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To plan properly for retirement, you'll need to have a rough idea of what a decent retirement lifestyle will cost you. But many people find that difficult to forecast.

Fortunately, there are two good ways to approximate those retirement spending needs. You can estimate it as a percentage of income set in relation to peak income from your working years (known as the "income replacement" rate). Or you can estimate it directly. Either way, you may be pleasantly surprised to discover it isn't as much as you think you need.

First consider income replacement. Many financial advisers will tell you that you will need to replace 70 per cent to 80 per cent of income from your peak earning years. But retirement experts such as Malcolm Hamilton who have looked closely at this say most Canadians don't need nearly that much.

Instead, replacing 50 per cent to 60 per cent should be sufficient for most couples to maintain their standard of living, says Mr. Hamilton, now a senior fellow at the C.D. Howe Institute. Meanwhile, most singles should plan on a little bit more, about 60 per cent to 70 per cent, he says.

"It doesn't give you an extraordinary 'Now I'm affluent and can do everything I want' kind of retirement," explains Mr. Hamilton. "It gives you a comfortable retirement that's much like the rest your life."

Spending in your senior years is usually much lower than your middle years because many costs don't continue into retirement. That typically includes the cost of raising children, contributing to their educations, and paying down your mortgage.

In addition, you no longer have work-related costs for transportation, clothing and payroll deductions like those for Employment Insurance and Canada Pension Plan. And once you're retired, you're past saving for retirement. Then with spending lowered so much, you need way less income and therefore pay a lot less income tax.

Of course those rules of thumb don't work for everyone. Childless renters who never shouldered the hefty costs of raising kids and paying a mortgage may need to replace more income to maintain their accustomed lifestyle, says Mr. Hamilton. Carrying a lot of debt into retirement or raising your lifestyle can have a similar effect, he notes.

On the other hand, many seniors get by on a lot less. I know one couple who retired in their early 50s from high-paying technology jobs who live frugally but comfortably on an income replacement rate of only 16 per cent. In their case, that works out to about $40,000 a year, a fraction of the combined $250,000 they earned in their working years.

The other way to figure it is to consider what seniors actually spend. The Statistics Canada Survey of Household Spending for 2010 found senior couples on average spent a combined $53,100 a year (including money paid to income tax). From looking at that figure as well as talking to seniors and their advisers, I estimate that a retirement lifestyle that you might call middle class or a bit better costs about $40,000 to $70,000 per couple (also including income tax payments).

Singles aren't usually able to economize the way couples do by sharing living expenses such as those for accommodation and a car. As a result, single seniors generally need to spend more per person. Statistics Canada found that the average single senior in 2010 spent $31,100, although the figures include a substantial proportion of less-active older widows and widowers. I estimate the cost of a reasonably active single senior lifestyle that's middle class or a bit better is roughly $28,000 to $50,000.

David Aston, CFA, MA, is a freelance writer specializing in financial topics.


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