Determining how much retirement income is needed

One of the most important things you need to determine when saving for retirement is how much money you will need to live on once you are retired.

Half a lifetime ago, everyone seemed to be struggling with the question, “is this the right career for me?”

These days, the questions have changed.

Now, it is often, “how much money is enough to retire on,” and “how long does my money need to last?”

The four per cent rule

You may have heard of the “four per cent rule,” a rough guide for making your retirement income last for 30 years by drawing down only four per cent of your savings each year.

There’s controversy about whether it will work in the future. The rule was developed in an era of higher interest rates, when you could expect higher returns from the fixed-income portion of your portfolio, and it doesn’t allow for different income needs at different stages of your retirement. Even right now, it has two shortcomings.

It doesn’t tell you if you’ve saved enough money to retire with (you may not be able to live on four per cent of your savings per year), and it doesn’t tell you how long you’ll live, which will drive up how long your retirement income needs to last.

Sun Life Financial advisor Andrew Wilkin, from Waterloo, Ontario, explains how to find answers to these tough retirement questions.

How much income will you need to reitre?

“If someone is trying to find out how much income they’ll need in retirement, the first thing to understand is how much income they need today,” Wilkin says. “I’m a financial planner, so I ask people about their finances. Usually, people know how much money they make, but they can’t tell me how much they’re spending.”

So, before calculating how much retirement income you’ll need, he suggests you start by tracking how much you’re spending today, and what you’re spending it on. Ideally, do that for a year or two.

But if you’re forced to retire by poor health or job loss before you can do any long-term tracking, Wilkin suggests you do the next-best thing: Use recent bank statements, credit card statements, and receipts for contributions to RRSPs and tax-free savings accounts (TFSAs) to get a summary of how you’re spending and saving.

Next, adjust for what you expect will change once you’re retired.

For example, you might save $100 in gas and $50 in car insurance a month when you no longer commute to work.

You’ll probably spend less on clothing as well. If you play golf or like to travel, you’ll probably spend more on those things. And maybe you’ll want to eat out more.

Once you estimate how much income you’ll need in retirement (Sun Life’s Retirement savings calculator can help available at, a financial advisor can help you consider how a variety of other factors could affect your situation. Some of the factors will include inflation, expected investment returns, your tolerance for risk, and how your money is already invested today.

This annuity calculator will give you an estimate of the guaranteed retirement income you could have with an annuity.

How long does your money need to last?

Nobody knows for certain how long they will live, but factors such as gender, current age, weight, and activity level can be used to produce a rough estimate. Sun Life’s life expectancy calculator is just one of many free longevity tools available online.

Here’s an important note: The calculator will give you a number for the average life expectancy for someone in your situation, but you still have a 50/50 chance of living longer than that.

Realistically, you should not accept a 50 per cent risk of running out of money. Also, if you have a spouse or partner who survives you, remember that your money needs to last as long as your partner’s lifetime.

How an advisor can help your planning

Wilkin said that when he works with people planning to retire, he calculates their basic ongoing living expenses: food, accommodation, taxes, basic transportation, etc.

Then, Wilkin recommends combining income from guaranteed products such as annuities, guaranteed investment certificates (GICs), and segregated fund products with payments from the Canada/Quebec Pension Plan, to ensure that money will never run out for those basic living expenses.

Next, he recommends other ways to create retirement income intended for discretionary expenses or lifestyle choices such as leaving an inheritance, renovating a home or travelling the world.

In their youth, most people shy away from talking about their money or their mortality.

But Wilkin says those planning for retirement are more open to discussing such taboo topics.

Is it time for you to break a taboo and get answers to your retirement questions?

Sponsored by Shannon Hood Financial Services Inc.

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