This is a question I get asked a lot. In fact, it’s probably one of the most discussed financial topics out there. Some experts have created guidelines that give you an idea of what you’ll need to put aside for retirement based on your age, but there are so many other factors to consider.
How much you’ll need to save depends on what age you intend to retire at, if you have a pension, if you’ll retire with no debt, and what kind of lifestyle you expect to have in your retirement.
Personally, we’ve always followed the 10% rule – saving 10% of our gross income (income before taxes), and assuming that we’ll earn a decent rate of return.
In a recent article in the Canadian Business Journal, television host Gail Vaz-Oxlade lays it out by your age when you start saving. “If you are in your 20s, you need to save about six per cent of your income, because you have time on your side in terms of compounding interest. If you are in your 30s are you have saved nothing yet, you need to save about 10 per cent of your income. But if you are in your 40s and you have saved nothing yet you need to save about 18 per cent (the RSP contribution limit).”
Retirement planners used to assume that you would need about 75% of your current income after retirement. If you’re tracking your spending now, you should have a pretty good idea of whether that 75% is about right, or if you’ll need more or less, as you can predict what your expenses will be after retirement. While most retirees expect to have eliminated mortgage payments, life insurance (if you’re self-insured), debt repayment, and expenses related to your children (education, dental, clothing, food), many aren’t able to actually do so. 54% of Canadians will hold some debt in retirement.
What happens if you don’t save at all? The good news is, the government will take care of you (barely).
A 2010 MoneySense article talks about what a bare bones retirement will cost you. The article is about a study called Basic Living Expenses for the Canadian Elderly, which describes a no-frills retirement as one in which a couple rents a one-bedroom apartment plus utilities, has no vehicles, and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol (but does cover three nutritious home-prepared meals a day, along with typical health-care costs and essentials like clothing and personal-care products).
The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors would provide you with a combined $22,750 a year if you have no other income. Canadians who have worked most of their lives would also receive substantial Canada Pension Plan payouts in retirement. A couple which receives the average CPP payout, plus maximum OAS, and some GIS can expect to receive almost $30,000 a year.
So, unless you plan to live on the bare minimum the government provides, it’s a good idea to crunch the numbers to figure out where you are and then set up a plan to get where you want to be.