How Much Do You Need to Retire in Canada?

It's a loaded question, and one of the most common we hear from Canadians planning for retirement. With rising inflation and cost-of-living pressure, it's more important than ever to understand what you'll need to retire comfortably.

How much will you need? The short answer is that your retirement is what you make of it. There is no magic number that universally applies to everyone, and it depends on your personal goals, lifestyle, and expectations. In this article, we'll walk through a few simple frameworks to help estimate how much YOU will need in retirement.

Income Replacement (Top-Down)

One of the simplest ways to think about how much you'll need is called income replacement. If you plan to maintain the same lifestyle before and after retiring, then your retirement income needs will be similar to your current working income.

The next step is to use an income replacement ratio (the share of your current income you'll need in retirement). When you retire, a few major expenses drop off, reducing the income you'll need:

• No longer paying payroll taxes or CPP contributions
• No longer contributing to retirement savings

As a result, many people assume a retirement income ratio between 70-85%, due to reduced expenses. The 70% figure in particular is a common rule of thumb in retirement planning. So if you were earning $100,000 per year when working, you may target a retirement income $70,000 - $85,000 per year based on these assumptions.

This is a high level estimate for your retirement income, but if you're new to retirement planning, it's a good place to start.

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Expense-Based Planning (Bottom-Up)

Another way to think about retirement planning is the bottom-up approach. You start with your anticipated expenses in retirement to determine how much income you'll need to cover your costs.

Before retirement, you may have been budgeting for categories such as housing, dining, travel, utilities, and healthcare. Not much changes once you retire! If you've been tracking your monthly expenses, or keeping a budget, you're in a good position to estimate your retirement income needs based on historical spending.

But there is some nuance here. For example, many retirees spend more on travel in the early years of retirement, then shift spending towards healthcare as they get older - a pattern sometimes called the retirement spending smile. Retirement expenses are dynamic, and it's impossible to predict exactly how they'll change over time.

So where does that leave us? As a rule of thumb, early retirement travel expenses often get reallocated to healthcare later on. To keep planning straightforward, it can help to assume your annual spending stays roughly flat over time.

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The 4% Rule

At this point, you should have an idea of how much income you'll need to meet your retirement goals. This might be an annual figure, based on your current salary, or calculated from your expected retirement expenses. So what's next?

There are many approaches to withdrawal strategy, which we'll cover in a future article. For today, we'll introduce the 4% Rule, which can be used with our estimated retirement income.

If you've spent time reading about retirement planning, you've likely come across the 4% rule. First articulated by William P. Bengen in 1994 (PDF), the 4% rule was intended as a worst case scenario for retirees in the US, using a hypothetical example of someone retiring in 1968 at a stock market peak, before a protracted recessionary period paired with the high inflation of the 1970s. In this scenario, Bengen found a 4% withdrawal rate still allowed the retiree's funds to last 30 years.

Applying the 4% Rule

To apply the 4% rule, take your target retirement income, and divide it by 4% to estimate your required savings:

$$\text{Required Savings} = \frac{\text{Target Annual Income}}{0.04}$$

For example, if your goal income is $80,000 per year, you would need $2,000,000 in assets to safely draw down your portfolio at 4% annually, over 30 years.

A Conservative Approach

Historically, average sustainable withdrawal rates have often been higher. Bengen has noted that over the last century, the average safe withdrawal rate would have been about 7%. The key takeaway is that the 4% rule is intentionally cautious to reduce risk. He later revised his SAFEMAX to 4.5% (2006) and again to 4.7% in his 2025 book. That's still a worst-case floor; many retirees can use 5.25% to 5.5% or more depending on their situation.

So what does this mean for the rest of us? That the 4% Rule is just a starting point for your retirement plan. It's a good way to stress test your scenarios to have confidence in retiring, before digging deeper into budgets, asset allocation, rebalancing frequency, and other factors. As Bengen puts it, it's better to be approximately correct than precisely wrong.

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Bottom Line

That's it! If you've made it this far, you now have the tools to apply a few practical rules of thumb to quickly evaluate your retirement plan. Whether you prefer a top-down or bottom-up approach to estimating retirement income, you can use the 4% rule to get a high level estimate of your retirement savings target.

The key takeaway: start with your expected income needs, then work backwards to your savings target. The 4% rule provides a conservative framework, but remember that your actual needs will depend on your unique circumstances, life expectancy, and risk tolerance.

If you're looking for a more analytical approach, check out our free Loonie Nest Retirement Income calculator, where you can explore different scenarios and outcomes to see how they impact your plan.

Thanks for reading!

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