So, what’s the magic number for retirement? It’s a question that pops up a lot, and honestly, there’s no single, easy answer. If you’re looking for a headline figure, industry surveys consistently find that Canadians believe they need somewhere in the neighbourhood of $1.5 million to retire comfortably – and that perceived number has been creeping upward for years. That’s a pretty substantial chunk of change. But here’s the catch: that number might not be the right one for you. The real truth is, your “true retirement number” is a lot more personal than a big, round figure.
It’s tempting to latch onto a single dollar amount. It feels concrete, like a goal you can put a pin in. But retirement isn’t one-size-fits-all, and neither is the amount you’ll need to live comfortably. Any headline figure is an average, and averages can be misleading. It’s what many people think they need, and that perception is influenced by a lot of factors, including current economic conditions and what they hear in the news.
The Shifting Goalposts
You might have seen different numbers floating around over the years, and you’ve probably noticed they tend to change. That’s because the cost of living goes up, investment returns fluctuate, and our own expectations for retirement evolve. What seemed like a lot a decade ago might not feel like enough today. Survey after survey shows the perceived retirement need ratcheting higher over time, highlighting this constant recalibration. It’s not that people suddenly got richer; it’s more likely that their understanding of what “comfortable” means in retirement has become more expensive.
It’s All About Your Lifestyle
The biggest driver of your retirement number is, unsurprisingly, how you plan to live. Do you envision yourself traveling the world, picking up expensive hobbies, or enjoying quiet nights at home? Are you planning to downsize your home and reduce expenses, or will you be hosting family gatherings regularly? These are the questions that truly shape your financial needs in retirement. Someone who plans to live frugally and stay close to home will need significantly less than someone who dreams of frequent international trips and a bustling social life.
The 80% Income Replacement Rule: A More Practical Compass
Instead of getting fixated on a grand total, a more practical approach is to think about replacing your pre-retirement income. A widely used planning guideline is to aim to replace about 80% of the income you were earning before you stopped working. This isn’t a hard and fast rule, but it’s a good starting point because it acknowledges that some expenses might decrease in retirement.
What Goes Down (and What Stays the Same)?
Think about it: if you’re no longer commuting to an office, you’ll likely save money on gas, public transport, and work attire. Your mortgage might be paid off, or you might downsize, reducing housing costs. If your kids are grown and out of the house, those significant child-rearing expenses will have vanished. However, some costs might actually go up. Healthcare expenses, for example, tend to increase with age. You might also find yourself with more leisure time, which could lead to increased spending on hobbies, travel, or dining out.
Calculating Your Target Income
To use this 80% rule, you need to know your current annual income. Let’s say you’re earning $100,000 per year right now. Aiming to replace 80% means you’d be looking for an annual income of $80,000 in retirement. This is still a significant sum, but it’s easier to conceptualize than a million-dollar figure.
The $60,000 Annual Retirement: A Concrete Example
Take that $1.5 million headline figure and apply a conservative 4% withdrawal rate, and it works out to roughly $60,000 per year in retirement income – about $5,000 per month, before layering on CPP and OAS. This provides a slightly more tangible sense of what that large sum might translate to on a monthly basis. Again, this is a rough illustration. Your actual needs could be higher or lower depending on your spending habits and where you live.
The 25x Rule: A Savings Multiplier Approach
Another helpful guideline is the “25x rule.” This rule suggests you should aim to have saved about 25 times your expected annual spending in retirement. It’s a different way of looking at the same problem but can be quite useful for setting savings targets.
How the 25x Rule Works
Let’s go back to our example of needing $80,000 per year in retirement. Using the 25x rule, you’d multiply that by 25: $80,000 x 25 = $2,000,000. This suggests you might need closer to $2 million in savings. Notice how this differs from the $1.5 million headline figure? This is why different rules of thumb exist and why personalizing your number is so crucial. The 25x rule often implicitly assumes a safe withdrawal rate (like 4%) which is a common industry standard for how much you can take out of your retirement nest egg each year without running out of money.
