The retirement savings rule: How much do you need to save?

One very simple way to figure out how much you need to save for retirement is to multiply how much you need in retirement, by how many years you expect to live.

$40,000 IN RETIREMENT UNTIL THE AGE OF 80

Let’s say you want $40,000 in retirement, which will net you about $33,897 after tax in Ontario, or about $2824.75 a month, net.

So if you retire at 65, and plan on living until 80, you have to pay for 15 years of retirement.

15 years x $40,000 = $600,000

That’s it.

$40,000 IN RETIREMENT UNTIL THE AGE OF 80, BUT RETIRING AT 50

If you want to retire early at 50, you’ll need even more money if you want $40,000 a year.

30 years x $40,000 = $1.2 million

ADJUSTING FOR LIFE EXPECTANCY

If we look at StatsCan to provide us with a life expectancy rate, we get this:

I suggest rounding up to age 80 for men, and age 85 for women just to be sure.

Higher, if your family has a tendency to live longer (like mine).

ADJUSTING FOR INCOME

$40,000 (in today’s dollars) is quite a lot especially if you have a house paid off, or have very low expenses in general.

The problem is inflation, and 30 years from now, it will cost more money to buy an apple then, than it will be today.

If you want to be sure, I’d suggest rounding up to about $50,000 or $60,000 for a conservative requirement for your future purchasing dollars.

This also doesn’t include any Social Security (U.S.) or CPP (Canada) pension plans from the government, or from your employer, so just keep that in mind.

A CONSERVATIVE RETIREMENT SAVINGS AVERAGE TO AIM FOR

MEN

15 years x $60,000 = $900,000

WOMEN

20 years x $60,000 = $1.2 million

If you’re the only person saving (read: single income earner) for 2 in the household, you need to save a total of about $2 million for you and your significant other.

WHAT ABOUT MY KIDS?

The above doesn’t even take into account that you’ll be saving anything for your kids in terms of education and paying for their college funds.

This is the reason why just simply saving for your own retirement should come before saving for your kids’ education.

You need to make sure you aren’t a financial burden on them in your old age, for two major reasons:

1. Kind of not fair, unless it was something really out of your control
2. They may not have the means to take care of you

NURSING HOMES ALSO COST A LOT OF MONEY

Can you imagine if you need to go into a nursing home for 24 hour care? That’s going to cost a lot of money, a lot more than what you might imagine, around $1500 a month, which means you need a gross income of about $21,000 in Ontario (before taxes), to pay for your own nursing home.

Not to mention that we’re very lucky to be living in Canada where universal healthcare is provided for, and we don’t need to worry about being slapped with a $10,000 bill just to take an ambulance to the hospital.

BUT WHAT IF MOST OF MY MONEY IS IN MY HOUSE?

If most of your retirement savings is actually locked up in your house, you need to basically consider liquidating your house if it gets to the point where you can’t keep it any longer.

This is the case with my parents, who have most of their personal retirement savings locked up in a house. To retire and use that money in their net worth, they need to sell it.

I think we sometimes forget about that point when we look simply at net worth.

WAIT, THIS DOESN’T EVEN INCLUDE TRAVELING!

Yep. It doesn’t even include traveling. We’re talking about just covering your basic living expenses.

Photograph I took of Sweden, Stockholm

THIS IS VERY DEPRESSING, WHAT CAN SOMEONE DO?

You have to understand that your retirement is your choice, in that you are presumably saving money now when you’re young, healthy and whole, to be able to not have to wake up and work until you die.

It’s a privilege, not a right.

Lower your current living expenses

If you don’t need as much money, you won’t need to save as much. Theoretically speaking.

How do you lower your current living expenses? Glad you asked.

You first have to know what your living expenses are, and that comes by way of tracking your expenses, against a preliminary budget that you create for what you think you spend each month.

99% guaranteed, you will be just as surprised as I was when I first started budgeting, at how much money was just falling through the cracks and I didn’t even notice it.

Save more money

Don’t like that option? Perhaps you did the numbers and you STILL need that money in retirement.

In that case, I suggest you save more money for retirement.

How do you save more money for retirement without lowering your current living expenses? Make more money.

Retire somewhere cheap

There are plenty of countries around the world today that only need $10,000 a year to live like a king.

In Britain, most pensioners tend to flee to the south, and with their very strong pound, they can buy a small house somewhere in the countryside of France, Spain or Portugal, and live quite happily.

North Americans can do the same thing — go south to South America, go to Asia, or how about Europe?

These are all possible options, but it only means you won’t be staying in Canada or the U.S.

Don’t retire at all

The final option is to work well into your retirement age. Don’t retire at all.

Work until the day you die. That’s kind of the only option left if you aren’t able to meet your retirement savings goal and you don’t want to move.

If this is depressing in the slightest, you should re-read the above paragraphs on lowering your current lifestyle expenses, retiring somewhere cheaper, and saving more money again.

MY PERSONAL NUMBERS FOR RETIREMENT

I’ve always held fast to at least having $1 million by the time I retire, knowing that I am willing to move and live somewhere cheap, and that I don’t have to worry about saving for BF (he has to come up with his own million).

I am absolutely able to live on less if I put my mind to it, and if there’s no other option but to do so.

With that in mind, if I were to retire at 55 (conservative, I may work longer), requiring about $40,000 gross a year, and living until 90, this is what I need:

35 years x $40,000 = $1.4 million

This might seem like I’m $400,000 off, but there are 2 things I’m keeping in mind:

1. I can still expect to get something from the Canadian government

I don’t know what it is, so I put it at $0, but I know it’s at least $100/month.

2. If I continue to bank an average of $50,000 a year for 35 years I get a lot more at the end than $1.4 million

35 years x $50,000 = $1,750,000

If I imagine that I’ll get about 5% interest (very conservative long-term rate) on my savings over time via investing, and I started with a balance of $200,000, I will have:

$5,879,704.73

…by the time I retire at 55.

Even if I only earn 1% interest on my savings, I will have:

$2,377,740.71

…by the time I retire at 55, which is still well over my $1.4 million estimate. Heck I could probably retire sooner.

Or if I wanted to retire at 50, I just have to save more than $50,000 a year.

Anyway, these are all numbers I play with to motivate myself.

It’s kind of overkill, but better safe than sorry. I still stick to needing about $1 million to $1.5 million when I retire, but I’m comforted by the fact that if I miss my goals in some years of not saving $50,000 I’ll still be all right.

I just need an average of $50,000 saved for about 35 years.

HAVE YOU RUN YOUR NUMBERS?