Just poke around the internet for a while looking for answers to how much money you need to save before you retire and you’ll get answers ranging from next to nothing up to $3 million or more. It looks like some of them must be wrong, but it all comes down to your spending and pensions.
Let’s take an example. A Canadian couple, Mary and Bill, are both 65, have no debts, have no workplace pension, and are about to retire. They both worked enough to get maximum CPP benefits. Together they can expect CPP plus OAS of $3200 per month rising with inflation.
Suppose that $3200 is enough to cover their spending. Then the total savings they need is zero. Nada. Zilch. It can be dangerous to count on being able to work until age 65, to count on maximum CPP benefits, and to assume you can live on $3200 per month, but now that Mary and Bill have made it to 65, they need no savings beyond a modest emergency fund.
What happens if Mary and Bill have a more expensive lifestyle? Let’s say their spending is double their government pensions, $6400 per month after income taxes. Based on a series of assumptions, I work out that they need about $1.1 million in savings. This is hugely different from the first case where they needed no savings.
Let’s take it one step further and see what happens if they want to spend triple their government pensions, or $9600 per month after income taxes. Again, based on several assumptions, I calculate that they need about $2.4 million in savings.
No doubt others would calculate different amounts of savings needed to support the larger spending levels, but the point is that the need for millions of dollars in savings to retire comes from spending more than your pensions.
If you can live on your available inflation-indexed pensions, then you don’t need savings. If you need more money than this, your savings needs climb quickly. How much you need to save is so sensitive to how much you spend that we should never expect consensus among experts on how much you need to save.