Determine how much you need to save for retirement






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Calculation A – How much annual income will I

need when I am retired?

How much you need to save for retirement depends on what you plan to do in retirement. Some choices are more expensive than others.

Financial planners often use the 70% rule of thumb as a guideline to determine how much money to save. You’ll need 70% of your current gross before tax income to live comfortably. For example, if your current annual gross income is $50,000, you could live on a gross annual retirement income of $35,000.

Will this guideline work for you? It depends on what you plan to do during retirement and how old you are today. If you’re between the ages of 20 and 39, this rule of thumb should provide a preliminary target for your retirement savings. However, the more specifics you (or your financial advisor) build into your retirement planning, the more confidence you will have in the retirement plans you make. If you are not sure whether 70% of your current gross income will provide enough income for your retirement lifestyle, create a retirement budget to estimate how much you need to save.

Estimate the annual retirement income you will need. The70% rule of thumbis based on

your current gross income. Is the 70% rule of thumb right for you? Use the budget template to help you create your retirement budget.

Knowing what you hope to accomplish in retirement will help you understand how much you need to save. The following calculations will help you determine just how much you’ll require to fulfill your retirement goals.

Some helpful hints to keep in mind as you complete your calculations:

• Don’t be intimidated by the calculations… they aren’t as scary as they look. • Follow the example to help you with the calculations.

• Include all household savings and income (from you and your partner) for a more accurate picture of your current and future financial situation.


Calculation B – Government benefits and other

sources of retirement income

Government Benefits– Currently, the maximum annual benefit from government pension plans and Old Age Security is approximately $18,000.

Other sources – You should take into account other known sources of income you and/or your partner will receive at retirement. These might include:

• rental income,

• home-based business earnings, • life insurance proceeds,

• defined benefit (DB) pension income, or • inheritance proceeds.

At this point, you should not include income you are expecting from existing registered savings, such as:

• registered retirement savings plans (RRSPs), • defined contribution (DC) pension plans, • deferred profit sharing plans (DPSPs), or • non-registered savings plans (NRSPs). You’ll add these in later.

All estimates are in today’s dollars. You’ll include the effects of inflation later.

Robin is counting on some government benefits to provide support in her retirement. She estimates she will receive $10,000 each year from government benefits and nothing from other sources.

$10,000 + $0 = $10,000

Estimated income you’ll receive from government benefits

Estimated income you’ll receive from

other sources

Result of Calculation B



Government Benefits include two main programs: • The Canada Pension

Plan or Quebec Pension Plan (CPP/QPP), and • Old Age Security


A Guaranteed Income Supplement (GIS) is available for people who have a very low income.


Calculation C – How much income will I need

from personal savings?

Subtract the amount you determined in Calculation B from the amount you determined in Calculation A to estimate the extra retirement income you’ll need to provide through your personal savings.

Robin estimates she will need to provide an annual before-tax income of $25,000. She calculates this by subtracting Calculation Bfrom Calculation A.

$35,000 - $10,000 = $25,000

Calculation D – The impact of inflation

To get a better picture of the amount you need to save, you should also consider the impact of inflation. Look at the table below and select a factor based on the number of years before you retire and the annual rate of inflation you expect.


annual Years to retirement inflation

rate* 5 10 15 20 25 30 35 40

2% 1.1041 1.2190 1.3459 1.4859 1.6406 1.8114 1.9999 2.2080 3% 1.1593 1.3439 1.5580 1.8061 2.0938 2.4273 2.8139 3.2620 4% 1.2167 1.4802 1.8009 2.1911 2.6658 3.2434 3.9461 4.8010 5% 1.2763 1.6289 2.0789 2.6533 3.3864 4.3219 5.5160 7.0400

*Note:From 1988-2003, the fifteen-year average of the inflation rate was 2.60%.

Choose a factor from the chart to calculate the additional money you need to save as a result of the impact of inflation.

