How much do you really need to retire?
I get the question about retirement a lot, from people in their 20s as well as people in their 50s.
Research shows that too few people plan for retirement. In fact, 21%[1] of Americans, and 30%[2] of Canadians haven’t saved a cent. So, this begs the question, how much do you really need to save for retirement?
Well, the one thing that I do know is: how much you need to save, all depends on how YOU want to spend your retirement.
Here are a few things to consider:
- Your age when you retire
- If you will be working after you retire
- Where you would like to live in retirement
- What you would like to do when you retire i.e.: traveling, focus on hobbies, etc.
- If you have any debt to pay while in retirement such as a mortgage or a loan
How to get an idea of how much you need to retire
According to several calculators people will live on 70% -80% of their pre-retirement income in retirement.
So if you made an average of $60,000 per year during your working years, you may only need $42,000 to $48,000 a year in retirement.
There are two ways to determine how much you need for retirement. Although these are not 100% precise calculations, they certainly can provide some guidance.
Approach #1: The 4% withdrawal rate
The 4% withdrawal rule infers that you build up a retirement portfolio that provides 4% annual income. A 4% withdrawal rate is often referred to as a “safe” withdrawal rate.
Here’s how this approach works:
Let’s say you have figured out that you need $40,000 per year in retirement. Using a withdrawal rate of 4%, you should have a minimum of $1 million in retirement savings before you retire.
$40,000 ⁄ 4% = $1,000,000
This approach can work whether you plan to retire early, or if your chose to retire at 65. This strategy is used by many “early retirement” enthusiasts – this movement is often referred to as “FIRE” – Financial Independence/Retire Early.
Approach #2: Your desired annual retirement income multiplied by 25
This rule is a bit easier to calculate. It infers that in order to meet your income needs in retirement, you would aim to have at least 25 times your desired annual retirement income.
Here is how this approach works:
Let’s say you estimate that your expenses per year in retirement is $40,000.
$40,000 x 25 = $1,000,000
See how much you need to safe for retirement with the Retirement Calculator
So now that you know your retirement savings number, here’s how you can start planning & saving
1- Compare your current spending with expected spending
Look at how much you spend today, then figure out how these expenses will change when you will retire.
For example, you won’t need to spend the same amount of money on your car/transportation to get to work, but you might decide to spend more on hobbies or on travel.
2- Decide when you will retire
Deciding when you'll retire has a big impact on how much you need to save. It's important to have a basic idea of how long you should expect to be retired. You'll need to make sure you have enough money to support yourself for the entire length of your retirement.
When deciding when you'd like to retire, think about:
the retirement lifestyle you want to live
your spouse/partner’s retirement plans
your/spouse/partner health
your current financial obligations and living expenses
how much you'll receive from pensions, personal savings and investments
How long you'll live will also impact how much you need to save for retirement. Today people are living longer than past generations. It may be smart to budget for a retirement that can last 30 or more years.
3- Plan for unexpected expenses
Unexpected events can have a big impact on your retirement savings.
It's possible that you could face:
having to retire earlier than expected because of personal, professional, or health reasons
major unplanned expenses such as home or car repairs
health emergencies, or a need for additional care, for yourself or a loved one
having to move or make changes to your home because of a change in your health or the health of a loved one
To help plan for unexpected events, set up a bank account or another type of investment or savings tool to use as an emergency fund. Have a percentage of your income automatically deposited into the account. The fund should be enough for you to live on for 3 to 6 months.
4- Create an emergency fund
Having an emergency fund is always a good idea. It's even more important in retirement, when you won't be working. Your emergency fund should be in addition to your regular retirement savings. Check out how you can build an emergency fund.
5- Figure out if you need insurance
Consider whether you have enough health insurance, disability insurance and/or life insurance. Think about whether you'll need to purchase more insurance to lower the risk and financial impact of unexpected events.
Bottom line
Today is the perfect time to start to think about when you would like to retire, what you want to do in retirement and determine how much you would like to have in retirement. The bottom line, it’s never too early to start to think about retirement.
Have you started to think about retirement? Share your thoughts below.
[1] Newsweek Aug 2020 -Why Americans are Under-prepared for Retirement: 5 Mind-Boggling Facts you Must Know (newsweek.com)
[2] CTV News Feb 2020 - Majority of Canadians aren't prepared for retirement: study | CTV News