Professionals from all walks of life and sectors have a knack for making the simple, extremely complex. The financial industry is no different. How much do you need to retire? “It depends” is usually the answer.
I dislike the “it depends” answer since while true, this does little to help people prepare for the future using any combination of assumptions. I think some financial assumptions are better than none; a plan is better than no plan at all. For today’s post, I thought I’d share some common “retirement rules” to consider. As always, let me know what strikes a chord with you.
Rule of 20
- The premise: for every $20 saved you can live off $1 in retirement.
- On your retirement date: $300,000 saved and you can likely live off $15,000.
- On your retirement date: $500,000 saved and you can likely live off $25,000.
- On your retirement date: $1 million saved and you can likely live off $50,000.
This rule seems to make some sense. A $1 million portfolio that yields 5% per year will provide $50,000 income but that doesn’t’ account for any taxes paid on that income. $50,000 income is closer to $35,000 take home pay after tax. I guess if your *TFSA is eventually worth $1 million you don’t have to worry about any taxes. *Young people of today should take note of the power of the TFSA as a retirement account.
Rule of 25
- The premise: take your anticipated retirement expenses (in future dollars, after tax) and multiply this amount by 25 for your “retirement number”.
- I figure we’ll need less than $60,000 per year for retirement expenses in today’s dollars. That “retirement number” today is $1.5 million. Using future dollars, that number is over $2 million.
As someone who is a bit worried about having “enough” this rule seems to make more sense to me, more so than the Rule of 20.
Replace 50-70% of your income during retirement.
- The premise: take your 50-70% of your current income and that’s what you’ll need in retirement.
- Let’s again use the less than $60,000 per year for retirement expenses in today’s dollars. I guess this implies our household income should be well above this, especially as inflation grows. There is no guarantee our salaries will continue to climb, matching or beating inflation, at least I’m not counting on it.
I suppose this one of the more reasonable retirement rules since 30-50% of your income today might be attributed to your mortgage, lump-sum payments on that mortgage and saving for retirement in the first place, expenses that would not exist in retirement. At least this is where 30-50% of our money goes today (mortgage and saving for retirement).
There are no hard and fast rules when it comes to determining your retirement number other than taking the first step, figuring out what you’ll likely spend in retirement. Life can change fast and the future is always cloudy. Our plan is to save as often and as much as we reasonably can while enjoying what life has to offer today.
Any retirees out there want to comment? What rules of thumb did you use to estimate your “retirement number”? Did your forecast line up with actual expenses?