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How much do you need to save for retirement?

MoneySense | posted Tuesday, Nov 17th, 2015

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Here’s somewhat of an intimidating question: Are you on track to achieve your retirement savings goal?

If you don’t quite know the answer, take heart—most Canadians don’t know either. In fact, only 42% of us agree that we understand how much we need to save for retirement, according the latest results of a BlackRock global investor survey that tasked 2,000 Canadians with this question.

Based on BlackRock’s findings, part of the disconnect appears to come from Canadians not quite clear understanding of how much they should rely upon government plans to meet their retirement needs versus how they need to be actively saving on their own. For instance, very few (only 18%) of the survey respondents thought the Canada Pension Plan (CPP) and Old Age Security (OAS) would sufficient to fund their post-working lives for 25 years.

On this latter point, Canadians are absolutely right—government benefits alone won’t be enough for most retirees. According to pension expert Malcolm Hamilton, a senior fellow at the C. D. Howe Institute, only low-income earners making minimum wage or less throughout their entire working lives could count on government benefits providing them with the standard of living they’ve always been used to in retirement. Few Canadians, though, will actually fall into this demographic.

According to BlackRock’s survey, Canadians have annual retirement income expectations of about $47,000 in after-tax income—and the good news is that level of income will be more than enough for couples with basic retirement needs. That includes affording a car that’s used for eight years or more, taking driving holidays and even the occasional jaunt outside of Canada.

If you have that kind of retirement in mind, government benefits won’t get you all the way there—but the average Canadian couple can count on at least $30,000 in combined annual CPP and OAS payments once they stop working, according to Hamilton. (Don’t worry about the future of CPP and OAS, either. Both of these programs are very secure and sustainable, notes Hamilton.)

That means that you and your partner would only need to save up enough to provide yourselves with an additional $17,000 of annual after-tax dollars in retirement—not the full $47,000, for those who aspire to that goal.

Read more about retirement lifestyles—for couples or singles—and the savings required »

Keep in mind, too, that your level of retirement savings required will also be much less if you’re lucky enough to be enrolled in a workplace pension or savings plan. In fact, for some it could be enough to bridge the gap between a government pension and what additional level of savings you need.

For most of us, though, a diligent savings plan will be required to top-up our retirement nest eggs. And while you often hear retirement planning boiled down to a single figure (“you need $1 million to retire well”), a better approach is to calculate your must-haves in retirement versus your nice-to-haves—and then determine a specific savings goal based on the amount you actually require.

Hitting your target number might mean working an extra year or two longer than you planned, or you may find you can stop working earlier than you expected. And don’t forget, once you’re retired you’ll have considerably less living expenses: the home should be paid off, the kids will be financially independent, you probably won’t need that second car anymore, there’s no more commuting or business attire costs—and, of course, you’ll no longer be saving for retirement.

Calculate how much you really need

Want to get a handle on how much income you can expect in retirement? Try using this free online program called ESPlannerBASIC, which was recently made available to Canadians through a partnership between its creator, legendary economist Laurence Kotlikoff, and Jack Mintz of the University of Calgary’s School of Public Policy. It’s an elaborate financial projection calculator that allows you to enter the details of your particular situation, such as your age, your salary and when you hope to kick off your golden years. It then calculates how much you need to save each year, what your nest egg will be worth and how much you’ll need to live on. It automatically factors in Canada Pension Plan (CPP) and Old Age Security (OAS) payments, and also accounts for mortgage payments, your spouse’s income, taxes and other factors.

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