Retirement NeedsCalculating your retirement needs A Companion Advisor Article Planning for retirement makes good sense but it is important not to be discouraged by big numbers. When you add up the total income you will need for your retirement, you might be surprised. Remember, this number totals your income needs over several years of retirement. For example, if you currently earn $40,000 a year, over ten years you will earn $400,000. Over 20 years you will earn $800,000, a big number. And that doesn't include any pay raises you might receive. So, retirement planning might involve big numbers but you don't need all that money tomorrow. If you retired today Calculating how much you will need for your retirement is good financial planning. Some of your expenses will go down because your children are grown and your mortgage might be paid off. Others will go up because you may want to travel more. A good rule of thumb is that you will need 75 per cent of your current salary to live comfortably in retirement. The first step is to find your current salary (or combined salaries if both you and your spouse are working) in Table 1 (below) and then circle the corresponding number in the right hand column. This number represents 75% of your current salary.
Table 1: 75 per cent of current salary Current Salary- $25,000 Needed to Retire- $18,750 Current Salary- $30,000.00 Needed to Retire- $22,500 Current Salary- $40,000 Needed to Retire- $30,000 Current Salary- $50,000 Needed to Retire- $37,500 Current Salary- $60,000 Needed to Retire- $45,000 Current Salary-$70,000 Needed to Retire- $52,500 Current Salary- $80,000 Needed to Retire- $60,000 Current Salary- $90,000 needed to Retire- $67,500
Inflation Cars, furniture, and chocolate bars were all cheaper 20 years ago because inflation increases prices over the years. In the future, prices will probably be higher than they are today. Take the amount represented as 75 per cent of current salary from Table 1 and, on from the table below, find what the corresponding dollar amount might be when you retire, assuming an inflation rate of three per cent a year: Table 2. Target Retirement Income 75% of current salary In 10 Years 15 Years and 20 Years Current Salary- $18,750 10 Yrs-$25,198 15 Yrs-$29,212 20 Yrs- $33,864 Current Salary- $22,500 10 Yrs-$30,238 15 Yrs-$35,055 20 Yrs- $40,638 Current Salary- $26,250 10 Yrs-$35,278 15 Yrs-$40,898 20 Yrs-$47,410 Current Salary- $30,000 10 Yrs-$40,317 15 Yrs-$46,740 20 Yrs-$54,183 Current Salary- $37,500 10 Yrs-$50,397 15 Yrs-$58,425 20 Yrs-$67,729 Current Salary- $45,000 10 Yrs-$60,476 15 Yrs-$70,110 20 Yrs-$81,275 Current Salary- $52,500 10 Yrs-$70,555 15 Yrs-$81,795 20 Yrs-$94,821 Current Salary- $60,000 10 Yrs-$80,635 15 Yrs-$93,478 20 Yrs-$108,367 Current Salary- $67,500 10 Yrs-$90,714 15 Yrs-$105,165 20 Yrs-$121,913
The resulting amount from the chart above is your Target Retirement Income. Keep in mind however that it may be more or less than that, depending on your lifestyle. If you work part-time, receive a company pension, or qualify for the Canada Pension Plan, that will supplement your income. If you have no other sources of income, you will have to rely on your savings. Now, how many years will you be retired? If you retire at age 65, you can expect to live about 15 years in retirement. Multiply your Target Retirement Income by 15 to see your total amount of retirement funds needed. The resulting amount from the chart above is your Target Retirement Income. Keep in mind however that it may be more or less than that, depending on your lifestyle. If you work part-time, receive a company pension, or qualify for the Canada Pension Plan, that will supplement your income. If you have no other sources of income, you will have to rely on your savings. Now, how many years will you be retired? If you retire at age 65, you can expect to live about 15 years in retirement. Multiply your Target Retirement Income by 15 to see your total amount of retirement funds needed. Target Retirement Income X 15=$ Remember, this is the total amount you might need over all your retirement years and it may be a big number. However, you might also have other sources of income and if so, they will reduce your total retirement funds needed. Also, you will not need all this money on the day you retire. Your investments will continue to earn returns even after you retire as long as you don't spend all your savings at once. So, even though it may be a big number, with planning and good investments, it is possible to achieve. The most important action you can take is to start saving even a small amount today. If you have a company pension, ask your plan administrator what your benefits are expected to be when you retire. The question is, "Where will the rest of my total retirement funds come from?" The short answer is, "from you." Table 3 gives you the amount you might have to invest, over various time frames, at various rates of return. Find the amount of your total retirement funds in the table and then see how much you would have to put away every year (and at what rate of return) until your retirement. Remember, this assumes you will have no other sources of income when you retire. Total Retirement Funds Needed- 6% Return: Yearly Saving Required- 2000 4000 6000 8000 10000 10 yrs 2k-26360 4k-52720 6k-79080 8k-105440 10k-131800 15 yrs 2k-46560 4k-93120 6k-139680 8k-186240 10k-232800 20 yrs 2k-73580 4k-147160 6k-220740 8k-294320 10k367900 10% Return: 10 yrs 2k-31880 4k-63760 6k-95640 8k-127520 10k-159400 15 yrs 2k-63540 4k-127080 6k-190620 8k-254160 10k-317700 20 yrs 2k-114540 4k-229080 6k-343620 8k-458160 10k-572700 14% Return: 10 yrs 2k-38680 4k-77360 6k-116040 8k-154720 10k-193400 15 yrs 2k-87680 4k-175360 6k-263040 8k-350720 10k-438400 20 yrs 2k-182060 4k-364120 6k-546180 8k-728240 10k-910300
Total retirement funds needed Yearly investment, rate of return, and number of years until retirement all work together to determine the value of your portfolio. You can put away more each year, work longer and retire later, live more simply in retirement, or make sure you are getting the maximum returns. It's unlikely you will be able to save enough at a 6% rate of return to fund your retirement. You will probably have to make your money grow at a higher rate, and that means developing an investment program. There are many ways to gather resources for retirement: savings accounts, GICs, T-bills, stocks, and bonds are just a few, and the wise saver may have some of each. How do they compare? "Canadian Stocks, Bonds, Bills and Inflation: 1950-1987", a study written by Dr. James Hatch and Dr. Robert White, compared various investments over time. For one year periods within their time frame, stocks did not provide significantly greater returns than bonds or T-bills. However, for 10-year periods, which included the 1987 stock market tumble, stocks outperformed bonds and T-Bills in 29 of the 32 periods from 1950 to 1991. If you want to go way back, historical U.S. average annual total returns for the years from 1926 to 1996 are as follows: Stocks (S&P 500 Index) +10.7% Bonds (Long-Term US Government) +5.1% Cash Reserves (US Treasury bills) +3.7% Source: Vanguard Marketing Corporation However, with higher returns come higher risks. Stocks and bonds can go down as well as up. Notice that the returns given are for 10-year time periods. Over the long term, stocks and bonds have outperformed fixed interest-rate savings. However, there is no guarantee they will continue to do so every year, year after year. The most important point about planning for retirement is to start your investment program now. It's like the old saying about planting trees: "When is the best time to plant a tree? 25 Years ago. When is the second-best time? Today".
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