How much will you need in retirement?

By Charley Tsai, Vice-President, Wealth Planning Support, TD Waterhouse Canada Inc.

A couple walks along a country ski trail.

Your expected retirement lifestyle is probably the most important determinant of the amount of income you will require.

Retirement represents a new phase in your life. The first step towards financial preparedness for retirement is to determine the amount of retirement income you will need.

Conventional wisdom suggesting that you must replace 60% to 70% of your pre-retirement income has changed. There is no infallible benchmark, and how much you need in retirement will depend on a number of factors.

Your retirement lifestyle

Your expected retirement lifestyle is probably the most important determinant of the amount of income you will require. Ask yourself these questions:

Where will you be living? Will you be staying in your current home or are you contemplating downsizing to a smaller residence to increase your retirement nest egg?

What activities will you pursue? Do you envisage travelling a lot or taking up new hobbies?

Do you plan on becoming a “working retiree”? Some of today’s retirees have decided to keep working for a few more years after retirement to fulfill social and emotional needs. The decision to work part time or phase out full-time work may also have a positive impact on your retirement income.

Costs change when you retire

Once retired, you will likely be spending less on costs such as clothing and transportation.

Taxation. Your income tax bill will likely go down when you retire. Moving to a smaller dwelling may also mean a lower property tax bill. Depending on your retirement income sources, you may be able to take greater control over planning your taxes. Thus, if your income sources include registered Retirement Savings Plans (RSPs), Tax-Free Savings Accounts (TFSAs) and non-registered investments, planning your withdrawals wisely can have a significant impact on your taxes.

Contributions to pensions and savings plans. Pre-retirement expenses associated with contributions to public pension plans, employment insurance, company pension plans and RSPs may be eliminated.

Health coverage. Your medical and dental costs could increase if you are no longer covered by an employee plan.

Do you plan on early retirement?

The earlier you retire, the more money you will need. The amount of retirement benefit you will receive from the Canada or Quebec Pension Plan (CPP/QPP) may also be affected, especially if you also decide to start receiving those benefits earlier.

Last but certainly not least, don’t forget to factor in the rising cost of living. For example, with an annual inflation rate of 2%, a current after-tax retirement income of $50,000 a year would mean a need for more than $90,000 in 30 years’ time.

The more time you devote to your retirement planning today, the better your chances of financial success during retirement. For more information, visit www.tdretirement.com