Financial planners dread being asked how much money people need before they can say good-bye to work. It depends, planners say, and so it does – on how much you make, on what age you want to retire, on your current standard of living, on your workplace pension (or lack thereof) and on your tolerance for risk, just for starters.
So let's acknowledge that there is no simple one-size-fits-all answer to this question. That said, here's one way to arrive at a ball park figure for your own circumstances.
1) Start by figuring out how much of your working income you're going to need to replace in retirement. Most people find 50 per cent to 70 per cent is adequate. You can get a more precise idea by visiting our replacement ratio calculator.
2) Consider how much you can expect to receive from government programs such as Canada Pension Plan and Old Age Security. The combined payout for a lifelong resident of Canada who has worked steadily for decades and is just beginning to collect now, at the age of 65, would typically be around $15,000 a year but could be significantly lower or higher depending on salary history and other factors. You can see what you will receive by visiting the federal government's retirement income calculator.
3) Do the math. Start by figuring out what your replacement ratio means in dollars. If your household income is $120,000 a year, and you need a 60 per cent replacement ratio, your target retirement income will be $72,000 a year. To calculate how much of this must come out of your own pocket, subtract government stipends from the target figure. In this example, if CPP and OAS will pay you and your spouse a combined $30,000 a year, that reduces the amount you must generate from private sources to $42,000 a year.
4) Your workplace pension may cover most of this gap. If not, or if you don't have a workplace pension, you can figure out what it would cost to generate $42,000 by looking at how much it would cost to purchase an annuity that would pay you that amount every year. You can find annuity rates here.
5) Stuff happens. Maybe you'll get a divorce. Maybe you'll wind up in a long-term care facility. If it helps you sleep better, you may want to add a buffer of $100,000 or so to the previous total to help cushion such contingencies.