The Safe Withdrawal Rate Connection
The 25x rule is closely tied to the concept of the “safe withdrawal rate,” often cited as 4%. This is the percentage of your total retirement savings you can withdraw each year with a high probability of your money lasting for 30 years or more. If you withdraw 4% of your savings annually, and your savings are 25 times your annual spending, you’re essentially covered. For example, if you have $1 million saved, 4% of that is $40,000 per year. If your annual spending is $40,000, then $1 million is 25 times your annual spending.
When Does the 25x Rule Make Sense?
This rule is particularly helpful if you have a good idea of your expected annual retirement expenses. It’s less about income replacement and more about directly estimating your spending needs. It also tends to align with more conservative financial planning, which can be a good thing when planning for decades of retirement. It might also be a more accurate target for those who are expecting higher retirement spending than the 80% income replacement rule might suggest.
High-Net-Worth Individuals: A Different Ballgame
It’s interesting to see how the retirement number differs for those who have already accumulated significant wealth. Surveys of high-net-worth individuals consistently show they believe they need substantially more – often close to double the general population’s target – to retire comfortably.
Why the Gap?
Several factors likely contribute to this difference. High-net-worth individuals often have higher current expenses that they wish to maintain in retirement. They might also have more sophisticated investment portfolios and be comfortable with a more active lifestyle that includes expensive travel or charitable giving. Furthermore, their planning might be more detailed, taking into account inflation, taxes, and estate planning, all of which can increase the required nest egg.
More Sophisticated Needs
It’s not just about accumulating a large sum; it’s about managing it. High-net-worth individuals might be more concerned with wealth preservation, intergenerational transfers, and philanthropic endeavors. These goals can add layers of complexity and require larger sums to achieve while maintaining their desired lifestyle and leaving a legacy.
Beyond the Big Numbers: Age-Based Milestones and Salary Multiples
| Age | Annual Income | Retirement Savings |
|---|---|---|
| 30 | 50000 | 100000 |
| 40 | 70000 | 200000 |
| 50 | 90000 | 400000 |
While headline figures and the 25x rule offer helpful frameworks, other common benchmarks can also provide context. You might have heard about needing to have saved a certain multiple of your salary by a specific age, or broader benchmarks like aiming for 10 to 12 times your annual salary by traditional retirement age.
Age-Based Savings Benchmarks
Several large investment firms publish guidance suggesting you save multiples of your salary based on your age. While the specific figures vary and are presented as guidance rather than strict rules, the principle is sound: the earlier you start saving, the less you’ll need to save each year, and the more time your money has to grow. This approach emphasizes consistent progress over time.
Salary Multiples: A Quick Check
The idea of having 10 to 12 times your annual salary saved by traditional retirement age (often considered around 65) is another way to gauge your progress. If you earn $80,000 annually, this would suggest a target of $800,000 to $960,000. This is significantly lower than the headline survey figures and the 25x rule calculation.
Why the Discrepancy?
These salary multiples are often based on different assumptions about spending needs and investment growth. They might be more geared towards individuals who plan for a more modest retirement lifestyle or who have other income sources like workplace pensions or healthy CPP and OAS entitlements. It’s important to understand the underlying assumptions of any rule of thumb before applying it to your own situation.
Creating Your Personalized Retirement Number: The Real Work
Ultimately, the most important number is the one that reflects your unique circumstances, goals, and aspirations. Forget the headlines; it’s time to do some practical digging.
Step 1: Estimate Your Retirement Expenses
This is the bedrock of your personal retirement number. Don’t just guess.
Housing
Will you own your home outright? Are you planning to downsize? What are the expected costs for property taxes, insurance, maintenance, and utilities in your desired retirement location?
Healthcare
This is a big one and often underestimated. The Alberta Health Care Insurance Plan covers physician and hospital care, but it doesn’t cover everything – dental work, most prescription drugs, vision care, and long-term care can all come out of your own pocket. Research supplemental private health insurance premiums and realistic out-of-pocket costs, and consider long-term care insurance if that’s something you’re weighing.
