How much money do I need to retire ?

The amount you need to retire is a function is an input of many variables including but not limited to:

• The age you wish to retire at
• Your current age, your current income, and the amount you save per annum
• The average return you anticipate from your investments
• Whether your home is paid for
• Where you want to retire

The answer largely depends on where you are in your financial journey and how early you wish you to retire.

So, how do I know how much I need then to retire?

Here are a couple of popular methods with examples in detail:

The 4% Withdrawal Method -Popular among the FIRE (Financial Independence Retire Early) community is the 4% concept. This concept assumes that a household can retire if their annual expenses are covered within 4% of their nest egg. This 4% is referred to as a Safe Withdrawal Rate. Another way of looking at this could be multiplying your expected annual expenses by 25. Using this example, a household will need $1M if they expect to live off $40,000 per year. The assumption using the FIRE method is that your investments will bear at least a 4% return (after inflation). This way you keep withdrawing the interest and your nest egg remains untouched until perpetuity.

75% of your Pre-retirement Income – Another commonly used method in traditional finance. Assumption is that a household will need about 75% of its pre-retirement income to sustain itself in retirement. If you expect your nest egg to last 30 years and you earn $60K today, you will need about $45K ( 75% of $60K) per year. Times that by 30 i.e., $1.35 Million is what you would need to need to retire. Note that this approach is not adjusted for inflation.

Income Multiplier – Fidelity Investments recommends that a household save 10 at least times its gross annual income by 67. At an income of $120K the nest egg amounts to at least $1.2 Million.

“Time has a wonderful way of showing what really matters” – Margaret Peters

Let’s work through a few hypotheticals below to get a better context of why I am quoting here.

• Your household income is $120K and say your retirement goal is $1 Million. You and your partner intend to keep working for the next 25 years. You have $50,000 saved up today. Assume your investments return 7% annualized.  To get to your nest egg of $1M, you would have to invest $1000 each month for the next 25 years.
• Your household income is $120K and say your retirement goal is $1.0 Million. You’ve saved $50,000 today. You only want to work for the next 15 years. Assume your investments return 7% annualized. To get to your nest egg of $1M, you would have to invest $3000 each month for the next 15 years now.
• Let’s say we kept the inputs the same but now wanted to retire in 5 years. This is one-fifth the time we state in first scenario. To get to your nest egg of $1M, you would now have to invest almost $14,000 each month for the next 5 years. In essence, our monthly contribution has gone up 14 times compared to Scenario 1.  

I learnt in high school but am only realizing now that Time is indeed the most magical factor when it comes to Compounding. Quintessentially the later you start saving, the more you need to contribute each month. Don’t worry if you start late but try and be consistent with the money you put away each month moving forward.

In the example above, I am not considering any federal government benefits offered in Canada. Your nest egg number will likely be lower given these federal benef decrease if you’re looking to retire at or after 65 years of age owing to these benefits. I will be sure to tag a blog post here when I calculate the Nest Egg amount requirement for retirement at 65 (or older) in Canada.