Amount from Calculation A

Amount from Calculation B

Result of Calculation C


Inflation, or the rising cost of living, is the reduction in the purchasing power of one dollar over time. Inflation is an important factor to consider when planning your retirement.

The higher the rate of inflation you use in your calculations, the more money you will need to save.


Calculation E – How much will I need to save?

Now it’s time to estimate how much money you need to save to generate the retirement income needed to achieve your retirement goals. The amount you need depends on two important factors: how long you expect to be retired, and the rate of return you expect your investments to yield once you are retired.

Use the following table to determine how much money you need at a given retirement age, to provide an income until age 90. The factor you use will depend on the rate of return you expect to earn on your investments after you retire.


annual Retirement age

rate of

return* 55 57 59 60 61 63 65

2% 19.6630 18.5777 17.4867 16.9397 16.3939 15.3091 14.2392 4% 15.7498 15.0609 14.3490 13.9848 13.6166 12.8712 12.1186 6% 12.9986 12.5454 12.0654 11.8153 11.5597 11.0337 10.4917 *Note– These rates of return are conservative. When you’re retired, your primary concern is preserving your investment and maintaining a modest stream of income.

Assuming Robin retires at age 65, Robin estimates that she will need total accumulated savings of $735,393 assuming an average annual rate of return of 4% until age 90.

$60,683 x 12.1186 = $735,393

Calculation F – The value of your current


Now it’s time to calculate how much your current investments will be worth when you retire. Include savings you have accumulated in:

• Registered retirement savings plans (RRSPs), • Defined contribution (DC) pension plans, • Deferred profit sharing plans (DPSPs), or

• Non-registered savings plans (NRSPs) you intend to use for retirement purposes.

Amount from Calculation D

Factor from table

Result of Calculation E


Select the appropriate factor from the table using your years until retirement and the average rate of return you expect to earn on your investments until you retire.


annual Number of years until you retire rate of

return 5 10 15 20 25 30 35 40

4% 1.217 1.480 1.801 2.191 2.666 3.243 3.946 4.801 6% 1.338 1.791 2.397 3.207 4.292 5.743 7.686 10.286 8% 1.469 2.159 3.172 4.661 6.848 10.063 14.785 21.725 10% 1.611 2.594 4.177 6.727 10.835 17.449 28.102 45.259

Currently, Robin has $25,000 in RRSPs. With 30 years until retirement, and an anticipated return of 6%, she can expect $143,575 from her existing RRSPs.

$25,000 x 5.743 = $143,575

Calculation G – Your retirement savings gap

This is the difference between what you need to save and what you’ve already saved. Subtract the results of Calculation F from Calculation E.

When Robin subtracts the future value of her existing RRSPs from her estimated

Calculation E Calculation F Result of Calculation G


Your current savings

Factor from table

Result of Calculation F




Calculation H – Your monthly savings goal

To estimate how much you should save each month, consider how long you have to save it (the number of years until you retire) and what rate of return you expect to earn on your investments. Use the chart below.


annual Number of years until you retire rate of

return 5 10 15 20 25 30 35 40

4% 0.0151 0.0068 0.0041 0.0027 0.0020 0.0015 0.0011 0.0009 6% 0.0144 0.0062 0.0035 0.0022 0.0015 0.0010 0.0007 0.0005 8% 0.0137 0.0056 0.0030 0.0018 0.0011 0.0007 0.0005 0.0003 10% 0.0131 0.0050 0.0025 0.0014 0.0008 0.0005 0.0003 0.0002

With 30 years until retirement, and assuming a 6% rate of return, Robin estimates that her monthly savings should be $591.82 per month.

$591,818 x 0.0010 = $591.82

Calculation G Factor from table

Result of Calculation H



Just like an annual check-up with your doctor, it’s a good idea to review

your retirement plan annually, or at least when you have a significant life event such as marriage, a child or a new home. For additional information,