Want to Retire?
You need to plan for it…
Most people work when they are young or middle aged, however, eventually everyone retires when they get old or have enough money to live comfortably without working. The retirement age varies by countries, typically between 60 and 65. Until the early 1990s, most workers worked for their entire career at one company or Government department, and were assured of a decent pension on retirement. While you may still find some well-paying pensionable Government jobs, those in the private sector have more or less disappeared. So, you need to plan for your retirement, and sooner you do it the better.
You Need Money to Retire
As already mentioned, these days, most people can’t find a job that entitles them to a decent pension on retirement, so you need to somehow create your own pension. In other words, you need to save enough money during your working life that you can use during your retirement life. Alternatively, you may acquire some business or property that will continue to provide income when you retire.
How Much Money Do You Need to Retire?
Well, the diplomatic answer to this question is, it depends.
If you do a Google search, “How Much Do I Need to Retire?”, most (so-called) financial experts advise that your retirement income should be about 70% to 80% of your final pre-retirement annual income. In other words, if you earn $100,000 annually at retirement, you need at least $70,000 to $80,000 per year during retirement. In my opinion, this figure is on the higher side, because during your working life, you are saving money for retirement, children’s education, repaying housing loan (mortgage), pay higher income taxes, and so on. Besides, when you retire, you usually receive social security (old age security) and some government pension(s) and/or supplements/allowances.
The amount of money you will need during retirement depends on your expected lifestyle during retirement. Some people want to travel a lot after they retire, while others want to enjoy their retired life peacefully in their city. Some retired people want to play golf or go skiing on a regular basis while others want to read books in their backyard. In simple words, you definitely need money for your needs during retirement, and if you plan to have any wants, you also need money for those.
To get a better idea about the money you will need during retirement, look at your expenses during the past year or two and determine the monthly or yearly amount needed for basic needs, i.e. food, clothes, housing and other essentials, such as phones, internet, insurance, recreation, etc. Do not include the money you are saving for retirement and children’s education, or using to pay for mortgage, income tax and vacations. The reason I am asking you not to include the mortgage payments in your estimate is that I expect that your house will be paid off before you retire. (It is not a good idea to retire while you still carry a mortgage.) Of course, you can include property tax, maintenance and home insurance if you own a home, or rent and insurance if you live in a rental property.
Let us assume that your current monthly expense for basic needs is $2,500. Next, look at the Government website(s) to determine benefits (Social Security and/or pension) you will receive when you retire. The government benefits you may receive depend on the number of years you have lived and/or worked in the country. In the USA, the average Social Security benefit was $1,543 per month in January 2021, and in Canada, the average CPP (Canada Pension Plan) and OAS (Old Age Security) benefits were about $1,350 per month in mid 2021. These payments are indexed to inflation, so you will receive higher payments when you retire in 10, 15 or 20 years. Note that these are average payments; you could receive higher amounts if you have contributed more to the corresponding government plans. You may look at your contribution statements or the government website for the approximate amount you will receive when you retire.
Okay, let’s assume that you will receive $1,500 per month as retirement benefits and your estimated monthly expense is $2,500, so you need to withdraw $1,000 from your savings. (Actually, you will need a little more to pay for income taxes.) Now, the question is how much savings you need to have so that you may continue to withdraw this amount during your retirement life without running out of money. Well, this is not a simple question to answer. Most financial experts recommend “the 4% Rule”. As per this rule, if your savings are invested in 60% stocks and 40% bonds, you can withdraw 4% of your savings each year, adjusted for inflation, i.e. in subsequent years, you can increase the withdrawal by inflation. So, in this example, if you need to withdraw $12,000 per year from your savings, you need to have a savings of $12,000 x 25, i.e. $300,000. You may need to adjust the withdrawal rate based on the blend of stocks and bonds in your portfolio and your expected years in retirement.
Savings Goal Calculator
Let us assume that you are 45 years old, have saved $50,000 and want to retire in 20 years with a portfolio of $300,000. How much money do you need to save every month for the next 20 years to grow your savings to $300,000 in 20 years? A quick web search will reveal several such calculators, and here is a one from the United States government:
Savings Goal Calculator: https://www.investor.gov/financial-tools-calculators/calculators/savings-goal-calculator
You just need to plug-in the numbers as shown here:
After entering the numbers, press the Calculate button and it displays the results on your screen, as shown here:
That is, with an initial investment of $50,000, you need to save $316.34 every month for the next 20 years for it to grow to $300,000 if it grows at a rate of 6% per year.
(The historical average stock market return of the S&P 500 index comprising about 500 of America’s largest publicly traded companies is about 10%, not including inflation. During the last 20 years, average inflation has been around 2% in North America.)
When should I Start Planning for Retirement?
