You know you need to save money for your retirement. Maybe you just started or maybe you've been at it for a while. What can be hard to wrap your head around, let alone calculate, is how much money will be enough.

No doubt your goal is to retire "comfortably" (whatever that means to you), but how do you know what you should be saving to get there? Assigning a dollar figure to your retirement fund can help saving feel less insurmountable and more realistic.

Here are some ways to calculate how much money you'll need to retire.

Consider your income, focus on your spending

You may have heard people say you should aim to live on 70% of your current annual income in retirement (meaning if you make $50,000/year, you should plan to live off $35,000/year in retirement). While this is a neat and tidy calculation and it seems logical to believe you'll spend less in your later years so you won't need as much income, it's not quite that simple.

In short — you can't assume your life will be cheaper in retirement than it is right now.

It's true that the majority of your debt repayment expenses (mortgage, loans) and child-raising costs (clothing, extra-curricular activities, education) will likely be behind you as you enter retirement (some further in the rearview mirror than others). However, other costs are probably going to increase: one good example is healthcare expenses. At some point during retirement you're also likely to incur new expenses, like outsourcing household chores that you may not want, or be able, to do (snow removal comes to mind living here in Alberta).

Beyond the basic costs of living, you'll want to consider your discretionary spending and what that will look like in retirement. Do you plan on traveling more or taking up new hobbies with associated costs? Remember to factor those costs into your annual retirement income needs.

Your present-day income is also not likely to stay your income closer to retirement (we're hoping you'll see a raise or two). Basing your retirement savings strategy on a number that's probably lower now than it will be later on, doesn't work. Not to mention the effect inflation will have (more on that later).

Another factor you shouldn't ignore is your entitlement through the Canada Pension Plan (CPP), which you can begin collecting at age 60. Be sure to factor in this income as it will offset a portion of what you need to save to maintain your lifestyle through retirement. 

Plan for inflation

Over time there is a general increase in the cost of goods and a decrease in the value of a dollar. This shows the effect of inflation. You need to consider keeping up with inflation when it comes to your retirement for two reasons.

1. It will affect each of the factors you've already considered (your current income, your annual spending and the time you have between now and retirement).

Spending: the prices of goods and services increase almost immediately in line with inflation (there are other factors at play also, but here we're strictly talking inflation).

Annual income: your income is likely to go up due to inflation as well, though you may not see that adjustment as quickly (this may be more dependent on your employer's compensation policies).

Combined, these factors may delay the age you'll be financially ready to retire.

What this means for your savings: as these numbers fluctuate you'll want to adjust your contributions accordingly. Instead of saving a specific dollar amount each year, make it a specific percentage (apologies in advance: this requires more math). This way your savings will always be in proportion to what you earn.

2. The second reason to consider inflation is its effect on your income once you actually pull the trigger and retire. Your retirement could last as long as it took you to save that money in the first place! We're living longer — your retirement income can't stay the same for 25 years.

But what to do? Factor this in beforehand, work a bit longer and save even more? Maybe. But you also need an investing strategy where interest rates keep up with (or exceed) the rate of inflation.

An illustration of retirement planning. From left to right, a checklist with check marks, a calculator showing 3 question marks, a Happy Retirement card with money in it.

Sustain your savings

At this point, you've considered your income, your spending and how inflation affects both when it comes to your savings. You might have a ballpark figure in mind for your annual retirement income. Now it's time to think about how long you'll need retirement income for and what that will look like.

We're living longer and it's reasonable to assume your retirement could last anywhere from 20-30 years. This is exciting when you picture 20 years' worth of time spent with family and checking things off your bucket list, but can be nerve-wracking to think about stretching your savings for that period of time. Preparing for this will help you avoid running out of money.

Whatever ballpark number you had in mind for your annual retirement income, take it and multiply it by how many years you expect to be retired. If you plan for $50,000/year for a retirement lasting 25 years, you will need $1.25 million (between savings and CPP or another employer pension) to support you.

Factor in your age

Okay so you have your savings goal in mind. Let's work backwards and make that number manageable (this math is a bit simpler). Take your current age and subtract it from the age you plan to retire at. No surprise here, the result is the amount of time you have to save.

For example, you need to save $1.25 million and you have 30 years to do so (divide $1.25 million by 30). What you'll do next is subtract the CPP income you expect to collect and the remainder is what you'll need to save per year to reach your goal.

If this number isn't realistic whatsoever, you may need to go back and adjust your ideal retirement age, or investigate how your age affects your CPP payments to see if delaying your collection will increase your benefits.

Like most things related to finances, there is no straightforward, one-size-fits-all solution (unless "get personalized advice from a financial advisor" qualifies). What's most important is to consider all the factors that go into retirement planning, to create long-term goals and to accept that your plan will probably change as you go (and that's ok).

We're always here to help. You can also contribute to your RRSP via online banking.

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