How much is enough in retirement?

Well, it depends.

The rule of thumb that you only need 70% of your pre-retirement income is too simplistic.   For some people, it is sufficient.   But for many, it is not.

A good start in determining how much you’ll need in retirement is to break down your budget into two categories of spending –

  • necessities (basic food, shelter, clothing, medication, etc.), and
  • discretionary (travel, dining out, entertainment, money for a new car every years, etc.)

If your basic needs add up to 50% of your after-tax income, you will have up to another 50% for discretionary spending.  So if you choose to spend only 25% on discretionary items, then you will need a total of 75% of your current income in retirement.

And remember to take into account in your calculation that certain expenses will decline or even disappear in retirement.   For example, you will no longer have to make CPP or EI contributions, income tax will likely decrease, and the need to buy work clothes will be a thing of the past.

On the other hand, certain costs will likely increase in retirement.    Healthcare and hobby related expenses will likely go up.   So include these items in your retirement budget.

The last bit of planning is to make sure you will have enough income to take care of your retirement needs when you retire, before you retire.