How Much Does It Really Take To Retire?

February 24, 2010

By Heather Compton and Dennis Blas
We are delighted to be new contributors to the Impowerage e-zine. Their mandate to encourage Canadians 60+ to lead their best possible life is so in tune with our own values and outlook!

Each month we will be answering your finance questions but need to warn you, every finance-related question under the sun has only one correct answer – “it depends”, followed by a long list of caveats. Although we write about money, we hasten to add that in order of importance, money follows health, relationships, and meaningful activities in virtually any ranking of what creates a retirement that rocks!

We would love to hear from you. Submit your questions using the form below. Just a couple of ground rules – questions must be general in nature and those deemed of interest to the broadest number of readers are more likely to be chosen. Securities laws prevent us from commenting on specific securities, that’s a job for your personal financial advisor. We will certainly do our best to provide accurate information but always seek professional advice before acting on any information provided here. Enough of the “fine print”!

Q & A How Much Does It Really Take to “Retire”?

Well… that depends! What is the retirement life you envision? Are you puttering in your garden in a pair of old shorts or are you taking the helm on your personal yacht? Will you work part-time or is it your desire never to do a day’s work again? How old will you be when you call it quits, from the work-place and from the planet? Do you come from long-lived stock? Will you travel, take up new hobbies, downsize the home? Your life design work must come first!

Three Spending Scenarios
Obviously, the greater your spending the greater your retirement pot needs to be. We ask clients to create three separate spending scenarios. First, what does it costs to feed, water and house you with none of life’s extras? This is the “Eeyore” or “I’m not having any fun” model, the base level “needs” not the “wants” picture.

Second, the “Tigger” version or the full meal deal. We want your believable version of the “lifestyles of the rich and famous”. If your normal life ambitions don’t include a villa in France, don’t add it in now. This is the “everything included” picture – travel, cars, wine, house cleaning, fresh flowers.

Third is the happy medium. What would you be prepared to bail on if you had to and still enjoy a good quality of life? Show us a life more than the minimalist picture but less than the full meal deal. In essence, show us what is “enough.”

We often put the “not enough” roadblock in the way of our retirement plans and continue working without even considering other options. If required, would you be willing to replace the car every seven years or buy used vehicles or holiday just every third year or move to a smaller home and take some money off the table? We are all very adaptable. Most of us can and will change our spending and consuming behaviour to suit our circumstance and we already have concrete life experience of doing so. Let’s stop spending time thinking we want more and more time planning how we might experience a very good life with enough.

How Much is Enough?
OK, so how much is enough? We’ll give you just one answer to that question using a “rule of thumb”, but let’s just remember, we all have different thumbs! View this as a back of the envelope or ballpark calculation.

A common rule of thumb estimates we need a nest egg of 20 times our annual spending in order to die broke after a 30 year retirement. If we want to leave an estate behind, we need 25 times what we spend. For example, if we spend $50,000 per year and have no company and no government benefits, the required retirement “pot” could be as much as $1,000,000. Before you throw up your hands and assume you are on the “Freedom 95” track let’s look at some facts.

Many working Canadians will receive both CPP and OAS. If a couple both receive maximum benefits, the required savings are reduced to $303,480. It could be even less if you receive company pension benefits or you’ll work part-time or if you reduce spending. Part-time work or a company pension paying $1000 per month can reduce your required savings by an estimated $240,000.

This rule of thumb calculation assumes a 5% real rate of return and 30 years of retirement. Should you plan a longer retirement or earn less on investments, you’ll need to save more. History suggests your portfolio asset mix would need to be better than 50% in equities or stocks with the balance in fixed income and cash.

Are You on Track for Retirement?
Run your own calculations using any number of tools available on financial service company websites, consult your advisor, or check these out:

Better yet, purchase our book and review the financial section carefully!

About the Authors Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.

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