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Your retirement number is wrong...and that's OK

How much do you need to retire?

The answer can feel slippery and elusive – and for good reason. No matter how personalized the calculation is, no matter how much thought you put into it, it will never be right. Anytime you forecast the future, you have to make assumptions – sometimes a lot of them. Most of the time, some or all of them will be wrong. If the inputs are wrong, the output will be wrong.

Does that make retirement planning useless? Not at all. Even if your “retirement number” isn’t completely right, it does give you something important: a target. Having a goal or target to work towards is a huge motivator and a very important part of financial planning. It helps you decide how much you should be putting aside and as you watch your savings grow, you can see tangible progress towards the goal.

Whether you choose to use an online calculator or hire someone to do a customized estimate, take the results with a grain – no a 1kg box – of salt. There are two main reasons why your retirement savings estimate will be wrong: the assumptions that go into the calculations are a guess and it’s very hard to know how much you still spend.

Let’s look at the assumptions. Consider a 40 year-old who wants to retire at 65 and spend $75,000 a year in retirement. They need to have saved about $2.8-million by the day they retire in 25 years (equivalent to $1.5-million in today’s dollars). The assumptions that go into this calculation are that inflation will be 2.5% per year (every year, indefinitely), that they can return 6% on their investments (every year, indefinitely), that they receive CPP and OAS, and that they will live to age 95. What happens if those assumptions are wrong? Well, if inflation is 3% instead of 2.5%, they will need $3.4-million (or $1.6-million in today’s dollars). What if they earn 5% on their investments instead of 6%? Now they need $3.8-million ($1.8-million). The difference between the first calculation and the third is about $300,000 in savings. That’s a big difference.

Another challenging number to come up with is knowing how much you will want to spend in retirement. I’ve had clients who have both grossly under-estimated and over-estimated how much they will need. Once they fill in the Retirement Budget sheet that I provide to them, they get a more accurate idea of how much they might spend. The Retirement Budget spreadsheet is really important – it forces you to add up all of your required, non-negotiable costs like property taxes, utilities, insurance, cell phones, internet, car maintenance and so on. Then you need make an estimate of your discretionary expenses like eating out, entertainment, clothing and travel – not just what you spend today but how your spending might change later in life. This “budget” won’t be completely accurate but it acts as an anchor to come up with your retirement estimate. Generally, I’ve found that people will plan on spending between $60,000 and $120,000 per year depending on a variety of factors such as whether they are single, where they will live, and how they want to live.

Oh, but wait. When you’re 66 you will probably be out and about doing more things and spending a lot of money. When you’re 80 you might slow down and spend less, and then when you’re 90 you might need long-term care or in-home help. Now it gets complicated since the trajectory of spending is in the shape of a smile: high/low/high. Should you account for higher spending in the early and late years and lower in between? Probably, but for simplicity, taking an average is a reasonable compromise.

How impactful is the spending estimate? The difference between living on $60,000 a year and $80,000 a year is huge. That extra $20,000 of spending per year means you need to save about $600,000 more by age 65. That extra savings isn’t something that happens by accident – you’ll need to plan to save more to hit this number. Taking the time to figure out how much you spend now and how that might change in retirement is well worth the time if you’d like to make the range of your target smaller.

You can see why the “how much do I need to retire” number is so hard to pin down. Does that mean it’s useless? Not at all. Go ahead and find your magic number, determine how much you need to save every year to get there, and then automate your retirement savings. Just get started, get on a plan, and let it do its thing. Every few years you can revisit your savings and see how you’re tracking to your goal. You can also then see how realistic the assumptions were – has inflation been higher or lower? How have your investments performed – better or worse than expected? Do you have a better handle on how much you are spending now and how much you will want to live on later?

Calculating the number can be done with varying degrees of accuracy, depending on how personalized the calculation is. You can use an online calculator like this , which will give you a ballpark figure. This might be appropriate for young people, since the long time horizon means the accuracy of the calculation will be weak. If you’re closer to retirement, you might hire someone to calculate the number. You can find a fee-for-service or flat-fee financial planner or coach (like me) to help you. This approach will give you a better estimate because we will spend time talking with you about your life and your future plans. We will ask questions like “How do you see yourself spending time when you stop working?” and “What do you expect to do with your home?” Then there’s questions about helping out other family members, pension money you might be getting, whether you want to work part-time, and whether you expect an inheritance. Ignoring these factors can lead to drastically over or under estimating what you need to save, which in turn can result in sacrificing too much today for the future or finding yourself a little panicky on your 59th birthday.

Whatever method you choose, recognize that there is a range around the target. Even if you are days away from retirement you won’t know for sure what the right number is, never mind if you’re 27. But use it as a guide and a motivator to save regularly, to automate those savings and invest.

The best way to stop thinking, worrying or wondering about saving for your later years is to get some numbers and get going. Shooting for a fuzzy target is better than aiming with your eyes closed.


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