How much do you want to have saved when you retire?

It's a big question, isn't it? How exactly do you get your head wrapped around such a big question? Well, let's give it a try.

Part of how you answer this question will be affected by how old you are right now. If you're in your 20's, you're about 40 years away from your goal and have very little information to go on. But you're also in the best position since you have all that time on your side. It's been estimated that if you wait to start saving for retirement until you're in your 40's, you'll have to sock away between 15-20% of your income. But if you start in your early twenties, then you only have to put aside between 3-5% of your money.

Early savers can also behave a lot less desperate. Hunting down an elephant-sized return won't be half so important because you have time doing most of the work for you. If you can sock away $100 a month - or $1200 a year - in an RRSP and earn 5% on your money on average over 40 years, you'll have put away $48,000, which will have grown to almost $181,000.

Start at 40 and do the same thing and you'll have just under $67,000 to work with. You'd have to save $3200 a year to have what the twenty-something has saving just $1200 a year.

But will that be enough?

Well, that depends. It depends on whether you end up with a company pension plan. It depends on whether you can expect to get your full government benefits. It depends on when you actually plan to retire, or if you'll keep working past normal retirement age (65 years). And it depends on how much you plan to spend.

If you're going to be funding your retirement all by your lonesome, then that $181,000 won't go far enough. Here's why:

• Let's say you decided you could live on $20,000 in today's dollars during retirement.
• Let's say inflation averaged 1.5% a year. (Inflation is sitting at over 2% right now.)
• You would have to spend just over $36,000 a year to buy the same stuff you're spending $20,000 on today.
• So your $181,000 would last you about six years. Ouch!

To have that $20K ($36K in future dollars), you'd have to ramp your saving up to almost $3200 a year. Or you could earn more return.

Of course, there are all those other considerations to take into account like:

Will you have a company pension plan?
According to the Stats Man, more than 5.52 million workers were covered by registered pension plans (RPPs) at the end of 2002. Sad to say, not everyone takes full advantage of this. When I was speaking at a corporate meeting not long ago, I asked how many people were taking advantage of the corporate matching program offered by the company. (If an employee contributed 3% of his or her salary to the pension plan, the company would match the contribution up to 3%, doubling the contribution.) Less than half the room put up hands. OMG! Your company wants to GIVE you money and you can't get it together to take the GIFT! Whazzup with that?

I am constantly amazed at the number of people who don't know how their company pension plan works. If you have a company pension plan, do you know if it's a defined BENEFIT plan or a defined CONTRIBUTION plan? There's a difference, a big difference, and if you don't know you should find out.

Whatever you will get from your company pension plan reduces the amount you'll have to save on your own, so this is a big consideration.

Will you receive full government benefits?
How much you end up receiving from the government will also have an impact on how much you'll need to save. It's not much, but it's better than a kick in the teeth. Find out what you can expect to receive so you can plan accordingly. HRDC has a calculator you may find useful. Or you can use today's maximums as a guideline if you know you'll qualify for the maximum at retirement.

For 2008, the maximum Old Age Security, or OAS, benefit you'll receive is $497 a month or $5,967 a year, based on being a resident of Canada for 40 years from your 18th birthday.

The maximum amount for a CPP retirement pension is $880 per month/ $10,560 per year (as of 2008). But that assumes you earned the what's called the maximum "average annual earnings" -- $43,700 in 208 -- to qualify for the biggest pension. If you didn't your CPP benefits will be less. So, for example, if your average annual income was $30,000 a year, your CPP benefit would be $625 a month, or $7500 a year. The average monthly CPP payment in 2006 was $473 or $5,676 a year.

So at the maximum, that's about $16,000 a year in income. Keep in mind that both CPP and OAS are taxable income.

When will you retire?
The earlier you retire, the more you'll need to get you through retirement. According to the Stats Man, our average life expectancy continues to go up and the gap between men and women is closing. Life Expectancy table. So if you're planning to retire at 60 and stay on this mortal coil until you're 82, you'll need enough money to get you through 22 years of not working. Hmmm. The longer you put off you're retirement, the more you can accumulate before you trade in your work-boots for a pair of really comfy shoes, and the less time that money has to last.

Will you work part-time during retirement?
If you do, you'll be able to supplement your pension with money you earn. This is a growing trend, as we recognize that work ain't all that bad after all. In 2005, over 20% of retirees were working.

How much will you need/want to spend?
Here's the really BIG question. If you're spending $60,000 a year now - in all likelihood you're going to need a little more than $20K a year to make ends meet. One rule of thumb is that you'll need about 70% of your pre-retirement income to be comfy.

Some people arbitrarily pick a goal for how much money they think they'll need. That's where the Magic Million came from. It was dart thrown in the dark. And it's no more true for the guy who is currently living on $250,000 a year, than for the guy living on $25,000. Guessing is fine if you're 20 and just starting out. After all, life's going to throw you a huge number of curve-balls before you actually get to shake off the harness. But if you're in your fifties or sixties, people, it's time to stop guessing and do some ground-work. The last thing you want to do is get to retirement only to find out that you have enough money to last until next Tuesday.

BTW, Fiscal Agents has terrific calculators to help you do some of the retirement savings math.