The Bottom Line On Saving For Retirement
Knowing how much you need to retire is about the number of years between now and retirement and saving enough to meet your goal. The earlier you start saving and investing, the more comfortable retirement you’ll have. It’s as simple as that!
Rick is a Personal Finance Expert, Best Selling Author of The Financially Independent Millennial, and Co-Founder of Travel Addicts Life, a travel blog that focuses on the life of a traveler.
- Rick Orford
Whether You’re Still Working
Once you reach your full retirement age, you can continue to work and still get your full Social Security benefits penalty-free. Individuals under full retirement age for the entire year who have already begun claiming benefits and earn over the annual limit will be penalized with a $1 deduction from their benefit payment for every $2 earned above that limit . You’ll still get credit for those earnings, and the SSA will recalculate your benefit once you reach full retirement age.
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How Can I Save Money From My Paycheck
Automate your salary savings. Once you know how much you need to cover your bills and expenses, you can set aside some of the money in your paycheck to spend on your savings. Arrange a direct transfer from your salary to your savings account. So the money goes straight to savings every payday.
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Registered Retirement Income Funds
A Registered Retirement Income Fund is a tax-deferred retirement plan that is essentially a continuation of your RRSP. While you can open an RRIF after the age of 55, once you turn 71, you must close your RRSP and convert it into an RRIF for regular, taxable retirement income. This transfer has zero tax impact.
Five: Subtract Other Retirement Income Like The State Pension
Income from other sources takes the pressure off your private pension.
The State Pension is the main alternative income stream for most retirees.
You can deduct the State Pension and any other income you can reliably expect from non-investment sources from the total spending estimate generated by steps one to four.
The remaining sum is the retirement income you need to generate from your private pension and any stocks and shares ISAs.
Subtract your significant others State Pension too if youre calculating a budget for two.
Your State Pension forecast reveals how much money you can expect to come your way courtesy of UK PLC. The State Pension can be a solid wodge, provided you max out your National Insurance record.
Other retirement income sources may include:
- Defined benefit pensions
- Passive income trust payments, royalties, and so on
Only include income streams youre confident of receiving throughout your retirement.
Part-time work or a side hustle can do a lot of heavy lifting, especially early in retirement. But its not reliable enough to be a key part of your plan. Such work can dry up, or you may suffer ill-health or just decide you dont want to do it anymore.
Treat any uncertain income as a bonus or back-up instead. The same goes for inheritance money.
Only deduct the amount of income youll receive from other sources after tax. Otherwise, youll deduct an unrealistic amount of income from your total so far. See the tax section below.
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When You Plan To Retire
The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That’s because delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.
Consider some hypothetical examples . Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x his preretirement income.
Of course, you can’t always choose when you retirehealth and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.
Retirement Calculator How Much Money I Need To Retire
With the few rules of thumb outlined, you can easily create a formula.
- TGA = Target Retirement Age
- PI = Pension Income
Portfolio Value = * PI)
See some example in the table. Those with a pension plan dont really see total value of their pension but rather the income they would receive and as such, remove the income from the total.
In the examples, no pension income is considered.
| Retirement Age |
|---|
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Understanding Lifetime Income Riders
To recap, annuities can offer a lifetime income stream similar to a pension plan. A pension is a type of annuity.
You purchase an annuity contract with an income benefit. Then, when retirement age begins, that annuity distributes a paycheck to you for the rest of your life as if you were still working, even after the account has run out of money.
Make sense?
In these scenarios, I have used an income rider on a fixed index annuity contract for future income planning and an immediate annuity with a single life payout to determine immediate income planning.
Our retirement income calculator results are guaranteed values based on zero growth from now until the target retirement start dateno hypothetical growth.
B How Much Government Benefit Do You Expect To Receive
If you have lived and worked in Canada before retirement, you can expect to receive Old Age Security and Canada Pension Plan benefits.
The amount you receive will generally depend on how long you have lived in Canada , how much you have contributed to the plan, and for how long .
The maximum monthly OAS payable in 2021 is $635.26 for a total of $7,623.12 per year, while the maximum CPP was $1,203.75 for a total of $14,445 per year .
