How much Income do you need in Retirement

How much income do you really need in retirement? Many financial planners will say (as a starting point) that the level of income you should aim for in retirement is approximately 70% of your current income adjusted for inflation. The reason they use 70% as a starting point is because by retirement most people plan to have their mortgages paid off and mortgage payments are by far the largest monthly expense for most Canadians.

The following scenario illustrates how a financial planner will perform the calculation. Let’s say you are 55 and your (or your family’s) current income is $ 100,000 per year. If you plan to retire at 65, then your income just before you retire, adjusted at 2.0% inflation, would be approximately $ 119,509. If your planner has used 70% as the magic number in his projections, then your plan will be built on drawing income from your retirement portfolio and government benefits equal to $83,656 starting in your first year of retirement. To keep pace with inflation, your planner will adjust the $83,656 every year by an inflation estimate, perhaps 2.0%.

The question is, will this level of income sustain my lifestyle and why is this so important when building a financial plan? Firstly, the income level that you desire in retirement will determine how much you need to save annually and what investment rate of return you need in order to build a retirement portfolio that will sustain this level of income until you pass. If you desire a higher level of income, then you either have to save more each year and / or take more risk in your portfolio to achieve the desired returns.

Secondly, astute financial planners are realizing that the 70% figure may not be sufficient for a lot of Canadians. These financial planners will ask you to consider what days of the week you currently spend the most money. Most people will respond that Saturday or Sunday are the times when they spend the most. This is because you are likely not working on the weekends, rather you are out doing leisurely activities which all cost money. The logic is that during retirement ‘every day is a Saturday’. In retirement, you have more spare time to fill and many retirees are choosing to fill their time with activities that increase monthly expenses.

If you consider the kind of lifestyle you want to maintain during retirement and it looks rather expensive, talk it over with your financial planner and try to build a realistic picture of your desired level of retirement income. Again, the figure you come up with will have a dramatic impact on how you save and invest your money today.