How much you need for retirement may be the biggest financial question of all, and it guides much of people’s financial and investment planning. The answer to the question tells you how much you need to save every year. It may even influence your investment decisions by helping you determine how aggressive or conservative your portfolio should be. The answer affects life plans too, such as when you can retire.

More than math

But how exactly do you determine the amount you need to retire? You may have heard guidelines, such as basing your annual retirement income on a percentage of your pre-retirement income, often 70%. Or maybe you’ve seen some of the many retirement income calculators available online. 

But calculations are only part of the solution. What’s most important is developing a good understanding of your personal retirement situation – the following elements in particular. 

Timing. Start with when you would like to retire because many of the remaining factors depend on it. If you have a spouse, do you plan to retire at the same time? Simultaneous or staggered retirement dates have an influence on the lifestyle you want and the size of the nest egg you need in the initial years of retirement. 

Lifestyle. What kind of retirement lifestyle do you want? The more details you can provide, the better. Do you plan to travel, and will it be world travel? How often? Will you purchase vacation property? If yes, will it be here or in the Sun Belt? Will you stay in your home, downsize, or move elsewhere? 

Perhaps you or your spouse plans to work during your retirement years. Some people continue working for the income, and some for fulfillment and a sense of purpose. Others may start a new venture as a labour of love. 

Health care. Financial protection against the risk of failing health is essential. Long-term care at home or in a residence represents a significant cost – potentially tens of thousands of dollars every year.¹ Long-term care insurance is one form of protection. Or you can self-insure by setting aside funds dedicated to the potential need for care. 

Helping others. You may plan to leave assets to your children or grandchildren or perhaps distribute some of your property during your lifetime. Consider whether you want to leave a gift to a charitable organization and what the amount might be. Also, do you have any financial needs or responsibilities specific to your family, like supporting an adult family member with special needs?

Start the conversation

You probably think of the above items every once in a while, but to properly determine how much you need to retire, you need to write it all down. Set aside some time to think about your future and make a formal record of your expected retirement date, lifestyle aspirations, and plans for health care and helping others. Then you need to put dollar values to your plan and determine your financial needs during retirement, accounting for inflation and increasing longevity. If you get stuck, it may be beneficial to talk to an advisor who can help you figure out exactly how to work towards the retirement you want.
¹ Source: Canadian Life and Health Insurance Association, A Guide to Long-Term Care Insurance, 2012.