In a recent post, I shared with you that most of us can enjoy a similar standard of living in retirement if we have roughly 50% of our pre-retirement income. This is possible because:
1. We no longer have some major expenses at retirement such as raising children, paying the mortgage, saving for retirement, paying payroll taxes (Employment Insurance, Canada Pension Plan contributions).
2. We may also be able to reduce other expenses like getting rid of a second car, buying lunch every day, and spending money on work clothes.
3. We will start collecting both Old Age Security and Canada Pension Plan payments in our 60’s that will last the rest of our lives and are indexed for inflation.
This 50% number was not a number that I came up with myself. The number came from actuaries like Fred Vettese and Malcolm Hamilton; well respected experts who have studied spending habits for millions of Canadians at different stages of life.
In fact, for many higher income earners (family income in your final year of working above $110,000/ year) the actual replacement percentage is between 41% and 44%. The 50% rate mentioned above includes the greatest swath of Canadians and also creates a little extra cushion to ensure a smooth transition to retirement.
If you still don’t believe me, watch this video for more detail.
So the question remains, how much do you have to save, year after year while working to give yourself an income stream that equals 50% of your working income. The answer varies depending slightly depending on your family income.
In general, you need to save 6-10% of your income depending on your chicken index. That’s all.
For example, if your family income is $110,000/year you could choose to save to save 6% of your income, each and every year for 35 years (age 30 to 65) in order to achieve your post retirement income goal. If you miss a year, you will have to double up the next year to catch up.
Another way to look at this is how much you should have saved by age 65 in order to have enough money to create an income steam that delivers 50% of your pre retirement income.