Retirement Numbers and Rules

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.

Examples:

  • 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”.

Example:

  • 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.

Example:

  • 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?

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51 Responses to "Retirement Numbers and Rules"

  1. I think for most people they’ll be best served by just saving as much as they can for now and then reevaluate/refine once they’re within 10 years of retirement. I’m not too worried about an overall portfolio value since I’m focusing on dividend growth investing. It’s all about the cash flow in retirement. The rules of thumb are good general guidelines but none of them are worth anything if you don’t save a large portion of your income.

    Reply
    1. Agreed JC, for me as well, it’s all about cash flow…replacing as much income as I can in retirement as during my working years. Rules of thumb are just that, at least they are something to strive for.

      Reply
  2. I’ve been trying to figure out a sports analogy to describe how much you need for retirement. The best I came up with was that your working years is like the regular season and you just need to get yourself in position to make the playoffs. That means establishing good savings habits, avoiding debt, investing for the long term.

    Once you get to the playoffs (say, 5-10 years from retirement) you can fine-tune your game in order to make a championship run. Now you can determine what kind of expenses you’ll have in retirement, and whether you need to work longer, save more, etc.

    That’s about as far as I got, so I’m not sure what makes a Stanley Cup champion in retirement. I guess, “it depends”, is still fitting 🙂

    Reply
    1. Ah, c’mon Robb…no more “it depends”! Kidding aside, I think a good analogy is golf. The front nine, you are in your accumulation years. The back nine, you’re in your spending years. There are no guarantees the game on the front nine will be the same as the back nine, but if you practice and play well enough, your nines should be consistent. Either nine, if played poorly enough, can lead to disaster.

      I believe for us, a $1 M investment portfolio, a paid off home (no debt goes without saying), and workplace some pension income is “enough”.

      It would be interesting to hear from retirees what their projections were and what the reality is now.

      Thanks for the comment.

      Reply
  3. I’m not a retiree (I’m still in my 20s) but I don’t think it’s every too early to have a plan. Of course, things will change often, but at least if you have a plan that you are working toward, even if you have to adapt it, you are making progress!

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  4. Rules or not, I think the TFSA is a huge gift from the government that our generation seriously underestimates. Since it’s only $5500 per year max contribution, many people tent to write it off as minor or not important for retirement. But it really starts to add up over the years. Im hoping I can strike a balance between my TFSA and RRSP (using my RRSP for expenses and TFSA for ‘play’ money) when I retire – something previous generations weren’t able to do

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    1. I’ve written about the same and agree with you Dan, the TFSA is a gift every Canadian should take advantage of. The RRSP, not so much. I look forward to reading on your site how you manage those accounts.

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  5. Moving from the accumulation phase to the distribution phase of retirement investing is not easy! I’m near there. Asset allocation needs to change in that process. How? My own plan is not to retire until my minimum retirement living expenses (MRLE) can be met solely through riskless investments: CPP/OAS + gov’t bonds/GICs. This is presently difficult for me to achieve for obvious reasons (low rates!), but I’m getting there by re-evaluating my MRLE and saving more. So, I need to change the date of retirement somewhat. After achieving that, then I can have other risky assets such as equities and my preference is dividend etfs for inflation protection. But relying on equities (even dividend producing ones) to meet one’s MRLE can be a disaster because if a market downturn occurs at the beginning of one’s retirement and is prolonged then one can be in serious trouble! Equities are great when you are young but not always your friend in retirement.

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    1. Thanks for the great comment Harvey. We share a similar philosophy I think….I’m hoping to have our pensions provide for the majority of our expenses, at least >50%. This is my fixed-income. I’m looking at a combo. of dividend-paying, income-producing stocks and ETFs for the rest (50%). I figure a 50/50 equity/bond split is probably a pretty good one for a retiree. Anything I get from CPP and OAS is considered a bonus. I hope to write a post about that in the coming weeks.

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      1. You are in a very enviable position to have pensions (plural) excluding OAS/CPP to meet most of your retirement living expenses. You really then don’t need to take on risk! Unless you have a need to build an inheritance portfolio I might just then stick to a riskless portfolio excluding equities entirely and when interest rates rise you will be even happier! Well done.

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        1. Thanks Harvey and yes, we are lucky but you never know when things will change so that’s why I continue to save and invest on my own. If things work out, we hope to have 2 pensions worth 20-25 years each to rely on around age 55. That’s our fixed-income. We should have RRSP assets and TFSA assets, although we’ll spend the RRSPs first and turn that into non-registered income or tax-free dividend income. The plan is for no debt as well. We hope to start taking advantage of CPP and OAS around age 60 and 67 respectively but intend not to rely on that income for living expenses; that money will be taken and turned into non-registered income or put into the TFSA as contribution room rises. We’ll see…lots have to come together in the next 14-15 years to make this happen 🙂

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  6. I think the $50 000 is probably for a couple, in which case if the savings were optimized using spousal rrsps etc (and now there’s pension splittling for older retirees) the taxes would leave about $22 000 each or 44 000. And that’s before the age amount.