Ideally, you should start planning for retirement as soon as you start working — start saving money for your retirement fund, even if it is just $100 a month, as you want to work the power of compounding to your advantage.
Let’s assume that John starts his first job at the age of 25 and starts saving $200 per month in an investment account that pays 6% annual returns compounded monthly. John continues to save $200 for the next 40 years. Bob, John’s friend, did not save anything until he turned 45 when he decided to catch up with John, so he decided to save $400 per month for the next 20 years. Do you think Bob would be able to catch up with John? Using the Compound Interest Calculator, here are the results:
At age 65, John will have $398,298.15 in his investment account and Bob will only have $184,816, over $200,000 less than John! If you are wondering why Bob is not able to catch up with John even after saving double the amount, this is where the power of compounding comes into play. When you earn interest (or returns) on your investment, the interest starts earning interest. Next month, interest on interest will also earn interest. The following image illustrates the power of compounding — notice how quickly interest starts growing in the later years.
What will You do when You Retire?
When I ask this question to my friends who are fast approaching the retirement age, most don’t have a clear idea. Travel? Well, you can’t travel every day. Besides, you also need money for travel. During our working life, we get so involved with the work that many of us don’t know anything else to do. For this reason, many people are afraid to retire. So, if you are in that boat, instead of turning off the work switch suddenly, you may reduce the working hours gradually, e.g. work only two or three days a week, or work for 4 hours instead of 8 each day. You may restart playing the guitar that has been collecting dust in the basement for decades. Reading books is an excellent way to pass time — visit your local library and make books your friend. You can also volunteer at your local charities. Retirement also gives you time to take care of your health — now you can do yoga in the morning and walk an hour or two in the afternoon. Gardening is a nice hobby to pursue in retirement as it brings you closer to nature. If you are lucky to have grandchildren, you may babysit them or walk them to school. Well, the opportunities are endless.
Some people do want to retire because they are unable to retire as they have no savings and the government benefits are not enough to live comfortably. Well, if you are in that boat, you have no option but to continue to work; otherwise consider to retire as soon as you can, as you were not born only to work — life is meant to enjoy. Besides, when you retire, you do social service by vacating your job to a needy person, perhaps a fresh graduate who has a student loan to pay. And, remember that if you don’t retire voluntarily, ill health or death will force you to retire evantually!
Plan for a Healthy Retired Life
After working for decades, when you get a chance to retire, you must enjoy it, however to do so, you must be in good health when you retire. In their thirties and forties, many people take their health for granted, and if you are in that camp, start taking care of your health as soon as possible by eating healthy food, being physically active and not overweight or obese, getting good sleep, quitting smoking and drinking, etc.
See: How to Stay Healthy?
Plan to Retire with a Partner
To lead a happy retired life, plan to retire with a partner. Living alone in retired life is mentally very taxing. The long winter season of North America makes living alone in a retired life even more difficult. If you have a partner, it is easier to travel together. Another big advantage of retiring with a partner is that it increases the income as the partner also contributes money. The housing, heating, electricity, insurance and food costs remain more or less the same whether one person lives in a house or two. Also, the partners can help each other when one falls sick or otherwise needs physical or mental help.
Reevaluate Retirement Goals on Regular Basis
Reevaluate your retirement goals on a regular basis, after a couple of years or after a major life event, e.g. career change, loss of employment, marriage/divorce, birth of child, buying of a home, children moving out, significant change in health, and so on. Any of these events may cause change in your ability to save for retirement and/or money required during retirement, thus affecting your retirement goals. If you have a financial planner, do discuss major life events with him/her.
Don’t Make a Big Financial Commitment Near Retirement
Don’t make a big financial change or commitment when you reach near the retirement goal, e.g. taking a big mortgage to purchase your first house five years before your retirement. Now, if you lose your job, or mortgage rates increase significantly, your retirement planning may go upside down. On the same lines, be careful before making a big financial commitment after you retire.
Plan to Pay Minimum Tax During Retirement
During our working life, we pay a lot of taxes, however during the retirement phase, we want to pay the minimum taxes as we are not earning income, rather generating income streams from our hard-earned savings. As a rule of thumb, try to retire in the lowest income tax bracket and try to get the maximum government benefits and supplements. Also, different types of income such as dividends, capital gain, interest, etc. are taxed at different rates; some incomes may be completely tax free, e.g return of capital and withdrawal from Tax Free Savings Accounts. Therefore, a few years before your retirement, you may start planning how you want to withdraw your money and adjust your investment portfolio accordingly. You may also need to adjust your portfolio during retirement phase. If you are not familiar with your county’s tax laws or various types of investments, you should take the help of a financial expert.
Final Thoughts
Retirement planning is a long and continuous process; the sooner you start the better, and start saving for retirement as soon as possible as the government benefits during retirement will not be sufficient.
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