How Much Money Should You Have Saved Before You Can Retire?
How much do you think you need in retirement savings before you can retire? It was not that long ago that financial planners insisted that the minimum goal was $1M in investments to afford a comfortable life for – well, life. But a million dollars ain’t what it used to be. Now that figure has been bumped up to $2M (and woe to the person who thinks they can do it for less.)
What are you supposed to do if you don’t meet that $2M (or even $1M) “requirement?” Not retire, ever?
How much money do you think you need?
A recent CIBC survey reported that people think they will need $756,000 in savings before they can retire. Boomers (aged 55 and older) think they need $518,000.
The trouble is not many are doing this. On average, Canadians have saved $184,000. 39% have saved nothing at all.
The traditional recommendation for those in this situation is to work longer, save more and to scale down lifestyle expectations.
Where you save is important
What you care about in retirement is how much income you will have to spend after taxes and inflation.
Related: How Retirement Can Affect Your Taxes
If your only savings are in a Registered Retirement Savings Plan (RRSP), you will need a larger amount because every dollar you withdraw is fully taxable. Amounts withdrawn from Tax Free Savings Accounts (TFSA) are not taxed. If you have funds in non-registered investments, bank accounts or real estate, only the earnings are taxable.
You may not need as much as you think
There are certain people who can, and do, retire with little or no personal savings.
Those who have always been in a low-income bracket or have lost most of their savings perhaps as a result of things like divorce, disability, job loss or poor investing strategy could get by just on government benefits.
Canada makes sure that seniors don’t live in extreme poverty. In fact, the bottom 20% of earners will be better off in retirement than employed even without saving a dime.
A 65-year-old couple who each receive the average CPP payment of $679.16 a month as well as Old Age Security and Guaranteed Income Supplement would receive a little over $35,500 per year. A single 65-year-old would receive a bit under $21,000.
This is enough to keep them from falling below the poverty line IF they don’t live in an expensive city. But it just covers bare-bones basic needs and not much spare cash for any indulgences.
At the other end of the spectrum, a couple who both work in the public sector will find a good portion of their income will be replaced by defined benefit pension payments. Their combined indexed pensions will probably pay about $100,000 a year. CPP and OAS payments will be gravy on top.
Most retirees will fall somewhere in the middle. They want to spend time doing a moderate amount of travel, pursuing hobbies, dining out, and other entertainment. Many might also maintain vacation cottages or winter homes in warm places.
According to a 2016 BMO retirement report (latest figures available), average spending by a couple over 65 is between $42,000 and $72,000, assuming no debt and a paid for home.
Assuming the couple receives about $30,000 a year from CPP and OAS and have no employer pension, they’ll need a nest egg that can support an additional $10,000 to $40,000 a year in extra spending, plus inflation adjustments. So, for a middle-class retirement, you need $250,000 to $1 million in savings.
A single retiree doesn’t just cut that amount in half. He or she needs about $30,000 to $50,000 for a middle-class lifestyle and savings of $275,000 – $775,000.
According to author Fred Vettese, up to one fifth of middle-income households will suffer a 25% decline in their standard of living after they retire.
What do you want to do with your life?
You can’t just focus on a set dollar amount. Everyone’s idea of a perfect retirement lifestyle is different. How much you need to save depends on what you are planning to do.
The secret is deciding what you want your retirement to look like and then adapting to your circumstances and living within your means.
Really get into the details of what you intend to spend each year. Build in some contingency money for emergencies. And be flexible so you’re not burning through your savings too fast.
You will learn to do with less and your spending priorities will change. A Sun Life Retirement Report found that on average, Canadian retirees are living on 62% of the income they earned immediately before leaving the workforce.
Most retirees reported that they felt positive about their retired life.
According to Statistics Canada (2016):
- 63% of survey respondents who have household assets of between $250,000 and $600,000 are satisfied with their retirement savings.
- 81% are confident they will be able to take care of basic living expenses.
- 67% are confident they will have enough money to pursue their hobbies and interests and enjoy the lifestyle they want.
The bottom line
Retirement planning is hard because there are so many variables, but at least get a reasonable sense of what to expect with your retirement spending.
And remember, while we all need a certain level of retirement income to live, don’t be too focused on money.
Numerous studies show that we can achieve a greater sense of well being from strong personal relationships, good health and a strong sense of purpose.
Retirement isn’t about what you have, but how you live.