It depends. You want to save enough so you can have a secure retirement but not too much that you deprive yourself during your working years. How much to save depends on a bunch of different things like your yearly family income, are you married or not, do you have children, will you keep working until age 65, and do you own your home.
The common wisdom is you will spend roughly 70% of your yearly income when you retire. For example, if your family income is $100,000 average during your working years, you will need to spend $70,000 a year to maintain your standard of living in retirement.
The problem with this 70% number is it makes it very difficult to save enough while working unless you dramatically cut expenses when you are young. It also doesn’t take into account the fact that you won’t be supporting your children, or have a mortgage in your 60s and 70s.
Actuaries has been studying spending habits as we age for years. Their conclusions are very enlightening and reassuring. Basically, after taking into account the drop in “fixed” expenses like your children and mortgage, the vast majority of people will only need to replace between 40% and 50% of their working income in retirement*. Don’t forget, you will also be entitled to Old Age Security (OAS) and Canada Pension Plan (CPP) in your 60s that will add to your income.
At this level of income, retirees can enjoy the same living standards they had while working. The studies also showed that people did not change their spending habits much after retiring so living the same way you did when you were younger is quite a reasonable expectation. In fact spending actually decreased significantly in later stages of retirement as age and health issues make it harder to spend the same amount of money as you did as a “young” retiree.
What does this all mean for you?
Despite what you might hear in the media, collectively we are not all doomed to a subsistence retirement, as long as you save enough to replace roughly 50% of your income for retirement.
That’s sound better, but how much do you need to save every year while working to reach that 50% target? In order to have the same lifestyle in retirement as when you were working, you will need to save 6-10% of your yearly income each and every year from age 25 to 65. No excuses. 10% is more conservative and will even allow a cushion for the chance that you are without a job for a short while at some point.
* If you are interested in finding out more about how I reached this 40% to 60% replacement rate, read “The Real Retirement” by Fred Vettese. He goes into wonderful detail about the data and research.
I’m a department head for a high school in Toronto. I graduated from the Ivey School of Business at Western University and have been a DIY investor for over 20 years.