Most people will get less than the maximum amount. For example, the average monthly CPP benefit paid as of June 2021 was $714.21 .
For individuals who immigrated to Canada in their adult years , the total government pension they will be eligible for will be significantly reduced.
Using the 2021 maximum government pension amounts as an example, total payouts from this source to a single senior was:
$7,623.12 + $14,445 = $22,068.12 per year
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Saving For Retirement In Your 40s
A lot can happen in your 40s. You may be itching for a career change, or might find yourself settling into a more senior role with a higher salary. Either way, your 40s are a time to keep your debt to a minimum and your savings at a maximum. If a career shift or new business venture is in your plans, cash savings outside of your retirement accounts can fund your dreamskeep your retirement money hard at work.
Emergency fund: Do a check-in and make sure that you still have at least six months of living expenses saved, especially if youve bought a house or started a family.
Additional savings: Keep using a taxable brokerage account to invest additional savings.
Educational savings: Keep contributing to your educational savings plans for your kids.
Retirement savings: Review your contribution percentage annually, especially if your compensation has significantly increased. By the time you turn 50, aim to have six times your current annual salary in retirement savings.
Catch-up tips: If youre feeling behind in your savings, review your expenses and see where you can cut back. Each month, save any extra money in your IRA or emergency fund to further protect your retirement savings. You could also consider a side hustle to bring in some extra cash to boost your savings.
C How Much Do You Need To Save Up
To calculate this amount on an annual basis, you will need to subtract expected government pensions from the annual expenses you calculated in Step A, and then multiply the remainder by 25 .
For example, a couple who estimate their annual retirement income needs to be $70,000 will need to save:
| Annual expenses in retirement from age 65 | $70,000 |
| How Much Do You Need To Save For Retirement? c | $977,625 |
a. Most individuals will not get the full government pension amount from OAS and CPP. The amount here reflects 70% of the maximum CPP amount for a couple in 2021 i.e. moderately conservative estimate. b. Line 1 minus line 2c. Derived by multiplying the annual income withdrawn by 25 or dividing by a 4% withdrawal rate . The result is the same for both formulas.
As shown in the table above, government pensions offset some of the savings required by the couple pre-retirement. The more government pension they qualify for, the less money required in their investment portfolio.
Additionally, if one or both partners have a defined benefit pension, it will further lower the amount of savings required to meet their desired retirement income.
Overall, to fund their preferred retirement lifestyle, the couple in the scenario above will need about $1 million in their retirement nest egg.
Related: CPP and OAS Benefits for Surviving Spouse and Children
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Determine The Retirement Lifestyle You Need And Want
To figure out how much money do you need to retire comfortably, you need to project how much you will spend on your retirement needs and wants.
Needs: Do you own your home free and clear and do you have zero debt? Chances are youll need a lot less annual retirement income than someone who still has a mortgage and debt to pay off. What will you need to spend money on?
Wants:Do you want to travel the world, dine out regularly, buy a new home in a retirement community and feel free to buy what you want, when you want it? What will you want to spend money on in retirement?
Each of these questions, and more, play a role in determining how much income you will need to retire comfortably.
The trick is to get really detailed about your future and determine exactly what you need to retire comfortably. The NewRetirement retirement planner makes it easy to document future spending you can even set different levels for different phases of retirement. Or, browse 9 Tips for Predicting Retirement Expenses.
How Much Do I Need To Retire
Most experts say your retirement income should be about 80% of your final pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.
This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle. For example, you might need more than that if you plan to travel extensively during retirement.
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Factor No : How Much Will You Spend
The rule of thumb is that you’ll need about 80 percent of your pre-retirement income when you leave your job, although that rule requires a pretty flexible thumb. The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security , and you won’t be shoveling money into your 401 or other savings plan. In addition, you’ll save on the usual costs of going to work the pandemic won’t keep everyone at home forever such as new clothing, dry cleaning bills, commuting expenses and the like.
