Guest Blog By: Chris Brown, CA, CPA
There’s a rule of thumb out there that says you need to save enough money for retirement, to live on 75 to 85 percent of your pre-retirement income. For example, if your current household income is $100,000 you should plan to save enough money to have $75,000 to $85,000 per year when you retire.
I don’t believe that you can apply a “one size fits all” rule when it comes to someone’s retirement. In reality, it is your EXPENSES, not your income that should guide your retirement planning. It makes sense to base your needs on expenses. I support this approach and believe that it trumps the traditional rule of thumb that over-focused on income.
The best place to start is to figure out how much money you want to live on each year during retirement (i.e. what your annual expenses will be) then multiply by 25. That’s how much you’ll need to save. Now that is simplifying things a little but it’s a good place to start.
Of course, there is one critical factor in making this approach work. You must be able to accurately estimate how much money you’ll need each year for your living expenses. How can you figure this out?
Step One: Look at Your Current Spending
A monthly budget is a good place to start, then times by 12 months.
Step Two: Ask yourself the following questions:
- Do you have children or other family that may need financial help with; education, a car, a wedding, their first house, health care?
- Are you and your spouse in good health? You need to plan for the unexpected.
- Do you carry debt, such as credit card balances or car loans?
- Will your mortgage be paid off by the time you retire?
Add these estimated costs to your current budget and subtract expenses that will go away during retirement.
Step Three: Calculate Your CPP, OAS and other Pension Income
To determine your CPP and OAS benefits check out this website: https://www.canada.ca/en/employment-social-development/services/my-account/cpp-oas-information.html Add your annual pension entitlement, if you have one from an employer.
Step Four: Put it all together
The difference between income and expenses is how much you’ll need to withdraw from your portfolio each year. Multiply this number by 25. This is a good estimate of how big your portfolio needs to be when you retire.
So what’s your number?
For more information on retirement planning, please contact Chris Brown or give us a call at 289-755-0146 and we will connect you.
Chris Brown, CA, CPA
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