"How much money do I really need for retirement?" is one of the most frequently asked retirement questions. It's a very important question. After all, you spend many years working and saving to achieve your retirement dreams.

Getting to the answer of this fundamental question is not as easy or straightforward as you might think. Constant planning and review are necessary to make sure that you've done the best job possible to answer the question for yourself.

The short answer to the question is: it depends! If anyone claims that there is a definite answer to the question, be suspicious of the advice you are receiving.

There are a number of factors that affect how much money you need for retirement:

When do you want to retire? 
Obviously, the earlier you want to retire, the more money you'll need. Let's say you want to retire at age 60, you started working at age 20 and you live to be 90 years of age. This means that you would have 40 years of working to save enough money to provide you with income for 30 years of retirement. That's no small feat!

What kind of lifestyle do you want in retirement?
Just as important as the length of time that you'll be retired is the lifestyle you want, and the expenses associated with it. Be careful not to underestimate them.

Don't forget about the effects of investment returns, taxes and inflation.
These variables will have a major effect on how much money you need to save. The higher your investment returns, the less money you need to save. However, most people become more conservative in their investment decisions when they retire because they rely on their investment returns to generate income. This usually means that returns are lower than they were previously and, over the long term, means that they need more money.

Everyone is familiar with inflation and the effect that rising prices have on lifestyle. If you don't take inflation into account, you may fall short of achieving your lifestyle objectives. As well, taxes will have a significant impact on where you ultimately end up.

What is your marital status?
A single person who makes $50,000 per year will end up with less money, after tax, than a married couple with each person making $25,000 per year. You might argue that a married couple will have more expenses because there are two people instead of one, but marital status can affect other sources of income as well.

To illustrate the effect that these variables can have on how much money is needed for retirement, consider the following:

Suppose an individual has a $500,000 portfolio and a $500,000 Registered Savings Plan (RSP). Inflation is 3% and the person withdraws $40,000 per year from the RSP. The person's average tax rate is 35%. The two variables that we will change will be expenses and investment returns. The chart below shows the number of years that the person's money would last using these assumptions. 

What this means is that if you retired at age 55, your money would last anywhere from ages 76 to 92, depending on the variables noted above. Alternatively, if you retired at age 60, your money would last anywhere from ages 81 to 97. After having changed only a couple of assumptions, you can see the dramatic effect on the length of time the money would last.

For more information, please contact a ScotiaMcLeod advisor.

The information contained on this website is for use by persons resident in Canada only.