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Retirement Planning

The Number - How Much Money Do I (We) Need to Retire?

October 29, 2006

Over the years this is one of the most common questions members ask when reviewing their financial plan and investments. The concern members express is that someday they may run out of money. To alleviate the concern, below is a 2- Step process to answer this question.

Step 1 is to get an idea as to how much money you will require in retirement. As a rule of thumb, most retirees are able to “live on” 70% of current net income prior to retirement. However, this depends on what you want to do in retirement. Vacationing in Alberta in an RV for a month each year will probably cost a lot less than annually taking a trip to Europe and staying in hotels. Another consideration is that retirees generally tend to spend more money when they initially retire than when they become older as they reduce their travel and other expenses.

Step 2 is to calculate how much money is available via savings, RRSPs and pensions, government benefits, etc. It’s very difficult to factor in all variables including inflation, investment risks, how much you should leave your kids and charities, disasters (both natural and man-made) and how long you may live. To help out, below is a quick calculation that you can use to determine how much money you can safely spend each year in retirement.

  1. Total your invested assets (Term Deposits/GIC/RRSP, etc.) Multiply by .04. This is the amount of annual investment income you can safely withdraw each year and is based on the assumption that a 65-year old can withdraw 4% each year without running out of money regardless of market conditions.
  2. Add in the value of your home equity and divide by the number of years you expect to live. Say you are 65 and have $200,000 clear title home and anticipate living to 90, the annual value of your real estate for withdrawal purposes is $8,000 year. It helps to be ’mortgage free’ in retirement.
  3. Add the amount of annual Government of Canada Pension.
  4. Add the amount of annual Old Age Security and any other benefit programs you may be eligible for including Alberta Seniors Benefit.
  5. Add any expected annual pension benefits from your employer.
  6. Add any remaining annual income such as rental income, part-time work, or income from other sources.

Total (1) through (6) and you arrive at how much you can safely spend each year to get through the rest of your life without the risk of running out of money. Now compare this number to the amount you require (Step 1). You can then reflect and if necessary, implement changes to live within your means.

This Planner’s Corner was adapted from National Post, February 11, 2006 article entitled "The quick and dirty answer is a 4% annual withdrawal from your portfolio, but then there’s the Satisfaction Factor".

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