How Much Money Do You Need to Retire?

Edited Photo. Source: Flickr - Jonty

Investing generally boils down to one main goal: when can I flip off the boss, jump on my hot Harley, and say "sayonara" to my working life knowing that I will never have to spread my cheeks for anyone again. Other than the doctor for that dreaded yearly exam.

Retirement income can be generated from multiple sources. But here's a good starting point. Examine your expenses and calculate how much income you will need to maintain a good lifestyle in retirement. For a couple with a paid-off house, that number will probably be $40,000 - $60,000 a year for a comfortable lifestyle. If you're renting tack another fifteen on that. These numbers are "after-tax" dollars, so we'll need to add taxes as well but we'll get to that later. Just make sure your numbers include a safety net for larger one-time expenses: your roof needs to be redone, a divorce maybe, possibly a prodigal child, or whatever else might apply to your situation.

Early Retirement: The 30x Rule & 25x Rule

If you are dead-set on retiring super early (under 50), make sure you have 30x your expenses. Don't count government benefits in your calculation. The rule of 30 is simple, with a Balanced Portfolio you have virtually zero chance of running out of money when you withdraw 1/30th of your portfolio for expenses in year 1 and adjust withdrawals up for inflation after that. That includes sequence of returns risk, inflation risk, it worked through the dirty 30's, the Wars, the inflation 70's, tech crash 2000, and coming up... the tweeting Trump teens. It's basically bulletproof. If your Balanced Portfolio is worth 30x your annual spending you can quit your job and never run out of money. But don't quit before 30x unless you want to risk going back to work greeting people at the door of the Big Blue Store when you're a wrinkly.

If you want to retire earlyish (in your 50s), make sure you have 25x your expenses saved in a Balanced Portfolio. You have about a 92% chance you won't run out of money over a 40 year period -- based on historical data. Not perfect, but acceptable risk considering worst case scenario you will know the shit hit the fan a little ahead of time and can arrange for deferred CPP, an alright OAS check, and some seniors benefits. Maybe even subsidized housing if you live in the right city.

Normal Retirement: The 20x Rule

Retiring in your 60s is easy. You're officially a senior, you actually vote, you've got government benefits coming your way, and you can qualify for subsidized anything if you need it. And there's the cheaper Senior's menu at the localish chain diner. This calculation is a little bit more complicated, but nothing out of reach. All you need is a CPP estimate, pension estimate (if you got one), and you need to know your expected OAS income. For most Canadians who have lived in Canada all their life, OAS will be about $6,950 per year (2017). 2x for a couple is a hair under $14,000. CCP, OAS, and a safe pension are more or less guaranteed, so take them off your expenses calculation. Then with whatever number is left over, multiply by 20 and that should be your minimum assets invested in a Balanced Portfolio.

Your calculation might look like this:


Bottom line is this. If you want to retire super early have at least 30x your expenses; don't take government benefits into consideration at all. If you want to retire somewhat early have at least 25x your expenses and don't include government benefits. For a 60+ retirement include any government benefits or company pension that you're eligible for at the time of retirement (ie. don't calculate in OAS if you're 60 and can't take it yet) then have at least 20x the remaining expenses. Invest in a balanced portfolio, minimize portfolio costs, manage risk, and optimize your portfolio for taxes wherever you can. Any less than 30x, 25x, or 20x and you might have to trade in that Harley for a demodè Piaggio.

Next Monday come back for a new post on the real cost of management fees!

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