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How much will I need to Retire in Canada?

One question that receives a lot of attention on the Internet is “Can I retire with X million dollars”, with X being anything from 1 to 5 (and sometimes higher). Unfortunately, like most issues in financial planning, it is difficult to give an answer that applies to everyone. For example, if X=2 and we are talking about retiring on 2 million dollars, the answer would definitely be yes. It is certainly possible to retire on 2 million dollars but depending on your circumstances you might be living a lifestyle in retirement that is unfamiliar. If you are used to spending $200,000 per year in spending money, then you might find that living on 2 million would force you to significantly reduce your lifestyle to make the money last long enough. But if you are spending at a rate of around $100,000 per year, you’ll be very comfortable with 2 million in assets at age 65.

One rule of thumb is that you should expect to spend about 75% of your pre-retirement spending after retirement. Most retirees find that having more time allows them to make more cost effective choices (taking a vacation the second week of January rather than during the busy Christmas season), there are employment related expenses that disappear (lunches out, parking, dress clothes, etc) and, as we age, our pace slows and the number of activities we pursue declines.

Therefore, to calculate how much you need when you retire, the first step is to determine how much you want to be able to spend a year. To do that, look at your current spending level (analyzing credits cards and banking information is a good way to start) and take 75% of that. That number is your target retirement spending level per year. For example, if you find you are spending about $133,000 per year today in after tax dollars, then your target spending level would be $100,000 per year.

So, how much do you need at age 65 to finance that spending level? As with all financial issues, there are many factors that influence that answer. In this case, the investment horizon (how long you expect to be around), how much money you want to leave behind, and your expected rate of return on your money will all have an impact.

Let’s take an example to understand these concepts. Let’s use the numbers we discussed above. Assume that our retiree starts at age 65 with $2 million and wishes to spend $100,000 each year. Assuming a relatively low tax rate of 30%, that means that our example retiree would need to have $142,000 in pre-tax money to finance that lifestyle. They are going to get $6,000/year ($500/month) from their Old Age Pension and $7,500/year ($600/month) from their CPP (taxable). That means that they need about $128,500 from their investments to meet their goals. Also, our retiree wants to ensure that she has enough resources to last to age 90 (her kids can help out after that) and not have anything left when she dies.

First, let’s assume that she doesn’t take her Financial Advisor’s advice and keeps all her money in cash. With a 0% return on her portfolio, you see that she’ll run out of money by the time she is 80, not meeting her goals and making her a burden on her children.

Let’s now look at a more reasonable scenario where our retiree stays invested in a very risk adverse portfolio, saying mostly in cash, cash equivalents and high quality bonds and GICs, yielding an average annual return of 3%. In that case, she does much better, with the money running out at age 85 – almost to her goal.

In this particular scenario, our retiree needs a return of 4.25% to have the annual income she is looking for or she’ll need to reduce her withdrawals (reducing the withdrawals in the early years will have the biggest impact since that money can continue to generate returns). A low risk portfolio with a 4.25% return is not impossible, but is also not that easy in today’s low interest rate environment. The point is that you need to continue to manage your money well into retirement.

Of course, we can also look at any of the other variables in this equation. For example, if your goal is to have money to spend until 80 rather than 90, your investment return can be lower. But if you want to leave some money to your children, then something much change or the model isn’t going to work. When you work with a financial advisor, they can help you understand all of the factors and come up with a plan that works for you

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