Chapter One from first edition

How Much, How Long?

Marge often wonders how much she should be socking away each year for retirement. She has an RRSP, but never contributes the full amount she's allowed. That makes her feel guilty, especially during January and February when there's RRSP advertising everywhere she turns. She hopes she'll be able to retire comfortably, but doesn't really have a clue about how much money that requires.

Many, many people are like Marge. Are you among them?

In setting RRSP and pension limits, the federal government reckoned that you should be setting aside up to 18% of your pre-tax employment income. But, as you'll see later in this book, that rests on a range of assumptions that may not apply to your situation.

In any event, we suggest working backwards. Before you worry about what to save, see how much you'll need as a retiree. Then consider how much government programs and your employer's retirement plan will provide. With long service and a generous employer-sponsored plan, you may not have to do any saving beyond the pension contributions you're already required to make. On the other hand, you might find that you'll largely be on your own.

So, how much money do you need to retire? That's one of the most common questions financial advisors get. Unfortunately, there's no magic number. It depends on your current and desired lifestyle, family commitments, the age when you'd like to stop working full-time, whether you'd like to work part-time in retirement, your health and your life span.

That's a lot to consider, but there's a shortcut based on two concepts: your income replacement ratio and your life expectancy. The first concept establishes the income you need to be able to stop work without a major sacrifice in lifestyle. The second establishes how long that income must run. They're key factors in determining how much you should be saving now.