The retirement struggle is real. We spend a large amount of our working life is spent planning for retirement. If only there was a formula for what we need to save for retirement. Well, maybe there is:
How Much do Your Really Need to Retire?
If you read the headlines about how prepared Canadians are for retirement, you would think that we all flunked out of prep school. Ok, I know, a bad bun, but seriously, Canadians are underprepared for retirement.
No one disputes that a percentage of the population will be incredibly underprepared for retirement, the question is how much of the population will this be? My latest information tells me that it will be somewhere around 20%.
You’ve already received the memo stating that you should save 10-20% of your income, (including your employer match) in your retirement account. But how much will you need to save for your retirement? What’s your number?
The good news is your number likely isn’t as high as you think.
A good rule of thumb is 70% of your current income today will need to be replaced in retirement. However, I don’t like rules of thumb. A better way is to actually do some work. Yup, sorry. Work.
Take a look at your current expenses. I divide mine into two categories: fixed and variable. Fixed expenses will happen every month, housing and food are good examples of fixed expenses. Variable expenses need to be factored in too. Then factor inflation. A current expense of $2000 in 15 years is going to cost $3116 base on a 3% inflation.
Ok, so if you have an idea on your expenses, your next step is to calculate what your cash flow will be. Factor in government income, (CPP and OAS), any employer contribution plans, your savings etc. Also, do you own your home? Selling your home may be an effective way to help supplement your retirement income. In another article we can discuss the order in which you should withdraw your investments, but I digress.
Fidelity Investments uses the following life expectancy number for retirement purposes: 82.9 for the average man and 85.5 for the average woman. These numbers are of course an average, which means some people will live a lot longer. We argue that you should be prepared to be retired for 30 years or more.
Ok, so I have an idea of how much I need, an idea of how long I will likely live, what’s next? We should strongly recommend withdrawing no more than 4% from your investments in any given year. Why? More than that and it is likely you will outlive your money. This is a good starting point. But rather than blindly following a benchmark, why not sit down with a qualified financial advisor and figure out your number?
One final thought: You don’t need a large wheelbarrow full of cash the day your retire. What you need is cashflow to fund your expenses, both fixed and variable. A financial advisor can help you understand your needs and can put together a plan with your input.
A good plan should be able to tell a minimum of three things; what is your attainable retirement lifestyle, your required rate of return, and attainable age for retirement.
David Reeve is President and Owner of Davlyn Financial, a local financial planning firm in Hespeler. He can be reached at 519-651-1246 or firstname.lastname@example.org.