Daily Living
Think about groceries, transportation (car payments, gas, insurance, public transport), personal care, and clothing. Be realistic about your current spending in these areas and how it might change.
Lifestyle & Leisure
This is where your dreams come in. How much do you want to spend on travel, hobbies, dining out, entertainment, and supporting family? Be specific. Instead of “travel,” think “one major trip per year to Europe and a few shorter trips domestically.”
Taxes
Don’t forget about taxes. Your retirement income will likely be taxed, and the amount will depend on the type of accounts you draw from: RRSP and RRIF withdrawals are fully taxable, TFSA withdrawals are tax-free, and non-registered accounts fall somewhere in between. Remember, too, that your RRSP must be converted to a RRIF (or annuity) by the end of the year you turn 71, after which minimum annual withdrawals apply.
Step 2: Project Your Retirement Income Sources
Once you have a handle on your expenses, look at what income you can expect.
CPP, OAS, and GIS
Log in to your My Service Canada Account to get an estimate of your CPP benefits. Timing matters: you can start CPP as early as 60 at a reduced amount, or delay it (up to 70) for permanently larger payments. OAS begins at 65, and deferring it also increases the monthly amount. If your retirement income ends up on the low side, the Guaranteed Income Supplement (GIS) may provide additional support.
Pensions
If you have a pension, get the most up-to-date statement on your expected benefit amount and how it might be affected by inflation or survivor benefits.
Part-Time Work or Side Hustles
Do you plan to continue working part-time or start a small business in retirement? Factor in the potential income, but be conservative.
Rental Properties or Other Investments
Any passive income streams need to be realistically assessed.
Step 3: Calculate Your Savings Gap
Now, compare your estimated annual expenses with your projected annual income from all sources except your savings. The difference is the amount you’ll need your savings to generate each year.
Step 4: Apply a Withdrawal Rate
This is where the 25x rule or a similar concept comes into play. If you need to generate $50,000 per year from your savings, and you assume a 4% withdrawal rate, you would need $50,000 / 0.04 = $1,250,000 in savings. If you assume a more conservative 3% withdrawal rate (which might be prudent given longer life expectancies and market uncertainty), you’d need $50,000 / 0.03 = $1,666,667.
Step 5: Factor in Inflation
It’s crucial to remember that the cost of living will likely increase over your retirement years. Your savings need to be able to keep pace. This is often incorporated into more complex retirement planning software, but at a basic level, consider adding a small percentage for inflation each year to your projected expenses.
Step 6: Don’t Forget a Buffer
Life throws curveballs. Unexpected medical bills, family emergencies, or simply wanting to do something spontaneous can all strain your budget. It’s wise to have a buffer, perhaps an extra 10-20% on top of your calculated number, to provide peace of mind.
Your “true retirement number” isn’t just a dollar sign; it’s a roadmap for financial security and the freedom to live the retirement you envision. It requires a bit of honest self-assessment and practical planning, but the payoff – a confident and comfortable future – is well worth the effort.
FAQs
What is a retirement number?
A retirement number is the amount of money you need to have saved in order to retire comfortably and maintain your desired lifestyle.
How is a retirement number calculated?
A retirement number is typically calculated based on factors such as your desired retirement age, expected annual expenses, life expectancy, inflation, and investment returns.
Why is it important to understand your retirement number?
Understanding your retirement number is important because it helps you set realistic savings goals and allows you to track your progress towards a financially secure retirement.
What are some common misconceptions about retirement numbers?
Some common misconceptions about retirement numbers include underestimating the impact of inflation, overlooking healthcare costs, and not accounting for unexpected expenses.
How can I determine my true retirement number?
To determine your true retirement number, consider consulting with a financial advisor who can help you assess your current financial situation, estimate your future expenses, and develop a personalized retirement savings plan.
This article is provided for general information purposes only and does not constitute personal financial, tax, legal, insurance, or investment advice. Programs, tax rules, and regulations referenced are subject to change and may not apply to your circumstances. Please consult a qualified professional advisor before making decisions about your financial affairs. Lavoro Financial Group Ltd. is based in Edmonton, Alberta.