    I’m not sure most people have a fixed plan for retirement saving. I think many just figure if their RRSP still has room then they are failing. Unfortunately, I think that may lead some people to giving up, but I hope I’m wrong.

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    1. I was hoping you’d write Bet. My RRSP is also maxed out of contribution room, that should be done in another couple of years. My wife has lots of RRSP contribution room, hopefully we can contribute to that more in the years to come.

      We definitely have a fixed plan for retirement saving, we consider it a bill payment of sorts to “pay ourselves first”. I too, wonder how many others do this…
      Mark

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  7. I think for a personal finance blogger, I’m much less focused on retirement savings numbers than most. I prefer to keep my expenses in check, save what I can, and work on developing revenue streams that will hopefully last into the future even when I “retire”.

    If there’s still decent money coming in during my later years, I won’t need to have a magic number saved to get by.

    I still want to have a large nest egg for my later years, but it isn’t my biggest priority now.

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    1. You might be Stephen, I’m thinking about my “enough” number frequently, maybe too much 🙂

      Your desire to keep expenses in check is always a smart move. Combine that with more income streams and you’re well on your way to financial freedom.

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  8. we have been retired for 8 years! i can’t believe how fast time goes by. in the 10 years leading up to retirement i thought $30,000. per annum would be great. however, after retirement things changed — travel, 6 months in a warmer climate (in a 5th wheel) and having fun with our grand children bumped that amount up to $55,000. per annum. thanks to our wonderful country we receive cpp & oas which has bailed us out. our portfolio is 75/25 (stocks/bonds) because we need income. rules are good but as mark writes BUT things change and they can change very quickly. my last comment is ” use your TFSA for gosh sakes — it’s a gift!!!

    Reply
    1. That TFSA is a gift!

      Retired for 8 years Gary, that’s great! I think a 75/25 equity/bond split has treated you very well in recent years and you can reap the rewards of that with markets at an all-time high now. I think my wife and I will get some CPP and OAS, but we’re not counting on it in retirement. Those government programs will be icing on the cake for us and hopefully we can do the same as you Gary, use those programs to live it up a bit and travel to warmer climates for a few months each winter.

      Thanks for the comment!

      Reply
      1. Agreed about TFSA.

        We retired a few years ago and are living on just oas and cpp income, topped up by some other pensions. Our tax rate is impressively low at the moment.

        We we drawing from our rrsp accounts to put into tfsa accounts while our tax levels are low. Better that than to pay more tax on rrif withdrawals when they become mandatory.

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        1. Your plan sounds pretty good to me, withdraw from RRSP in lowest-tax years and fund the TFSA with it if you don’t need to spend (all) that money. This way, you can avoid mandatory RRIF withdrawals and get your TFSA (tax-free growth and income) working for you sooner.

          Congrats on the low tax rate with invested assets, nicely done.

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  9. While this certainly is some food for thought. I’m inclined to go with the rule of replacing 50%-75% of your income to be on the safe side. After all, in retirement I’m not planning on having a mortgage and I won’t be saving a large portion of my income for retirement. Those are the 2 largest “expenses” in my monthly budget, representing over 50% of our family income. With that out of the way, even with some travelling and hobbies, I think we could easily get by on 50% of our current income or less.

    Reply
    1. Thanks for the comment, good to hear from you.

      I agree, I think replacing 50%-75% of your income is certainly “safe”, for most GenXers anyhow. I know right now, lump sum payments on the mortgage, the mortgage itself and saving for retirement accounts close to 50% of our after-tax income. That will all be gone in another 20 years.

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  10. Rule no 1 was to tell our son that we would be spending his inheritance in retirement.

    For several years before retirement we tracked expenses on a spreadsheet, easily done and it let us see how much was needed, how much was work life related (x coffees and lunch each day!). There is the target income after retirement and I suggest anyone can do that at any age.

    Nothing magical after that it became a simple formula. We have $1m, if we invest safely at 3% in a world where expenses increase annually by 4%, will we have enough coming in to keep us going until mid 90s?

    Lifestyle changes, in vogue bucket list projects, that is another discussion that we needed to have.

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    1. @Richard, I have no problem if my parents decide to spend my inheritance, it’s their retirement!

