We're all looking for a way to secure a future. It's common to have dreams of a good retirement, with plenty of money to enjoy life. However, you can't expect to just have enough money to live on if you want to be comfortable. You have to plan ahead.
A recent survey from the Employee Benefits Research Institute indicates that more than half of workers in the United States haven't done a retirement needs assessment. It wouldn't be unreasonable to assume that Canadians have similar results. This means that there is a good chance that you might not have figured out how much money you need to retire.
If you don't know what you need to accomplish with your money, there is no way that you will be able to figure out how much you need in the end, or how much you need to set aside each month to reach your goal.
In order to live a comfortable retirement, you nee to ask yourself the following question: how much money do I need to retire?
The answer to that question will depend on a number of factors, including when you plan to retire and how much you will need to spend during retirement to maintain your desired lifestyle. Because of this, knowing what you need to retire in Canada is not a simple answer. However, there are a few simple calculations that might help to give you an idea.
The 4% Rule
The 4% rule says that you can withdraw 4% from your portfolio in the first year. Then in future years you withdraw the same amount plus the adjustment for inflation. This allows you to decide if you have saved up enough money to cover your desired income level in retirement.
If you use this rule of thumb as a starting point, you need to determine how much you need each year to live on. If you think that you can live on $40,000 a year, then you will need $1 million, since $40,000 is 4% of $1 million. However, you also have to consider inflation as well.
There are those who point out that the 4% rule doesn't really work out anymore. However, it doesn't make a bad starting point.
The Rule Of 20
The rule of 20 suggests that for every $1 of annual retirement income you would like, you’ll have to have $20 saved up. So if you’re looking for $20,000 over and above CPP and OAS, then you’ll want to have portfolio worth $400,000 by the time you retire. This is another rule that you need to be careful of. Just make sure that you accurately gauge your retirement needs.
The 10% Rule
While a little too simplified, the 10% rule tells us to save 10% of our gross income towards retirement. The idea being that it will give us a retirement income equal to what we’re used to now. My issue with this is the effect of this level of savings is dependent on what age someone starts saving towards retirement. The later you start, the higher percentage you might need to put away.
The 10% rule works well if you start in your 20s, but if you don't start until your mid- to late-40s, just saving 10% of your income isn't going to be enough. It won't have time to grow. You need to adjust the amount you put aside depending on how much time you have to let it grow.
The Rule Of 72
You can find out how long it should take to double your money with the rule of 72. For this calculation, you divide 72 by your expected return. A 5% return would take 14.4 years to double your money.
Of course with this rule, you’ll need to have a realistic percentage you expect for a return, you can’t always expect double digits in every single year.
You also need to realize that it works better if you have a lump sum to invest. It's easier to figure out how much money you'll end up with if you've got a large amount of capital to invest for the future.
So, how much money do I need to retire?
Remember that these are just rules of thumb. You don't want to base your entire strategy on these rules of thumb alone. Part of what you need to do is figure out how much money you think you will need during retirement, each year. You can use your current expenses as a starting point and try to figure out what your needs will be during retirement. Keep in mind that there might be tradeoffs. You might no longer have a mortgage payment, but you might travel more. Even though you might think that your expenses will be less during retirement, it doesn't hurt to assume that your expenses will be similar, or perhaps even a little higher.
Hopefully these retirement calculations will help you see what you’ll need to save to have the retirement you’re looking forward to. Keep in mind that a couple that have worked most of their adult lives and retired at 65 can expect CPP and OAS to pay as much as $30,000 a year. Many people get discouraged about their retirement needs because they forget about CPP and OAS. Work those programs into your numbers and you’ll likely be pretty pleased with how easy it can be to retire comfortably with just a little planning!