at age 65 is $1,203.75. The average monthly amount in March 2021 is $ 619.44. Your situation will determine how much you’ll receive up to the maximum but you can go online and calculate the exact amount you will receive. This means if you have a Canada Pension and are the average worker, you could generate between $7,433.28 to $14,445 a year in Canada Pension.

The second source of income is the Old Age Security income. At age 65 all Canadians receive Old Age Security which is $626.49 a month or $7,517.88 a year.

What other yearly income do I have as the average Canadian from other sources to help me in retirement. 

I need between $38,000 and $43,000 a year to live in retirement, and I have between $14,900 coming in from other sources. How much savings do I need to generate an income of $23,100 (which is the difference between what I need and what I have)?

If you have a company pension then you may want to add it to the mix, as most Canadians do not have a company pension, I am not including It in the calculations of how much you should save. If you do not have a company pension, then you may want to consider savings of around $355,000. This is what you will need if you take out 4% a year as recommended by the experts. That is a lot easier to save for than one million or even $600,000. If you have a company pension and know what you will receive then add it to the mix and you may find you do not need to save as much.

It is always a good idea to try to save as much as you can for retirement, but sometimes the numbers seem daunting. The reality is that in Canada at least we have two other sources to help us when we retire, and we forget to calculate these when we look at how much we should save.