10.1.3 Your retirement needs

There is no set formula for calculating the amount of money everyone will need for retirement. The amount will vary with your individual circumstances. As a very rough guideline, some experts say that you will need about 70 percent of the average annual income, before taxes, that you earned during your three highest-earning years (usually, but not always your last three years of work). With this amount, you should be able to maintain the same or a similar standard of living after retirement that you had before retirement.

For example, if your gross annual income averages $60,000 in your three final years of work, you will need about $42,000 a year in retirement.

Why do you need less to live on at retirement? Because many expenses will go down:

• Work-related expenses such as work clothing and commuting will disappear.
• You will likely pay less tax.
• You will no longer be contributing to a workplace pension plan (or to the Canada or Quebec pension plan), and no longer paying union or professional association dues.
• You may move to a smaller home that costs less to purchase and maintain.

On the other hand, costs for health care and social and recreational activities may go up.

How much money you will need for your retirement depends on many factors:

• at what age you retire
• how long you expect to live
• how you want to live and what you want to do
• and the effect of inflation on your savings.

Let's look at each of these factors.