Having taken a recent interest in personal finance, I noticed that one of the common pieces of financial advice is that you, or I guess me, or everyone, should generally save 10% of our income. For what you ask? Some say retirement, some say “the future”, or perhaps “a rainy day”. But what does that even mean? And exactly how much are we talking about here? What kind of vague nonsense is this?

While the general rule does steer you in the right direction, it often comes up short of telling you why and how you should do this.

Of course, there are a multitude of things that need to be saved for in the future. Short term, some examples are small home improvements, possible yearly one-time payments such as insurance, or property taxes, and vacations. Medium term expenses are large home improvements like a new roof or furnace, or your child’s school expenses. And long term there is your own retirement, and your emergency fund (which could be needed in the short term).

All of these things should be saved for in different ways. But for now let’s focus on retirement savings.

In retirement Canadians can generally be eligible for two sources of government provided funds: income from the Canadian Pension Plan (CPP), and income from Old Age Security (OAS).

The CPP provides a maximum of $13,610.04 of taxable income for 2018. However, the average CPP yearly payout is about $5,900 for women, and $7,600 for men. OAS pays out a maximum of $7,039.92 for 2018. This means that in 2018 you may receive a total of $20,649.96 from the government.

This income alone is woefully insufficient to live on comfortably. The Ontario poverty line in 2011 was $20,600.

To make matters worse, employer provided retirement plans are not common (especially those gold plated Defined Benefit (DB) plans), and are becoming more rare as time goes on. This leaves it up to the individual to save enough of their own after tax dollars to make up the difference between the maximum $20k (but more likely $15k) of government provided income, and their chosen lifestyle. Thus, the reason for saving for retirement.

So, exactly how much do you need to save for retirement? For those who want a quick answer, you will be disappointment because there isn’t one. It entirely depends on your lifestyle in retirement. A figure quoted in the recent news media says the average amount people think they will need if they retire this year is around $750,000. But that’s only the average of all Canadians - it doesn’t really mean anything to you as an individual.

Luckily we can still make some predictions with a bit of work. If your retirement is 30 or 40 years away obviously your numbers will be very, let’s say fuzzy, depending on your life circumstances but try nonetheless since more information is always better than less. Of course, one of the best available predictors (that is within your control) of your retirement expenses is your current expenses. Sure you will also have other things you want to do in retirement that you won’t be doing while working, but we can at least get a baseline from which to work from.