Calculating how much you need to save for retirement seems complicated. However it is important to know how much you need to save as soon as possible as you will need to start years in advance in order to be able to retire comfortably.
A quick way to estimate the amount you need to save for retirement is to multiply your annual retirement expenses by the « factor of 25 ».
The Factor of 25
By applying the following formula: (annual retirement expenses X 25), you will have an approximation of the amount that you will need to save to retire at the age of 65.
The factor of 25 takes into consideration that you may live a long life and that you might receive a lower than expected return on your investment portfolio.
Annual Retirement Expenses
To estimate your annual expenses at retirement, you must consider that your expenses should be reduced considerably as most of your financial obligations will have ended, such as mortgage payments, expenses for dependent children, saving for retirement and the costs associated with working (transportation, clothing, etc.).
Your expenses will also be greatly influenced by the lifestyle you wish to have during retirement.
Do you want to travel the world, spend the winters abroad or just enjoy a simple, modest lifestyle?
According to a survey of Canadian households, the annual expenses for retirees are estimated as follows:
|Middle Class – Couple||$ 40 000 to $ 60 000 per year (for the couple)|
|Upper Middle Class – Couple||$ 60 000 to $ 70 000 per year (for the couple)|
|Middle Class – Single||$ 28 000 to $ 42 000 per year (for the individual)|
|Upper Middle Class – Single||$ 42 000 to $ 49 000 per year (for the individual)|
If you have not eliminated or greatly reduced your financial obligations at the time of your retirement, you would need to increase the estimated annual expenses accordingly.
Retirement Savings – Amount Required
The tables below provide an estimation of the amount that you would need to save in order to retire at age 65.
|Annual Retirement Expenses||$40,000||$50,000||$60,000||$65,000||$70,000|
|Government Benefits ($ 15 000 per person)||($30,000)||($30,000)||($30,000)||($30,000)||($30,000)|
|Net Annual Expenses to Fund (per year)||$10,000||$20,000||$30,000||$35,000||$40,000|
|Factor 25||X 25||X 25||X 25||X 25||X 25|
|Required Retirement Savings (for the couple)||$250,000||$500,000||$750,000||$875,000||$1,000,000|
|Annual Retirement Expenses||$30,000||$35,000||$40,000||$45,000||$50,000|
|Government Benefits ($ 15 000 per person)||($15,000)||($15,000)||($15,000)||($15,000)||($15,000)|
|Net Annual Expenses to Fund (per year)||$15,000||$20,000||$25,000||$30,000||$35,000|
|Factor 25||X 25||X 25||X 25||X 25||X 25|
|Required Retirement Savings||$375,000||$500,000||$625,000||$750,000||$875,000|
The tables above assume that the individuals will receive government benefits, such as Canada Pension Plan and Old Age Security, which is estimated to be on average $15,000 per person per year (based on having earned an average salary during a normal career length; if you have earned a lower salary or worked for a shorter period of time, you would reduce the amount accordingly).
If you are not sure that you will receive government benefits, you can exclude them from your calculation to be more conservative.
Retiring before the age of 65
If you wish to retire earlier than age 65, you would need to increase your required savings by the amount of your annual expenses during early retirement.
For example, a couple with annual retirement expenses of $60,000 wishes to retire at age 60. The couple would need to add $300,000 (i.e. 5 years X $60,000) to the total of required retirement savings indicated in the table above.
A Financial Plan is a must
The calculations above are a rough estimate of what you will need to save for your retirement.
It is strongly recommended that you meet with a financial planner to develop a comprehensive financial plan that is customized to your individual situation. Contact one of our specialists at C Finance who would be happy to assist you.
You can also use the Retirement Calculator for a more precise calculation based on your financial situation.
Directions to use the Retirement Calculator:
Choosing a province: select Ontario if you live outside of Quebec; this will ensure that the government benefits are calculated correctly. The remainder of the calculations is not affected by the choice of province.
Expected Return: Choose the option that is most in line with your actual investment portfolio or your risk tolerance.
Desired Retirement Income: Enter the percentage of your actual income that you will require at retirement.
If you are not sure, you can follow these guidelines:
Couple: 50 % to 60 % of your actual working income
Single: 70% of your actual working income
These guidelines assume that you will have eliminated your heftier living expenses at retirement (mortgage, dependents, etc.). If not, enter a higher percentage of your income.
Additional Retirement Income: Do not include Canada Pension Plan or Old Age Security payments. These will be added later in the process.