How much do you need to save to retire? It’s a really important question. And it’s one that weighs on many people because behind it lurks a very scary thought: what if I run out of money after I retire? That’s why it can help to run some numbers.

For the average Canadian, somewhere between 5 and 10 times your annual income is often enough. Yes, that’s a big range, but it’s a good starting point for thinking about what you’ll need.

In general, you’ll have to save more if:

You earn more — government benefits will make up a smaller proportion of your retirement income because some benefits (such as Old Age Security) are reduced if you earn too much.
You don’t have a pension through work — you’ll have to pay for more of your retirement costs out of your personal savings.
You retire early — you’ll have to fund more years of living expenses in retirement.
You’re new to Canada — you won’t have access to as much money from government benefits such as the Canada Pension Plan.

Let’s go through a simplified example.

Most Canadian households (about 69%) have two incomes, and the average income in Canada is $51,300. Let’s assume a household makes $100,000, taking home about $85,000 after taxes. Let’s also assume this couple has no workplace pensions and is making mortgage payments of $2,700 a month, or $32,400 a year — with the mortgage fully paid off by the time they start retirement at age 65.

To sustain the same lifestyle after they retire, we’ll assume they need $52,600 to cover their bills. If they’ve lived in Canada for most of their working lives, they can expect:

About $10,500 each, or $21,000 total, from the Canada Pension Plan
About $6,000 each, or $12,000 total, from Old Age Security

Their savings will have to fill in the remaining $19,600. Financial planners often assume retirement lasts at least 25 years (to age 90 if retirement starts at 65) for at least one person in a couple. So, how much money does this household need in the bank to sustain their lifestyle for 25 years in retirement?

At a 4.4% annual rate of return, a balance of $500,000 can generate approximately $22,000 (enough to cover this scenario’s annual expenses) every year— though inflation means the couple’s budget will be stretched thinner as they get older.

That’s at the low end of the five to 10 times your annual income suggestion, and doesn’t include any buffer for unusually high bills. As you move up that range, you’ll have more flexibility to spend extra on activities, travel, and fun in retirement.

Of course, everyone’s situation is unique. The best way to work out how much you personally need to save for your retirement is to build a financial plan with an advisor. Then you can be confident that every dollar you save towards your magic number is getting you closer to the retirement of your dreams.

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Disclaimers

Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.