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You Need HOW Much to Retire?

You need HOW much to Retire?On my business trip this week a group of colleagues and were forced to extend our stay due to inclement weather. With little to do and no where to go, we congregated at the hotel lounge for a free drink and appetizers (a promotion the hotel was having). Even though I know I should avoid these less than health indulgences, I just can’t pass up a free beer and buffalo wings.

After a lengthy conversation about work we meandered on to the topic of retirement. All of my colleagues were older than I by at least a decade and couple of them were at standard retirement age.  No matter how many times I read about the financial attitudes of the average Canadian – it’s always an eye-opening experience to hear people’s perspectives first hand.

Steve

It started with Steve. After pontificating about what’s wrong with the recent decisions made by his employer, Steve ended his rant with “Well, hopefully I’m retired by then!”. My ear’s perked up. I asked Steve, when he thought he’d be retiring. He said as soon as he had enough saved. Steve’s been around for a LONG time and I know from past conversations with others that his employer offers a defined benefits plan. Steve went on to explain that he planned on cashing his plan out upon retirement – “The survivor conditions are too restrictive and I know that I can get a better return”. I smiled…okay Steve. “So how much is your cash out value?” I asked. Just over a million Steve responds. I was gobsmacked. A million and you don’t have enough? Really?

I told Steve if he just invested that million responsibly and lived off the income he could easily earn $40,000 a year. “Oh that’s not enough” he said. Do you have other savings I asked. “Oh yeah, quite a bit”. Interesting.  I asked Steve how much he thought he needed to have in savings. “I’m close” he replied without making eye contact. Interesting indeed.

Doreen

That’s when Doreen jumped in, “$40,000 a year? That’s not even close to enough! When I retire,  I want my standard of living to go up not down”. Doreen owns her own business and has a much higher than average income. She lives in a pretty high-end neighbourhood and doesn’t shy away from the nicer things in life. When I asked what she meant by “quality of life” she said she wants to travel and not worry about money. I reminded her that if she had paid off her mortgage and no longer had all of her work costs (clothes, vehicle, business lunches, insurance, etc) that her expenses would be far lower and that $40,000 would go much farther. She wasn’t buying.

Over and over, my colleagues indicated that an income of $40,000 per year wouldn’t be enough for them to retire on. With some prodding I found that none of them really had any firm idea as to how much money they needed to retire. This is actually true for a lot of Canadians. They know they want to retire, but they really have no clue as to how much they need.

Going Broke in Retirement

Recently, ING Direct released the results of an online study that found that almost a third of retired Canadians returned to work and a major reason for that is because they underestimated the amount of money they need to retire.  Either they didn’t save enough, or the failed to change their spending habits to match their new income level.

At first glance, this article seems to underscore the arguments my colleagues were making the other night. But the article actually highlights another point – people have spent far too little time figuring out how much money they will need in retirement and therefore have no idea as to how much to save in retirement savings.

Most financial advisors agree that you can sustainably take 4% from your retirement savings annually to live on when you retire.  In most situations taking only 4% means that you’ll never draw down on your retirement capital.  This rule of thumb is very important for us seeking financial independence, especially those planning to retire decades early. It means that the level of income we achieve is secure and will be there for us in perpetuity.

Home Much You Need to Save for Retirement

If you’re going to live on 4% of your savings that means your retirement savings have to be 25 times your desired retirement income. For example – if you wanted to have $20,000 in annual retirement income, you would need to save $500,000 ($20,000 x 25).  The table below shows you how much you’d need to save for a variety of retirement incomes.

 

Desired Retirement Income Targeted Retirement Savings

$12,500

$312,500

$25,000

$625,000

$35,000

$875,000

$50,000

$1,250,000

$75,000

$1,875,000

$100,000

$2,500,000

Knowing how much you need to save is important, but the big question is, how much you think you need in annual retirement income. This is a far more tricky problem because it’s not a simple math problem. This question requires that you think about the lifestyle you want to lead in retirement. It requires that you think about where you want to live, what you want to do, and what your expenses will be like. This can be difficult and is made especially more difficult when retirement is 5, 10 or 20 years away.

This is why my colleagues seemed so confused and scared about the amount of money they needed in retirement. They truly haven’t thought about life outside of the office.  Apparently this is true for many Canadians.

Not me though. I have been thinking about the life I’d like to lead after I leave full-time employment for good. Right now, I believe that Jane and I could live very comfortably on $36,000 a year. This assumes we have zero debt, that we continue to live in our lower cost community, and that we successfully reduce our regular spending (which we are working on now).  The beautiful thing about living more simply is that on top of freeing up money for increased savings today, a simplified lifestyle becomes habit and means that in retirement our income doesn’t have to be nearly as large. This is why I call simplified living a two front assault on wage slavery.

What about you – how much do you expect to need for retirement income? Have you given it any thought? What assumptions have you baked into your desired retirement income?

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  • Laurie @thefrugalfarmer

    Love this, Jack! It always amazes me that people aren’t willing to give up their “stuff” for the ability to live a life of freedom in retirement. Even with our four kids, we could be cozy on $40k a year if we had no debt. Choose experiences, not things!

    • http://www.seejacksave.com/ Jack

      I couldn’t agree more! I still suffer from the “stuff” addiction – though I’m on the road to recovery. The first step is admitting you have a problem right? I now see things as clutter, space fillers and space costs money! Having said that, I’ve still got a weakness for books. Damn you Amazon and your one-click purchase! $40k per year is pretty close to our $36k. We live in a lower cost community so this gives us a greater ability to keep our expenses low. If we were to move to a more expensive city – we’d have to adjust our target.

  • http://www.debtroundup.com/ Grayson @ Debt Roundup

    I am going for $50,000 in retirement. I think that will be enough. I believe that most people want to enjoy life in retirement and do things that they dreamed of when working. This usually entails expensive activities, which requires more money.

    • http://www.seejacksave.com/ Jack

      Very true Grayson. My impression is that most people haven’t quantified exactly what their dreams will cost. The goal of retirement needs to be a SMART goal, Specific, Measurable, Realistic and Time-bound. Selecting “your number” is a concrete way of moving retirement from hopes and dreams to ways and means. By choosing a retirement income of $50,000 all you need is a cool $1.25 million!