How long will your retirement money last?

How much money you’ll need for retirement is largely determined by how long you live – something that’s impossible to know with any certainty.

The best you can do is consider that healthier lifestyles and better medical care are helping Canadians live much longer than they once did. The average woman retiring today at 65 is expected to live another 21.7 years; men average 18.8 years.1 With life expectancy on the rise, retirements that last 20 years or longer will become more common.

At the same time, some people have been retiring younger. In fact, many people will spend nearly as many years in retirement as they spent working.

How much do you need?

How much do you need at retirement to generate the income that isn't covered by government programs, pensions and other sources? How long will that pool of retirement money hold out if you start dipping into it each month?

A general rule is that you need 70 per cent of your pre-retirement income but that can vary depending on things like lifestyle, age at retirement and rates of return.

Be sure to factor in inflation

You still need to account for inflation over your retirement years. Assuming an inflation rate of 2.5 per cent, your current dollar’s buying power will decrease by 40 per cent in 20 years.

Look out for taxes

While you’re saving, as long as your money is in a tax-deferred retirement plan you don’t need to take taxes into account. But when your money becomes retirement income, it gets taxed. Trim your budget to take taxes into account and to make a rough approximation of how taxes will cut into your investment earnings.

Choose a safe withdrawal rate

In the early years, your nest egg’s growth will probably offset your withdrawals. But over time you can eat into your principal, and ultimately deplete it. The larger the number you start with, the more likely it is your portfolio will last.

While no one can say with complete certainty how long your portfolio will survive any particular annual withdrawal rate, it’s wise to start off moderately so you don’t use up your money too quickly. Try to make withdrawals as close as possible to your retirement income products’ minimum withdrawal guidelines.

1Statistics Canada: http://www.statcan.gc.ca/daily-quotidien/130925/dq130925a-eng.htm