How much income will I need in retirement?

Markus Muhs - Nov 18, 2020
Here's another crucial question when planning for retirement: how much income will you actually need?
Myself, I'm not yet 40 as I write this, so I have no personal experience with retirement. What I do have though are dozens of retired clients living a broad range of retirement lifestyles. Some are in early retirement, some in late, some live very frugally, some luxuriously. Some retired in their 70s, some as early as in their 50s. There's a lot to think about here, and there’s no true answer in regards to the above, but I’ll share some things to consider.
When I start retirement planning with younger clients (usually in their 30s, sometimes as early as in their 20s), the retirement goal is so far off into the future that it's hard to really decide on either a retirement age or an expected income. These variables make a massive difference in the outcome—consequently how much you need to save. Obviously, you'll need to save quite a bit more if your plan is to have an extra $1000/mo to spend in retirement, or even if you just want to push up your retirement age a few years.
My advice is to aim for a "financial independence" age by around 60. By age 60 you want to be able to retire—if you have to due to health—or otherwise you want to be in a situation where you can call it quits or not have to worry about being tied to a job. For as long as I’ve been a financial planner, the actual retirement stats out there show people almost never retire when they plan to, and that’s usually been the case with my own clients (usually for the better: good health and a willingness to continue working).
I have also seen a lot of situations where having the freedom to retire at a reasonably early age—just the optionality to retire—can be very valuable. You don’t know what your health might be like and how valuable enjoying your time from age 60 to 70 or 65-75 can be until it’s already passed. You can effectively “miss” the fun part of retirement if you work too long, retire too late.
Because our aging bodies might not allow us to enjoy retirement quite so much post age 75 (or 80, or 85, depending on health), we should really plan to have more income available in the years leading up. This is why I’m generally an advocate for a sort of staged retirement. Perhaps plan for a reasonable retirement income for now (if you're planning 20-30 years out), but know you'll likely take from your later retirement spending to spend a bit more in early retirement. Don’t expect to be taking a lot of ski vacations, or trekking the Andes, when you’re 80.
How much will you need per month though? That’s what I want to give some food for thought on with this post. Note that most of my retired clients live in Alberta or ex-Vancouver, British Columbia, so your own cost of living in retirement might differ depending on where you expect to retire. 
The numbers below are monthly spends, so in other words you need to derive this income after tax to make ends meet. Don't forget about inflation either. If you’re 30 you ultimately won’t be spending (at bare minimum) $2000/mo in retirement. By the time you’re 80 you’ll need well over $5000/mo for minimal subsistence. Inflation should be accounted for in a proper financial plan though.
It’s also assumed that by retirement you live in a home free and clear and don’t have rental or mortgage expenses. Otherwise, still having a mortgage to pay in retirement upends all these numbers, and if you’re a lifelong renter you’ll need to add that on top of the numbers below.

Frugal - $2000/mo

This is to let you know that even without a lot saved up for retirement, you can probably get by on relatively little. Over the years, I’ve had clients who live decently spending only $2000 per month. 
Generally this doesn’t provide for much of a vacation budget nor eating at restaurants much. Health costs can stretch this budget too, though you’ll generally qualify for low-income subsidies at that income level, like your province’s seniors drug plan. You’ll get by.
A couple earning close to maximum CPP and OAS, starting at age 65 can actually make this work without any savings. Total income from those benefits would amount to over $3000 per month before minimal taxation, and the Guaranteed Income Supplement might kick in a bit too (kicks in more if one or both spouses earn less than the CPP maximum and have no other income). Of course that number drops sharply after one spouse dies, which is why it would still be beyond reckless to enter retirement with zero savings.

Modest - $3000/mo

Generally a basic planning starting point with my younger planners is plan to have enough saved that, together with CPP (but not OAS, as I don’t want to count on it being around in its current format in 30 years), you’ve got enough after tax cash flow to cover $3000/mo of spending from age 60 to at least 95.
Combine that, of course, with having the mortgage paid off (or downsizing) by age 60.
This is still just a modest cash flow; it allows for a bit more freedom but you’ll still be fairly constrained in terms of vacation budgets or other discretionary expenses. It’s enough to live contently through retirement, if you keep your hobbies/pastimes and general expectations fairly modest.
You won’t be eating catfood, but you won’t be eating filet mignon either.

Comfortable - $4000/mo

This is what I’d usually recommend as a planning goal, once any other shorter-term financial planning goals are taken care of. At $4000 a month retired couples or individuals are generally living pretty comfortably. They can afford vacations, regularly dining out, and don’t have to cheap out on gifts to their grandkids.
When thinking vacations, remember that all these dollar amounts are average monthly spends, so conceptualizing your retirement might involve actually spending $3000/mo but having $12K a year in vacation budget, or something like that.
If you plan on still having cars in retirement you'll also need to account for that. So you can see that spending $4000/mo isn't really spending $4000 every month; it's maybe $2000 a month in general lifestyle expenses, $1000 a month toward a big vacation each year, $1000 a month for car payments or savings for cars.

Freedom - $5000

If you can plan for a $5000/mo retirement you’ll be relatively unconstrained from budgeting or having to think twice about various discretionary expenses. You might be able to partake in more expensive hobbies and you should be able to fit some really nice vacations into your budget too.
For those planning to spend more during their fun years (ie: retirement to age 75) a $5000 monthly spend should suffice, which can then be scaled back to $4000, or even $3000, in later years. Others might plan to have enough to be able to spend $5000/mo in retirement but in actual practice might shift that to something like $6000/mo in early years, $3000/mo in later years.

Taxes and other considerations

I also have clients who spend $10,000 a month and beyond in retirement. Again, you have to consider the type of lifestyle you want to maintain, as well as for how many years you likely can do so. It’s easier than you might think to spend $10K a month in retirement if that’s the lifestyle you’re used to. “Lifestyle creep” has inertia, in that after your career it might take some time to bring down your lifestyle expenses, especially if keeping up with peers who are still working.
On the topic of lifestyle creep, if you're in your late-20s or early-30s and already planning your retirement, good for you! Consider though, depending on your career trajectory and the company you keep, that your retirement lifestyle expenses might be vastly different than today. You might be a young doctor with a young family, living frugally while you continue to pay off student debt, focus on starting your retirement savings and putting money aside for your kids' education. When you're in your 50s you'll likely be a millionaire several times over and have quite a different lifestyle that you may wish to extend into retirement. Plan big!
I don’t believe in rules of thumb like budgeting for “80% of your pre-retirement spending” in retirement either, and keep in mind that when we plan for retirement we always are talking about after-tax numbers; what you expect to spend. 
In planning, your tax load needs to be added to the above numbers to determine the gross income you’ll need. People are often (pleasantly) surprised at how low their tax bill is after transitioning from full-time work to retirement. A couple things should work in your favor, in addition to generally being out of the higher income tax brackets. For one, there is the age amount tax credit available to low and modest retirement income earners. The pension income tax credit also works in your benefit. Lastly, pension income splitting effectively allows you to split most of your income down the middle so that a retired couple generally has to be earning into the six figures combined before they’re even affected much by the second federal marginal tax rate.
I hope this helps anyone with some preliminary retirement planning. Comprehensive retirement planning is my specialty and you can see there are a lot of variables that can go into something like that. Visit my contact page if you have any questions (just enter them in that box there) or would like to schedule a free 30 minute Zoom consultation where I’m happy to answer any questions “in person”.

Markus Muhs / CFP, CIM 


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