How Much Money Will You Need for Retirement?

How Much Money Will You Need for Retirement?

The question “How much money do I need to retire?” can sometimes sound overwhelming. Luckily, you can use a variety of simple methods to determine how much you’ll need and how much you should put aside each year. In this article, we discuss some of the methods to help get your retirement plan started.

How much money do you need to retire?

Most financial and insurance planners suggest you’ll need around 70-80% of your pre-retirement income each year of your retirement. They generally assume that by the time you retire, you’ll have paid off your mortgage, your children will no longer be dependent on you, and you’ll have fewer work-related expenses.

But it’s important to tailor this number to your circumstances. For example, if you have a family member who is likely to remain dependent on you, you may need a bigger nest egg. Similarly, if you’re planning to travel a lot in your retirement, then you probably need to save a little more.

What Is A Retirement Plan?

Though it may seem far away, it’s important to start thinking about your retirement now. With life expectancy increasing, chances are you’ll be retired for 20-30 years. With no income, you’ll need to figure out how you’re going to feed yourself, keep a roof over your head, and pay your medical bills.

A retirement plan helps you determine:

  • The amount of money you need to save,
  • where you should invest and what returns you can expect,
  •  what government assistance is available to supplement your savings, and
  • how to take advantage of the tax benefits that apply to retirement savings.

Most importantly, a retirement plan can help you get the lifestyle you want after you stop working.

How much do you need to retire at 55 in Canada?

There are a lot of different ways people plan:

  • Rule of 10% – Save 10% of each pay cheque for retirement.
  • Rule of 20% – Save 20% of each pay cheque for retirement
  • Rule of 72 – Divide 72 by the rate of return of your investments (in percentage points). This will give you an approximation of how long your investments will take to double in value.
  • Rule of 4% – Aim to spend 4% of your savings each year of your retirement. The assumption is that your savings are invested and growing at a rate of 4% or higher so that you’re just living off the earnings and never actually dipping into your savings.
  • 25x Rule – Estimate your income the year before your retirement and multiply that by 25 to get your savings goal. The assumption is that you’ll be retired for 25 years.

Retirement Savings by Age

A good way to stay on track with your retirement plan is to set interim savings goals based on your age. Suggested savings benchmarks are

  • 1 year of salary by the age of 30
  • 2 years of salary by the age of 40
  • 4 years of salary by the age of 50
  • 6 years of salary by the age of 60
  • 8 years of salary by the age of 67

To achieve these targets, you generally need to save around 15% of your salary each year and invest at least 50% of the money in stocks.

If you want to save more aggressively, you could put aside 25% of your salary each year, and you’ll likely hit each of these benchmarks around 5 years earlier.

What Can Change Your Retirement Income Needs?

Of course, in any situation where you’re trying to plan for the future, nothing is set in stone. Unexpected health issues can derail your retirement plans either because you have expensive medical bills or because you have to reduce your working hours, and so you can’t save as much as you had planned. This is often why life insurance may be needed as part of a diversified retirement plan. For seniors that no longer want to pay premiums on their life insurance policy, a life settlement could be a viable option to gain access to cash.

Similarly, changes to your family situation can also impact your plans. For example, if you get divorced, or your spouse becomes ill, the family’s income could be halved making it much harder to save for retirement.

The good news is that you can always modify your retirement plan to account for these sorts of changes.

The Bottom Line

There are many different ways you can plan for retirement. Which method you choose depends on your individual circumstances and the type of lifestyle you’re planning for. The important thing is to get started straight away and tweak your plans as you go.


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