November 4, 2002

How Much Do You need To Retire?
by Marcel Chartier

How much do you really need to retire on? This question has more answers than financial planners have mutual funds, or so it seems. At the high end of investment expectations you have the planners that say flatly - "you need a million dollars in investments to retire". Yeah right. No wonder so many people just go "forgetaboutit" and put out of their minds the idea of retiring comfortably. If you are a high earner, then maybe this is right, but most wage earners will never get to that point nor should they.

Here is a simple way of figuring out how much you need to retire. This is a guideline, it is not written in stone and everyone is different, but even though figuring out what you need to retire can be complicated, it usually isn't. Here is my common sense system:

The Income In Half System

Requirements: This formula only works if you have no mortgage or regular large payments when you retire (then you will need to plan to cover that much extra).

Take how much you make in gross income and cut it in half. After you have paid off your mortgage and no longer have to invest money for retirement this amount is about right. You will be paying less in taxes, and you will not have spend money to faclitate going to work, or saving for retirement.

If you make $50,000 a year then, $50,000/2= $25,000.

At 5-7% income on investments - a conservative rate of return (average return in equities over past 60 years is closer to 11%) you would be making $5,000 to $7,000 per $100,000 invested.

So to make up $25,000 you would need to have $500,000 at 5% rate of return per year. Or, at a 7% yearly return, you would need $357,000 in investments.

If you have a company pension plan you have to subtract that amount from the divided amount - for example $25,000- $18,000(yearly pension)= $7,000. That would make a reasonable investment for you $100,000 to $140,000 to maintain your income level in addition to your pension income.

So, using our example of someone making $50,000, without a company pension plan, to live at a similar income level requires $357,000 to $500,000 in investments. Using my "projection.xls" tool I found that that starting with $65,000 in investments, and adding $10,000 a year, assuming 8% a year, would project $499,434 in investments 15 years.

Now remember, you may also qualify for government pension programs. I am in Canada and there is the Canada Pension Plan, which provides a small amount per month for Canadians - depending on how much you have contributed over you work life. Right now it is anywhere from a few hundred a month to almost a thousand or so a month. You need to be 60 years of age to collect most of the government programs, and generally the earlier you collect the less you get, which may or may not matter to you depending on your situation. And of course, government programs change what they provide and what they provide over time. I wouldn’t count on the program being the same or as generous as it is now when you retire, though I am very sure it will be there when you do. There are too many voters counting on it for it to disappear.

In many cases if you have no debt, you may actually be better off when retired than when you were working (if you have half your gross working income coming from investments and qualify for government income programs).

The key to a comfortable retirement is lack of debt (especially in Canada), not necessarily level of income.