How much will I need for retirement?

When preparing for retirement, this is probably the most widely asked question. The answer is actually quite simple. It depends on the lifestyle you want in retirement or the lifestyle that you have today. Everybody is different and nobody is typical.

The closer you are to retirement the more crucial the need to project your spending needs in retirement. You will also be better off trying to be more accurate in your approach.There are two basic approaches to answering the question”How much will I need in retirement?”. I call them the bottom-up approach and the top-down approach.

The top-down approach.

The top down approach is the easier of the two approaches. Essentially, with this approach you want to start with your current gross income, and then account for taxes and the amount of money you save for retirementto get to you total current spending onyour lifestyle. For example, let’s say Sara and Dan are making about $100,000 per year combined between the two of them. They are paying about $25,000 in payroll tax and saving $3600 per year into RRSPs. Essentially, if we assume that the rest of their income is used to support their current lifestyle, we can say that their lifestyle needs are about $61,000 per year. You could simply stop here and say that theyneed $61,000 in retirement in today’s dollars.

Related article: Retirement planning with gross incomes can be misleading

The next step is to make some adjustments for expenses that will be different in retirement. The most common rule of thumb is to use an Income Replacement Ratio of 70%. Based on this rule of thumb, Sara and Dan can expect their retirement expenses will be $42,700 (which is 70% of $61,000). The 70% figure comes from the assumptionthat you should have your mortgage paid off before retirement and dependent children will be financially independent in your retirement years.

Related article: What happens to your spending in retirement?

Remember that the Income Replacement Ratio is a very general rule of thumb and can be very misleading. In fact, some experts suggest that the income replacement ratio should be closer to 50%. In fact recent Stats Canada data showed that those over 65% spend about 50% of what 30 to 40 years spend. My question is whether that is because of lower income or really because they consciously need less in retirement. Whatever the case may be, it’s a general rule of thumb that should be used with caution. Interestingly, for Sara and Dan, they were surprised at how much money they were spending in a year. They had no idea where that $61,000 was going. Sara and Dan might benefit from looking at the otherbottom-up approach.

The bottom-up approach.

The bottom upapproach is different in that you will need to be much more detailed in terms of knowing where you spend your money. If we continue from the example of Sara and Dan, the bottom-up approach requires that they understand where they spend their $61,000. The bottom-up approach starts with tracking your cashflow. Sara and Dan needed to track where their money was being spent. Typically it is easier to categorize the types of expenses. For example, more people categorize expenses into home expenses, personal, transportation, medical, miscellaneous, financial, etc. It matters less what categories you use and more that you understand where your money is being spent.

Related article: How to track your spending?

Once you have done this, you will have a better understanding of where the money is going over the top-down approach. The difference is you are ball parking your expenses into one general category in the top-down approach as opposed to understanding the specifics of where money is being spent in the bottom-up approach.The similarity to the two approaches is the need to make adjustments for retirement. In the bottom up approach, you will know exactly what percentage of income goes to cover mortgage payments, children, etc. Some expenses will go down in retirement like mortgage, children, and clothing. Other expenses could be higher like health care, travel and leisure.

There is no right or wrong as to the approach you want to take in determining your lifestyle need. Both approaches have merits and flaws. The younger you are, the less accurate you will need to be since the future is more likely to change. Thus, the income replacement approach might be more suitable. The top down approach is a good way of understanding not only how much you spend but also where you spend it.

The closer you are to retirement, the more important it is to understand where your money is going and what adjustments will need to be made when you retire.


  1. Nicole

    Well, I think that everything depends on a person and his/her retirement plans. For example, someone is going to travel around the world while someone just wants to be able to cover casual expenses. But in any case, it’s worth to save as much as possible. And it’s necessary to take care of our future because there will come a day when we will be unable to work. That’s why it’s necessary to take out some amount of money out of each wage and put into your savings account.

  2. Charles

    I believe that OWNING your “No matter how humble” accommodation (Condo/house) is a must to a secure retirement ..Renting is a deal breaker..If you own out right and you have NO DEBTS .Then it is groceries clothing ETC..Your basic CPP/OAS would cover all the basics and leave any other amount that you have for fun in the sun.But when you really look at retirement the #1 asset has got to be your HEALTH..Without good health .Does anything else really matter?

  3. Dave

    Charles you are very right regarding owning your own home/ apartment. My now deceased mother had her own apartment fully paid for at 65. She had CPP OAS and another pension about the same $$$ amount as her CPP. She lived well but was not into travel. She was certainly not a financial burden to her kids. Had she rented it would have made a big difference to her financial well being, during her almost 20 years of retirement.

  4. Ivan

    You can use a simple spreadsheet to track all your income and expenses for the year on one page. Your basic living expenses can be monitored from year to year, and large/odd purchases can be at the bottom with notes. I have used this “system” for about 25 years – it works great.