You also need to factor in any pension or Social Security income you’ll be getting. If your annual pre-retirement expenses are $50,000, for example, you’d want retirement income of $40,000 if you followed the 80 percent rule of thumb. If you and your spouse will collect $2,000 a month from Social Security, or $24,000 a year, you’d need about $16,000 a year from your savings. Bear in mind, however, that any withdrawals from a tax-deferred savings account, such as a traditional IRA or a 401 plan, would be reduced by the amount of taxes you pay.
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Why Have You Set The Default Life Expectancy Of The Calculator To 95 Years
For starters, people are living longer. Even though the average life expectancy in Canada is 82 years, many people live past this. It’s better to have more money tucked away for retirement than to run out of savings. Extra savings can always be passed down to your beneficiaries. You can change the default life expectancy if you think you’ll live a longer or shorter life.
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Compare Your Current Spending With Expected Retirement Spending
Look at how much you spend now. Then, figure out how those expenses will change when you’re retired.
For example, you wont need to spend money on getting to work, but you might decide to spend more on hobbies or on travel.
You may save money by taking advantage of seniors discounts.
Low-fee bank accounts for seniors
Many financial institutions offer low-fee bank accounts for seniors. They usually offer these accounts to people 60 years old and older. Speak to somebody at your financial institution to find out if they have accounts for seniors.
Seniors who have a low income can get special no-cost bank accounts. Find out if you’re eligible to get a no-cost bank account.
Discounts on goods and services
Many businesses offer discounts to seniors on a wide range of goods and services including:
- groceries or household supplies
Always ask about seniors discounts. It could save you money.
What Is The Average Canadian Retirement Income
Without statistical research on savings and pension plans, we need to go by the Canadian Pension Plan data. As such, the average Canadian Pension Plan retirement pension hovers around $8,500 per year.
In 2021, the average monthly payout for CPP is $736.58, whereas the maximum account that could be earned monthly is $1,203.75. To achieve the maximum, you need to meet the CPP criteria found here.
In the end, the average CPP is useful but not enough. Plan without it and use it as a buffer to your plan in case it doenst go according to plan.
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Start With What You Have
The first step to figuring out how much money you need to retire is determining what you have on hand right now. Calculate your existing assets such as cash, investments, property, and bonds. Include any money set aside in work-related retirement plans, like 401k’s. This is all money that can be counted towards your retirement savings. Beware of relying too much on the value of your home, though. You will still need housing in retirement!
You can also look up what Social Security retirement benefits you will be entitled to. These will usually be able to cover a decent percentage of your monthly needs, often around 20%.
Follow These Steps To Find Out
How much money do you need to comfortably retire? $1 million? $2 million? More?
The most common rule of thumb is that the average person will need approximately 80% of their pre-retirement income to sustain the same lifestyle after they retire. However, there are several factors to consider, and not all of this income will need to come from your savings. With that in mind, here’s a guide to help calculate how much money you will need to retire.
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Consider Cost Of Living
While looking at your annual income will give you a rough idea of how much retirement savings you need, looking at your monthly expenses and then converting them to annual costs is a more accurate way to determine whether or not youll have enough savings to last through your retirement.
Sorting out your cost of living is relatively simple. Just create a monthly budget that lays out all your expenses and multiply that monthly number by 12. If you spend $5,000 per month, your annual expenses would add up to $60,000. Of course, you will also want to add in the less frequent expenses, such as yearly costs to file your taxes or register your car.
Make sure you include every expense, including any cash you set aside for travel, entertainment, dining out and more.
Youll also want to add in yearly inflation to make sure your retirement income can keep up with price increases. According to Trading Economics, inflation is projected at 1.9% in 2020. So, for every year youre working toward retirement and for each year you live in retirement, youll want to add 1.9% to the previous years number.
For example, if your expenses are $60,000 this year, they would become $61,140 next year, $62,301 the following year, $63,485 the year after that, and so on. If you only have a few years until retirement, you could do this with a calculator, but if you have a lot of years to add up, Vertex42s inflation calculator can ease the process.
Where To Start When Saving For Retirement
With several tax-advantaged options at your disposal which should you choose? Heres how experts recommend that you proceed:
This ordering of your accounts helps you secure a guaranteed return from the employer match before you turn to perhaps the best available retirement account in the Roth IRA. So you secure the best perks of these accounts first.
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