How to determine your “Number” for retirement

Written by: Brian Hay
Investment Specialist & Financial Advisor
CAPCORP Financial

I’ve had some interesting financial planning meetings over the years; each one different and memorable. I often think back to one meeting, where my client was trying to determine that magic “number” that would lead to a comfortable and secure retirement. Let’s call this client Dave.

When Dave came to see me, he was just entering the home stretch of his career; those last 10 years before you stop working. Somehow, those ten years have a way of feeling even longer than the previous 30. And like many, Dave had become preoccupied with ensuring that he was on track to retire.

On that day, Dave came into my office, shut the door, and sat down in front of me with an air that was clear that he meant business! Before I could say hello, Dave leaned forward, pointed a finger at me and said “OK Brian, let’s get to it! I need you to tell me exactly how much I need to retire. And I don’t want to hear any of that stuff about it depending on my lifestyle, or what I want to do or how long I think I’ll be alive. None of that! Just tell me – how much do people need to retire? What is “the number”?”. At which point he folded his arms, sat back, and waited expectantly for the answer.

After taking a moment to determine the best approach to telling Dave exactly the opposite of what he had asked, I leaned forward and began to explain “well Dave, it really does depend on your lifestyle and what you want to do….”.

But before I could go any further, Dave had thrown his hands in the air and muttered something that doesn’t bear repeating, but thankfully, settled in for the rest of my explanation.

You see, we all have a number that will ensure we retire with comfort and security. But that number is as unique as each of my clients and each of those memorable meetings.

According to a recent poll done by Ipsos for the Royal Bank of Canada (RBC), Canadians believe they’ll need $787,000 to retire. This number balances the average Canadian living in British Columbia, who believes they will need $1.07 million, with those living in Quebec, who feel that $427,000 is what they need. That’s a pretty big range.

How about the pros? What’s their take on” the number”? A recent poll of advisors indicated that Canadians should plan for savings in the range of $650,000 – $750,000. Using a 5% rate of return and allowing for 2% inflation, this level of savings could generate between $32,500 and $37,500 of income per year for 30 years ($2,700 – $3,125/month).

That income range is in line with a common retirement goal of needing 65% – 80% of your last years’ working income in retirement. According to StatsCan, in 2017 Canadians had an average annual income of $46,700. Applying the above % range, this would suggest that $30,000 – $37,000/year is the average retirement number for Canadians. It’s important to note though, that this number factors in the assumption that your expenses will be lower in retirement.”

And what about the government? They have a role to play in retirement, so where do they stand on ”the number”? Well, up until 2019, the Canada Pension Plan (CPP) retirement pension was designed to replace one quarter of your average income, up to a maximum limit each year. For 2019, that limit is $57,400, translating into a maximum monthly benefit of $1,154.58 (if taken at age 65). In addition, Old Age Security (OAS) provides a maximum benefit amount of $607.46/month. While this doesn’t determine what the total number should be, it does result in a maximum contribution of $21,144 towards “the number” and therefore, an important piece to the puzzle.

A good starting goal would be to aim for 65% – 80% of your final years’ working income in retirement.

Taking all that information into consideration, we can start to draw some conclusions. By combining what the average Canadian thinks they need with what the pros recommend, we get to $729,000 in savings at retirement, or approximately$36,450 in annual income. Adding CPP and OAS, the number comes up toto $57,594 annually, or approximately $4,800/month.

But is $729,000 the right number for everyone? Thinking back to the Ipsos poll, it wouldn’t be enough if you lived in British Columbia and would perhaps be too much for those living in Quebec. That brings me back to my discussion with Dave. $729,000 of savings, or $57,600 per year of income in retirement is an average number; one that many advisors would agree is very good starting point. However, the actual number truly depends on your lifestyle and more specifically, on your individual goals for retirement.

Luckily, Dave patiently listened to me talk about all the factors and we had a meaningful discussion on what retirement ideally looked like, allowing us to take an average and turn it into “the number” for him. And ten years later, he’s happily retired and enjoying all that life (or rather, “the number”) has to offer.

If you’re interested in exploring what your “number” should be, give us a call and we can work together to ensure you are ready for your retirement.