How much money do you think you’ll need for retirement?

How much money do you think you’ll need for retirement? That’s a question a reader sent me the other day. It’s a fair one, and it’s something we all should be thinking about! I often talk about how much we’re saving for retirement, but what kind of income do I think we’ll need once we stop working?

Coming up with the initial figure was tricky, and since early retirement is a huge goal of mine, it has forced me to think super long-term. How do I picture my life when I’m 60? 70? 80? You can’t know exactly what you’ll be up to, but it helps to at least start thinking about it.

Here are the questions I asked myself when figuring out an approximate retirement budget:

Where will we be living?

Both RD and I know we don’t want to be in Vancouver when we retire. Ideally, we’ll be living in a smaller city with a lower cost of living (but still have enough amenities that it doesn’t seem like a small town). Though where that will be is completely up in the air. We’ve tossed around a bunch of different locations – Sooke, Victoria, Comox, Powell River, Ucluelet, Pemberton, Whitehorse – we’re just not sure. But we know we want to be somewhat close to our families.

Originally, we wanted to be super close to mountains and the ocean, which was really limiting (and expensive, haha). But the more we thought about it, the more we realized that when we’re retired, we can go wherever we want, whenever we want. So if we want to be close to mountains, we can just take our little RV and go hiking all summer (we are for sure buying an RV). Or if we wanted to spend a few weeks near the ocean, we can do that too. So all of a sudden, we didn’t feel restricted with where we ended up living.

We’ll also be mortgage-free, but I’ll need to account for maintenance, fees, property tax, utilities, etc. because those kind of expenses will never go away. 🙂

What kind of lifestyle do we want?

Really think about this. You don’t need to have all the answers now, but it’s good to think about.

My dream for us would be to custom build our own small home with a rental suite for additional income where we’ll be close to nature, but also within walking distance to most amenities. But I wouldn’t be opposed to condo/townhouse life either. RD thinks it’s unrealistic to live my entire life within a 5 minute walk to a grocery store, but I disagree. 🙂

We’ll for sure need a car that can pull an RV, and I can see us traveling a lot at the beginning of our retirement. We’ll still be young(ish) and it would be amazing to travel half the year – whether it’s slow travel abroad, or roaming around North America.

We also don’t have expensive taste, and I doubt that’ll change when we’re retired. While we like spending our money on experiences and good quality items when we do buy things, we’re not really into fancy restaurants, designer clothes, expensive cars, or a lot of ‘stuff’ for our home. So while I can see us doing things more related to ‘entertainment’ I just can’t see our everyday expenses really increasing by a lot. Especially considering our budget is pretty padded right now anyway.

What method do we want to use for retirement calculations?

There are so many different ways people can estimate what they need for retirement, and I’ll quickly summarize the most popular ones.

The 4% rule

This rule estimates how much you should withdraw from your portfolio after you’re retired. Withdrawing 4% is considered a safe rate in order to not run out of money. So for example, if you save up $1,000,000 for retirement, using the 4% rule, you would have $40,000 per year in retirement.

The multiply by 25 rule

This is similar to the 4% rule, but it estimates how much you’ll need in your retirement portfolio (as opposed to how much you can withdraw). For example, if you want to withdraw $50,000 per year in retirement, this rule states you should have $1.25 million saved ($50,000 x 25).

The 70% of your income rule

This is the one I’ve heard the most – that it’s a good estimate that you’ll need 70% of your pre-retirement income in retirement. It’s what I kinda based my calculations off of when I first started estimating for retirement, but over the past couple of years I began to think perhaps it’s too liberal for most people. Especially if they move to a town with a lower cost of living (or they downsize), and if they don’t have children to care for, or a mortgage to pay in retirement.

The save 10% of your income rule

This rule is simple in that all you need to do is save 10% of your gross income (as opposed to net income) for your future. For example, if you earn $60,000 annually, you should be saving $6,000 per year (or $500/month) towards retirement. But this rule only really applies if you started saving for retirement in your twenties.

What method I ended up using

None of them. I mean, I’m technically following all of them. But I wasn’t convinced any of those rules were accurate enough to stop my anxiety over having enough for retirement. So I ended up coming to the conclusion of how much money we needed to save based on our current budget (I have over 3 years of data together, and 10+ years of my personal budget).

Calculating it this way made sure that I was saving a realistic amount based on real numbers and patterns tracked over years of spending. Finally, my obsessive budget tracking and forecasting has paid off!

The numbers

Right now, we are saving 30% of our net income towards retirement. This is on top of RD’s government pension. Saving at this rate will ensure that we can fully retire by the time RD reaches 57 (I’ll be 54). My personal plan is to semi-retire by the time I’m 52 and work part-time. Now, I have no clue what kind of work I’ll be doing, but that’s something I can figure out later. 🙂

This savings rate (assuming a 6% return) combined with RD’s pension and CPP/OAS will conservatively give us a $100,000 income for retirement. This doesn’t take into account increases in RD’s salary (which would affect his pension), increases to our savings rate, or the fact that we’ll likely move and downsize our home, freeing up some housing expenses and unlocking whatever equity we’ve accumulated.

The income we’ll have is more than we need based on the retirement budget that I’ve mocked up:

The budget above actually quite similar to the budget we have now – except that all the expenses that I’ve stripped away (like mortgage and commuting costs) have been allocated to travel. I feel like this is a good representation of what we’ll end up spending, but of course it’s just an assumption and a lot can happen between now and retirement.

Which means I want to continue aggressively saving. Maybe one of us will have to stop working for whatever reason (illness, change of career, back to school, etc), our income might drop, or maybe we’ll find out we can retire earlier than planned. Who knows! Having money in the bank gives us options, and options give us that flexibility and financial independence that we want.

What does your retirement life (and budget) look like for you?

Author: Krystal Yee

I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.

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