How much is enough to retire? 8 things to consider

It’s the million dollar question. Or is it the 500-thousand dollar question?

The answer is different for everyone because everyone is different, and no one knows the future.

Trying to figure out how much is enough to retire has caused many sleepless nights, but there are ways to narrow down the guess work. And the sooner you know, the sooner you can set a plan in motion to reach your goal.

Financial advisors and retirement calculators can help but in the end you need to do some soul-searching to determine how you want to live.

Here are some key factors to consider:

Current living expenses:
You can’t determine your future financial needs until you know your present financial needs. Budgeting is essential. List your current annual expenditures on one side of a spreadsheet and your total gross income on the other side.

If your expenditures consistently exceed your income you can not retire until you live within your means and start saving.

You should also have a plan to pay off debt. Bringing debt into retirement doesn’t make sense.

Living expenses in retirement:
How much would you need to maintain your current lifestyle if you retired tomorrow? That’s a tricky question. Fidelity Investments pegs the number at 80 per cent to 60 per cent of pre retirement income. Fidelity says living expenses diminish as people get older and less active.

As income requirements fall, so does income tax. Of course, work related expenses like commuting, pension contributions and other deductions are stripped out as well.

On the other hand, Fidelity warns many retirees overspend in their first few years of retirement because they are still active and have plenty of time on their hands.

Savings growth:
A well diversified, conservative portfolio of equities and fixed income should grow by at least 5 per cent annually. While you may be drawing from your savings in early retirement, the remainder of your savings can be expected to grow.

Retirement income:
If you’re lucky enough to have a defined contribution pension from your employer you can add it to your savings.

If you’re even luckier to have a defined benefit pension from your employer you can expect regular payouts throughout your life.

If you paid into the Canada or Quebec Pension Plan in your working years you are entitled to benefits as early as 60 years old. The amount depends on the individual. You can find out by contacting the CPP or QPP through their websites.

All Canadians are entitled to Old Age Security payments of as much as $6,500 a year starting at 65 until 2029 when the eligibility age is extended to 67.

Inflation:
CPP/QPP, OAS and some defined benefit pension plans are indexed to inflation, so there’s no need to worry. Most retirement calculators factor in average annual cost-of-living increases of 3 per cent.

House equity:
Some people choose to leave their homes to their children. Others choose to live off of the equity through a reverse mortgage or secured line of credit.

If you choose the later it’s important to understand that the interest charges from borrowing against your home will draw from the amount the house appreciates in value. Any debt sucks the life out of savings.

Health care and insurance:
Fidelity Investments says health care costs are the biggest factor that derails retirement plans. Government healthcare only covers so much and most company benefit plans do not extend into retirement. It’s important to budget for extended health care.

When one spouse dies assets are automatically transferred to the other, but you may want to consider life insurance for surviving children.

Life expectancy:
This is where personal finance gets really personal. Everyone is different but here are a few facts to consider: According to Statistics Canada the average male born in 1960 will live to 68 and women will live to 74. The average male born in 1980 will live to 72 – women to 79. Men born in 2000 will live to 77 and women will live to 82.