There is no way to know this with 100% certainty. And I think this trips most people up.
They think “It’s unknowable to know exactly what my expenses will be so I’m not even going to think about it”. And they are not wrong, but we can still work towards an answer that is close enough as a starting point. From there the number can be adjusted as we go.
There are a few methods that can be used to calculate how much income you’ll need in retirement
Method 1: Bank Statements
The first and most accurate method is to print your bank statements and go through them line by line and tally up the expenses.
While it’s not difficult to do this it can be tedious to do.
But if you go through a few months of bank statements you will have a very good idea of your overall spending and how much you’re spending for different needs (i.e. housing vs. transportation vs. food)
Method 2: Focus on the Big Costs:
By focusing on the big-ticket items you can get a good idea of how much you’ll spend in retirement. Instead of worrying about tracking every single purchase most large day-to-day costs are automated and knowable.
Most people wouldn’t know how much they spent on eating out last month. But most people can tell you what their mortgage payment is.
This is my personal favorite. I set a reminder each month to print out a statement. I look for all the big ticket and non-discretionary costs (i.e. rent utilities).
This gives me a sense of what my monthly burn rate is. If I know my non-discretionary expenses are $3,000 per month and I see I spent a total of $5,000 that month, I know that I spent $2,000 on “fun” things.
Some of the big costs to focus on are:
Home Ownership Costs
- Mortgage Payments
- Property Taxes
- Condo Fees
- Insurance
- Utilities
- Maintenance
- Roof
- Garage Doors
- HVAC
Transportation Costs
- Financing Payments
- Lease Payments
- Car Insurance
- Gas
Day to Day Costs
- Food / Groceries
- Travel
Method 3: Percentage Method
Using a percentage rule of thumb is the easiest way to estimate your retirement spending, but it is the least accurate.
A general rule of thumb is that you’ll need 70% – 80% of your current salary to afford retirement.
If you’re earning $75,000 that means you’ll need between $52,000 – $60,000 in retirement income.
While this figure may be roughly correct for Canadians at large it has little bearing on your specific situation. A number of changes could happen during retirement which alter your spending needs.
Nevertheless, if you’re unable or unwilling to calculate your spending using the first two methods this rule of thumb can act as a starting point.