    Another spreadsheet can tell you what makes the most financial sense for you: buying or renting; just plug in your numbers (mortgage details, home price, repairs/maintenance, property taxes, inflation, rent, annual rent increase percentage, and ROI for spare cash invested) and you get two charts to give you a quick snapshot of what your finances will probably look like. Two scenarios are shown: assuming you don’t want to sell the home later, and assuming you do want to sell later.

    A third spreadsheet I think that you’ll find helpful is a “Pension Planner” which calculates your CPP, OAS, GIS, PRBs, Disability, RIF, RRSP, DPSP, RPP, etc. and projects your income for about 40 years; you can play unlimited “What-if” scenarios re when to take your CPP and OAS. It also has a mortgage calculator which you can use to see what’s best: paying down your mortgage or putting cash into your RRSP. The best part is a Cash Manager which lets you see the impact of switching your money between your chequing, Savings, TFSAs, RRSPs, etc for the tax effect as well as GIS impact.

    Everyone’s situation is different; don’t accept that what someone else has decided is the best choice for you. Do your homework with these spreadsheets. No one is impacted by your financial decisions more than you/your family.

    You can find more details about the spreadsheets mentioned on my website

  5. Claude Mayrand

    Renting vs Owning. I have owned and now rent. In the Vancouver market the value of a residence is over $600,000.

    Own: condo fees, possible parking fees, roof & other repairs (variable), grass, gutters, fences, property taxes (increases), insurance, mortgage in some cases.

    Rent: rent, possible parking fees, insurance.

    My current portfolio is much lower than $600,000 but if I had $600,000, I would generate about $90,000 (at my current rate of return) of income tax advantaged income, plus CPP & OAS. My capital would fluctuate but my income would vary very little.

    CPP & OAS are buffers that I exclude when planning; they cover extra expenses like trips or surprise medical expenses.

    Let’s say rent of a nice place in this area is $4,000 a month, about $50,000 a year. In 2014 my effective income tax rate was 2.34%, let’s say about $2,000 on the $90,000. I still have $40,000 or so left to spend.

    Oh yes! I still have about $600,000 in cash that fluctuates, but produces about $90,000 a year. And I have a lot of free time… and money.

  6. Candace

    I agree with Claude. People seem to think that owning a home is one ticket to financial success and security but I’m not so sure. Assuming the mortgage is paid off, you will still be paying insurance, property taxes, maintenance, renovations, yard work, possible condo fees (and lord help you if those condo fees weren’t properly managed and a major issue comes up). If the furnace goes out or the fridge stops working, it’s your responsibility alone to replace it, and if that gorgeous tree in the front yard pushes its roots through the neighbors water pipes, that’s all on you. At least renting you know exactly what your monthly expenses are, and if something goes wrong, you call the landlord to get it fixed.

  7. RJ

    “My current portfolio is much lower than $600,000 but if I had $600,000, I would generate about $90,000”

    15% consistent return? Do tell…

    • Claude Mayrand

      I am not an advisor. I decided to stop working at 56 because I was unemployed and could only find minimum wage jobs, most part-time.

      So I decided to create my own minimum wage job, to generate about $400 a week. It took me about 6 months of focusing on income generating financial products. No monthly income, no invest. No monthly income over 10%, no invest.

      I bought only TSX stocks because I’m not smart enough to deal with currency issues or foreign policies and business practices, or the various tax rules related to foreign income.

      Eventually I “discovered” closed-end funds on the TSX.

      When interest rates got so low, I cautiously started to use my available Margin.

      Investing only for income tax advantages is a no-no for me.

      But when the Margin borrowing rate is less than 4% and the closed-end fund is paying over 10%, OPM (Other People’s Money) becomes extremely attractive by itself, but downright orgasmic when the CRA says you can write-off 100% of the interest used to generate an income and only tax you on a small portion of that income.

      I became aware that one can earn more than $50,000 in Canadian dividends tax-free.

      My gross income from my RRSP, TFiA (it’s an investment account, not a savings account) and my non-registered account have been paying me a gross income over 14% for almost a decade now. I am liquidating my RRSP and I reinvest in my TFiA.

      Unfortunately, when I started I spent many hours looking and monitoring, maybe 100 to 150 a month.

      Fortunately, now, a busy month might be 20 to 30 hours a month. It’s all done via the Internet so I can do my “job” anywhere.

      The only real skill needed is creating spreadsheets to monitor the portfolio.

  8. Claude Mayrand


    Someone suggested that I ignore CPP & OAS when trying to establish a retirement fund, a few decades ago.

    Because the future is unpredictable and most scenarios cannot accurately account for emergencies, disasters, other expensive events such as criminal financial activities such as the 2008-2009 crisis (which is not over as of 2015), the CPP & OAS become an emergency buffer at retirement time.

    If there are no panics, there is money for luxuries. If there are panics, there is peace-of-mind.

  9. Geraldine Beauchamp

    I am a single, 75 year old woman living in a small city in Ontario. I own my condo and my car, though 11 years old has only 100.000 km and runs well. Will I be able to sustain a comfortable retirement on a pre-tax income of almost $70,000 per year?

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