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Insights & advice

How long will my retirement savings last?

Key takeaways

  • The 4% rule of thumb is useful as a starting point to determine how long your retirement savings will last

  • By doing a little math you can estimate your own retirement income needs

  • How long you plan to retire has a real impact on how long your money will last

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You’ve spent your working life saving for retirement. Now it’s time to spend some of that money. But how much? After all, you don’t want to outlive your retirement savings. 

It’s safe to say we spend a lot more time figuring out how we’re going to save for retirement, than how we’re going to withdraw those savings. Here are some tips that may help.

The 4% rule

In the 1990s, financial planner William Bengen used historical data to determine that, as a rule of thumb, for most people, withdrawing 4% of their retirement nest-egg each year would allow them to enjoy a steady income for 25 to 30 years. 

However, there are some things to remember about the 4% rule:

  • You’ll still have to pay income taxes from this annual amount
  • You may need to adjust for the annual inflation rate (how much goods and services increase in price each year)
  • It doesn’t consider investment returns on your remaining retirement savings 

For many people, the 4% rule will be more like a guideline. Some years they may withdraw more, some years less, depending on their plans and lifestyle. 

Estimating your own retirement income needs

It’s difficult to calculate exactly how long your money will last in retirement. However, you can estimate using these steps: 

  1. Add up all your retirement savings including registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and non-registered accounts. Your retirement savings may also include the sale of a business. Divide your savings by the number of years you expect to live in retirement to get an estimated annual income amount from your savings. 
  2. Add up all your sources of monthly retirement income from company pension plans, government benefits such as Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Old Age Security and Guaranteed Income Supplement (GIS). Multiply this amount by 12 to get an annual amount. 
  3. Add the 2 annual amounts together from steps 1 and 2 to get your approximate annual retirement income amount. 
  4. Next, add up all your annual expenses in retirement. Include mortgage, car or rent payments, health care expenses, food, insurance, utilities, gifts, travel, etc. And be sure to treat yourself occasionally. 
  5. Compare your annual retirement income with your annual expenses. If your annual income is higher than your annual expenses, you’re in good shape. If not, you may need to reduce your expenses or consider working longer and saving more. 

Remember, this estimate doesn’t consider someone living off dividends or a similar constant income stream. 

This chart provides some examples and shows the importance of keeping your retirement savings invested.

Total retirement income
Investment returns
Total annual expenses/
withdrawal
Number of years money will last
$300,000
0%
$15,000
20
$300,000
4%
$15,000
25
$500,000
0%
$35,000
14
$500,000 6% $35,000 33

The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

The length of your retirement matters

While the average Canadian retires at age 63.5 according to Stats Canada, some people choose to work longer. If you continue to work until you’re 70, that’s 6.5 fewer years of retirement you need to save for, or more money you can spend annually during retirement. 

That said, if you want to retire at age 60 or even 55, you may need to plan for 35 years of retirement or more. That may mean you need to save more for retirement or spend more frugally.

What’s next?

Now that you know more about how long your money may last in retirement, you may want to contact your advisor to:

  • Create a retirement spending plan to calculate your expenses

  • Determine how much retirement income you can expect from the government

  • Calculate your total retirement savings

  • Learn about options for drawing an income from your retirement savings that may help you not outlive your money

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This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.