Dear @financial_laura,
I’m 35 and my family has just moved to a bigger house with a larger mortgage payment which is cutting into our monthly savings rate. Not being able to save for retirement stresses me out! Is there a calculation to determine how much money I need to have saved when I retire?
This is the fundamental financial planning question, isn’t it? Whether budgeting, or planning for retirement, coming up with that mythical ‘enough’ figure depends on so many variables which are uncontrollable, and leave many people confused and concerned about their future.
Personally, I’m a fan of the beer and wings approach…you know…keeping things simple.
Along those lines, here’s a simple calculation to get a ballpark figure:
(Annual spending in retirement – Government benefits) x 25 = Enough
This calculation can work for an individual or a couple, so let’s walk through each variable.
Annual spending in retirement assumes that there are no mortgage payments, but ensures all spending is taken into account including travel, insurance, or car payments. An average couple retiring today might come in around $60,000 to $70,000 and an individual around $40,000.
Government Benefits currently include Canada Pension Plan (CPP) and the politically correctly named Old Age Supplement (OAS). While the exact amounts and terms of these benefits may change from year-to-year, or election to election, it is safe to assume that some government assistance will be available at retirement. Using today’s benefits, an individual who has contributed to CPP for their career can expect to earn $15,000 annually (note: double this for a couple).
The magic number 25 is not taken at random. It represents a 4% withdrawal rate from your retirement portfolio which is viewed as the factor to ensure your funds last the duration of your retirement life-span. 1/0.04 = 25.
As an example:
Bob and Sue are 35, they: expect to pay off their mortgage by the time they turn 60, love to travel, do not want to change their spending habits much in retirement and still want to support their children. They figure they currently spend about $70,000 a year today excluding mortgage payments. With successful careers they will both qualify for the maximum $15,000 in CPP and OAS. How much do they need to have saved by retirement?
Answer:
Future value of $70,000 in 30 years (assuming 2% inflation) = $127,000
Future value of $30,000 in CPP/OAS payments (30 yrs @ 2% inflation) = $55,000
(127,000 – 55,000) x 25 = $1,800,000
What’s your number? Are you on the right track? Let’s talk about it!
To read more about this calculation, check out the following article:
http://www.canadianbusiness.com/investing/how-much-do-you-need-to-retire-well/
This article was first published on my blog at journeyfinancial.ca