It’s easy to figure out that many people will need somewhere around $2.5 million in savings in order to have $100,000 of pre-tax earnings that is designed to last in perpetuity. The formula for figuring out this is below. Retirement planning is a simple process because of the straight forward math however because of the number of factors involved, it can become confusing and frustrating.

The questions that people have are:

  • When can I retire?
  • What will my retirement look like?
  • Will I have to sell my house and downsize in order to afford retirement?
  • How do I know that I’m getting the best service with my advisor?
  • What fees am I paying?
  • How do RRSP’s and RRIF’s work?
  • Should I be contributing to a TFSA instead?
  • I’m good, I have a pension…
  • I didn’t think I would live this long (actual response)
  • How much CPP and OAS will I get?
  • How do I invest my money?
  • I’m 5 years out from retirement and I should be all in bonds… or should I?
  • I don’t want to change anything even though I’m not getting the best service.
  • This list goes on and on with the many questions that I’ve had from clients over the years. A lack of knowing where they are and what they need in retirement is the cause of most frustration.

I’m going to illustrate some simple ways to start to understand what your retirement will look like in a few simple steps.

Easy and simple bringing you comfort and security knowing where you are at. Transparency and knowing are the two things that bring me the greatest comfort and joy so that I know what I can and can’t do and I can shape my future accordingly.

Let’s use an example of a family making $200,000 before tax prior to retirement.

First, know this: Most people use about 60%-70% of their pre-retirement income in retirement.
Do a quick budget and see how much you are spending each year. It doesn’t have to be too in depth but do an estimate. The think about if your kids will be out of the house or if you will be taking on extra expenses to take care of your parents. Will you want to travel more?

Take that income without the travel and multiply it by 0.7. This will give us $140,000 per year. Then you may receive Canada Pension Plan which the maximum for one person is over $13,800 per year. Keep in mind that this is taxable.

For two people that is $27,600 which leaves a desired income of $112,400 ($140k – $27.6k).

You may have a pension and let’s assume for simplicity that it works out to $12,400 for easy rounding leaving you with a required income of $100,000. The bigger your pension contribution, the lower the required generation of income from your investment portfolio.

Now let’s assume that you retire at 65 and that inflation is an average of 2%. Let’s also assume that you are going to get a 6% return on your investments.

How much can you pull out without eating into the principal amount? Your desired income of $100,000 should increase every year to account for inflation. Therefore you will can withdraw approximately 4% (1.06/1.04 = 3.92% or about 4%).

Therefore $100,000/0.04 = $2.5 million. Put another way, your desired annual income X 25 equals your required nest egg.

Keep in mind that this is based off of today’s money and also that your income is expected to grow. The required income in retirement will be greater due to inflation however your income is also expected to grow. You should be increasing the amount you save every year to account for this.

Now the question comes down to how do I get to having $2.5 million in investments? We will cover that in another post.

Remember that your desired income X 25 is the desired amount of investments.

Other factors to consider are:

  • Other sources of income
  • Inheritance
  • Old Age Security
  • Inflation
  • Interest rates
  • Debt
  • If your kids are done school then perhaps weddings
  • Vacations
  • Legacy desires after you die
  • Legacy desires while you are living
  • Home renovations
  • Moving

Next Steps:
If you want a more in depth plan and would like to bounce these ideas off of someone then give us a call.

If you want to talk to more than a computer screen then we are the person for you.

Transparency and certainty are what we provide.

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