HOW MUCH MONEY IS ENOUGH FOR RETIREMENT

This post is about how much money is enough for retirement.

Why you have to think about retirement planning now

Retirement – it’s closer than you think

Opposite to what many young people believe, retirement is actually closer they think. Being in your 20s and 30s are the perfect years to start saving for retirement. In fact, I would even argue that the moment you start making money, start setting aside a percentage towards retirement.

Retirement is something that you should concern yourself with as early as possible in your working career because the earlier you start putting money aside for your retirement, the earlier you get to sit back and harvest the fruits.

When you start caring about your personal finances, you often start out with setting up your Emergency Fund. As soon as you have that set up though, you should contribute at least 10% of your paycheck towards savings in general if you can. You may increase this if you can afford to, of course. How much money you will need for retirement and planning ahead is as important as planning for short term expenses like a vacation or buying a house.

The question that you should ask yourself is whether you will have enough funds to provide for yourself in the future and will you be able to do the things you want to do without having to worry about money?

Based on what the government pensions look like today, it is without a doubt, that you must independently start saving for your retirement as early as possible.
You simply cannot rely on the government to finance your lifestyle in the future.

How much money will you need to live comfortably in retirement?

How much money you will need to live comfortably in retirement depends largely on how long you have worked, paid into the system and how much you have saved during your working years for retirement. You will also need to establish at what age you will want to retire and how many years you will think you will live with enough money to support those years.

Will you live a life that is financially conservative or will you be travelling? Will your house be paid off by the time you retire, will you anticipate living in your own home or go into a senior’s home? What about health issues later on in life?

As you can see, there are many many factors that you will need to consider in order to come up with the right figures.

• Read: How to stop living paycheck to paycheck

How to calculate how much money you will need to plan for retirement?

There are two ways to calculate how  much you need to retire among the personal finance and FIRE-community:

Desired annual retirement income X 25

This is an easy formula to follow. Based on your annual expenses, you multiply that number by 25. A general rule is that in order to live comfortably when you grow older and meet your retirement needs, you will want to have saved at least 25x your desired income.

So if your expenses are $50,000 a year now, you will want to have $1.25M in retirement savings.

4% Withdrawal Rate

This formula is a favorite amongst the FIRE-community (Finan3cial Independence – Early Retirement). It is based on the idea that you build up a retirement portfolio that will provide a certain amount of income to you annually at a 4% withdrawal rate. This 4% is often considered a conservative or very safe withdrawal rate.

So for instance, you figured out that you need $30,000 per year in retirement. When you use the withdrawal rate of 4%, you should have $750,000 in retirement before you begin retirement. This rule works whether you decide to retire at age 45 or 65.

This 4% withdrawal formula is based on the market’s annual returns of 7% minus inflation. Assuming inflation is at 3% of course. In most cases, we are talking about a more conservative, well-balances portfolio (a mix of stocks and equities).

How much income do you you need annually when you are retired?

Look at the lifestyle you envision you will have during retirement. Then estimate what your expenses will add up to – and don’t forget taxes (property, income, etc.)

Look at your lifestyle today and see where you can eliminate unnecessary expenses. You should exclude expenses that no longer will be relevant in retirement age. Examples include, your mortgage, transportation costs to work, child care, etc. and remember to add new expenses, such as for health care, travelling, other hobbies.

Can I expect money from the government for retirement?

Do not expect too much from Social Security or the Canada Pension Plan, please!

One mistake many people make is that they rely too much on Social Security or the Canada Pension Plan. You will receive a portion of what you paid in all those working years for retirement but it sure won’t be enough to cover ever increasing living costs.

You will have to prepare outside of Social Security or the Canada Pension Plan in order to comfortably retire WHEN you want to.

• Read: How to stay motivated on your debt-free journey?

What are ways for you to plan for retirement?

Doesn’t matter how old you are right now, retirement should concern the old as well as the young. Whether you are keen to get started in your early 20s or have a bit of catching up to do before you get to retire, there are a few things you can do to start familiarizing yourself with preparing for retirement:

1. Get smart about money and finance as early as possible. Educate yourself and dive into literature on how to max out your retirement savings accounts, how to save best for retirement and learn about investing. Nobody will ever treat your money and care for your money the way you do!
2. A general rule is to postpone or delay government pension for as long as possible. Working longer will delay the process of receiving retirement pension and can have a huge impact on the payouts later. The earlier you stop working, the less you will be entitled to as there will be deductions if you retire earlier than the retirement age.
3. Delay your retirement and do not touch your nest egg because you will have more to spend in future years. Keep adding to your 401K, Roth / Retirements Savings Fund and TFSA (Canada) based on annual contribution allowance.
4. Start to live a frugal life early. Delay gratification and save aggressively. Contribute to a well balanced portfolio, strive for dividend stocks to fuel your retirement fund.
5. Start to generate multiple income streams early in your life. Think of passive income streams.
6. Adjust your retirement strategy and be conservative. If you are at an older age now and have not build up a sufficient nest egg, lower your retirement lifestyle.
7. Figure out your dreams and goals for retirement. Keep track of your savings and networth and constantly update your finance strategy if you have to pivot.
8. Build a side business parallel to your day job. You could start a blog for fun on a topic that you are really passionate about and create your own business. This could potentially accelerate your savings rate if you made it a profitable blog.
9. Capitalize on your home – many retirement-ready individuals will sell their home and use that money to survive their retirement age. If you can, capitalize on your home but in a way that will generate monthly income. Instead of selling your home completely, if you do not have to, consider renting out your home to have a steady monthly income. Examples of long-term rentals through AirBnB for example or VRBO (Vacation rentals). Use this time to travel while you rent out your home. Or renovate your house so that you can have a basement apartment and rent that out on a monthly basis. Make sure your renovations comply with the local laws and it’s always best if your basement apartment has a separate (legal) entrance (this means more $$ as you can charge higher rent!).
10. Retire somewhere cost efficient – choose a country to retire where the cost of living for you is much lower than in the western countries. Countries include SEA, Southern America, and some Carribean islands. If you don’t want to leave the U.S. or Canada, choose a state that has one of the lowest cost of living. This way you will end up saving more from your retirement.

Final Note

Listen, retirement isn’t something that one of these days will appear out of the blue and say “hello”. Retirement isn’t also something that just concerns older people. As a matter of fact, the moment you start working, you should be opening your retirement savings account. The earlier you start to contribute, the greater your nest egg down the road will be. Retirement entails planning and making consistent contributions every month. There are many ways to start planning for retirement and I’ve listed 10 ways for you to start planning for retirement. Follow some of the simple ways to plan for retirement and you will see down the road that making this effort was well worth it.

Have you thought about your retirement plan yet?

This post is about how much money is enough to retire.

Image Credit

“Chairs on beach” – Unsplash

Other posts you might like:

• How to create a budget for the very first time

• Marie Kondo and Living with Less

• How to start a $500 Emergency Fund