How much do I need for retirement? Determining the amount needed for retirement is not always an easy task, today we will provide a step by step guide to determine your financial needs for comfortable retirement. You can also download this Retirement Calculator worksheet to estimate your retirement needs and annual saving amount.

We have completed the basic steps in financial planning and are now at the wealth building stage, in the previous step we discussed the importance of Investment Policy Statement (IPS) and saw a few samples. Before you can complete your retirement IPS you will need to know, or estimate, how much you will need for retirement and determining that can be tricky.

Don’t Worry, just yet.

As an adviser when I discussed the amount needed to retire comfortably with clients I would always see the shock on their faces “Wow that is a lot of money, I’ll never have that much!” They often forgot that the amount is not needed today or this year. It’s accumulated over couple of decades, so if you see a large amount at the end, do not worry; just yet.

1. General Rules

Once you retire not only will your income decrease but so will some of your expenses. Your children will not be living at home anymore, your mortgage will be paid off, you won’t have work related expenses, and so on. As a general rule it is assumed that one will need about 75% of their current income at retirement for a comfortable lifestyle, of course you can choose whatever percentage you wish.

Annual Retirement Income = Current Income X 0.75

2. Inflation

Inflation is when living expenses increase over time and money loses its value; $100 can buy you a lot more today than it will ten years from now. Since most people plan for retirement twenty to thirty years in advance we need to take inflation into account when calculating retirement needs.

Nobody can predict what the exact inflation rate will be over the years but a good number that is generally used is 3%.  Some years this will be higher and other years it will be lower, but over the long term 3% inflation is a reasonable estimate.

3. Sources of Income – How much will come from your savings?

Your annual income at retirement will not just be from your savings, in most cases there will be other sources of income. These sources could be government pension plans and perhaps company pension. To determine how much will come from your savings; add up all other income sources and subtract this from your total estimated annual income, the difference will come from your savings.

Income from your savings = Annual Income needed – Income from other sources.

4. How many years?

We now know how much is needed for a comfortable retirement and how much of this will come from your savings the next question is for how long will you need it? Current life expectancy is about 82 years for men and 87 years for women; I think it is safe to assume that with medical advances life expectancy will increase. So let’s assume a life expectancy of 90, take 90 (or whatever you believe your life expectancy to be) and minus your desired retirement age this will give you the years in retirement.

Years in Retirement = Life Expectancy – Desired Retirement Age

5. Total Retirement Fund

We determined how much you need annually after inflation and we know for how long you will need it, to calculate your total retirement fund you simply multiply the annual amount needed (after inflation) by the years needed.

Total Retirement Fund = Annual Income from Your Savings X Years in Retirement

6. How much should I Save?

We have now determined how much you will need at retirement, but how much do you need  to contribute on monthly or annual bases over the years to reach that goal?

This is a somewhat of a complicated calculation and needs to be done with a financial calculator; here is a Retirement Calculator worksheet that you can download. It will estimate your needed retirement fund and annual savings amount to reach that goal.

Start Early & Magic of Compounding

As you can see from above there are many unknown factors when it comes to retirement planning and the further you are from retirement the harder it will be to get accurate numbers, I would advice you to start saving/investing early and as much as you can to make sure you have a good retirement fund. Don’t forget the Magic of Compounding!

Download Retirement Calculator Worksheet

Some Retirement Resources & Articles

Million Dollar Journey on How much do You Need to Retire Early

Four Pillars on Safe Withdrawal Rule for Retirement Funds

Canadian Capitalist on When Does a RRSP Contribution Not Make Sense?

MSN Retirement Calculator

Canadian Retirement Income Calculator



Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.