      I think I’ll do the same when I get older, more diligently track expenses and find out where we are at. This way I know my burn rate. I figure a $1 M portfolio + pensions and of course, no debt should do it. Even if inflation runs close to 4% in retirement, if the portfolio can yield 4% each year generated by dividends and distributions I shouldn’t have to touch the capital. At least that’s the plan, so I need to save a bunch.

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  11. I guess I sort of indirectly used the “25 rule” when coming up with my number. I figured out $40,000 of tax efficient income in todays dollars would more than do the trick. Factoring in inflation, $50,000 10+ years from now is more realistic. Assuming I could return 4% net of inlfation on average, and that got to me to $1.25M in investable assets.

    The landscape changes quite a bit if you are looking at a target for early retirement vs working until 60-65 when you’re closer to a point where you can rely on CPP and OAS.

    Reply
    1. That’s one of the biggest challenges I find with “enough” projections, what inflation will be going-forward and during retirement. It’s a big unknown. Conservatively, I’m assuming it will run 3-4% going forward. If I’m wrong, and it’s lower, we should have more money to spend. If I’m right, I planned well.

      I think Canadians needing and wanting to work to age 65+ don’t need very much saved. The government programs will take care of them. Then again, I don’t want to work another 25+ years on somebody else’s terms. Thanks for the comment!

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  12. The rules are a good guide during your early years, but like many have said, concentrate on the Cash Flow or Income your investments generate. Invest during your accumulation phase for income and watch it grow till you are ready for retirement.

    I’m 72 with 100% equity DG stocks and no pension other than cpp & oas. Our dividends currently generate over $70,000 but I’m still re-investing most of them. Too bad the gov’t didn’t introduce tfsa years ago.

    Stick with large, non-cyclical, DG companies, and re-invest the dividends till you need them in retirement. Don’t think about how much you need to save ($500,000, $1 Mill, etc), but rather how the money you save and have saved generates income and is the income growing. Bonds, Mutual funds and even etf’s don’t generate much income.

    Reply
    1. Thanks for the great comment Henry, I enjoy learning from people like yourself who have been there and done that. With part of my investing approach being dividend investing, I’m definitely focused on cash flow for retirement; building it now actually – so check out my most recent post.

      That’s very impressive Henry: “Our dividends currently generate over $70,000”. Yes, for you, too bad about the TFSA. Do you use this account now?

      I figure a $1 M portfolio yielding 4-5% should suit me just fine in retirement, the challenge is saving that much! I stay away from bonds, dividend stocks and equity ETFs only.

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      1. Your portfolio will grow to the 1Mill, rather than saving that much, if you invest regularily when valued priced, re-invest the div and avoid cyclicals. The problems with etf’s is you are buying a bundle where many of the stocks held are cyclical, non-dividend growers and very small yield.

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        1. Not to mention, what the fee will be with etf’s if your portfolio is a Million or a portion of a Million. Every dollar paid in fees is that less compounding of your money for retirement.

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          1. Thanks again Henry, this is why I do not like high-priced mutual funds or having to pay other people to manage my money. The more I spend on them, the less I can invest and keep for me.

        2. I hope it will Henry, in another 14-15 years I hope. I would really like to retire early while I have my health and can do things.

          Your raise a good point about ETFs, you get the growers and laggards. The challenge with individual stock picking is always finding the growers.

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        1. Are you transferring in from your non-reg. account or RRSP or RRIF Henry?

          I think my plan is to wind down the RRSP and move assets to TFSA, if room, and non-registered if not. Especially the CDN stocks I own in the RRSP that are not part of these dividend income updates.

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    2. Henry,
      You’re the guy I’d like to speak to. I’m preparing retirement income to be able to have an income in 2 yrs, currently age 69. Would be interested in hearing about your portfolio.
      Janet

      Reply
  13. As an additional note, if the dividends are growing over the years, so will your principal and in the long run, at about the same rate. By re-investing the dividends and adding more money, buying when prices are reasonable, your total returns will be high.

    Many don’t consider Yield on Cost a valid measure of your actual return, but I do. If you take your initial investments, add dividend re-investment and the additional monies invested as your Total Cost, then by following the DG strategy, in 15-20 yrs your YOC will probably be over double digit. Yes inflation is a factor, but who considers inflation when they look at the interest they get from fixed investments, such as bonds or gic’s.

    Reply
    1. That’s exactly my plan: try to reinvest the dividends when prices are reasonable.

      I think for many of my holdings, my YOC is in the double-digits but I know for cash flow Henry, as do you, it’s current yield that matters. It will be interesting to see if I can stick to the plan long-term.

      Reply

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