How much do you need to Retire – Version 3- Part I

Well it’s time again for me to overhaul my calculations on how much I need to retire. You might ask: why? The answer is because some significant chances had happen to my plan since the last time I did my calculations. Also I want to round out some more information in some sections to provide a bit more detail. So hence we are now on version 3.

Retirement calculations are a entertaining little part of the world. They cross economics, math, sociology and every means of trying to predict the future which means the answers will shift around every hour if left alone on the page. The reality is we can’t know the number you need. It simply impossible to predict exactly due to the large number of variables involved.

Yet we can get you in the ball park with a few assumptions and a little personal insight about yourself.
First find your last couple of pay stubs and figure out how much money you took home last month after taxes, CPP and EI (if you have a spouse you can do this together).

Then minus anything you were saving for retirement, after all when your retired you don’t need to save for it anymore.

Then minus any directly work related monthly expenses. For example you won’t need too many suits when you retire or that parking space downtown. Also your bill for the gas to commute is likely to drop. Don’t forget about dry cleaning or the fast food for supper that you keep buying since you don’t have time to cook.

Then minus your mortgage payment (don’t forget to leave your property taxes in if they are combined into your mortgage payments). We are going to assume that you were smart enough to ensure your home is paid for when entering into retirement (unless of course you are renting then you keep in the entire amount).

Then minus what you spend on the kids every month on average (after all they should be out the door or close to it when you retire) and don’t forget about that RESP contribution you’ve been making. If you don’t have kids skip this step.

Then take that monthly amount and times it by 12 to get a yearly amount. This is your base number. Now we have to start adding a few things.

Add $1000/year for each property and/or car you plan to own in retirement. So if you have the house, cottage and a car you add $3000 to your base amount. This is to cover maintenance and depreciate costs for your home and car, respectively (This is just a baseline, if you have actual maintenance costs for a number of year feel free to replace these amounts).

Then think about what hobbies you want to do in retirement and add in an estimate on the yearly cost for those. Keep yourself from going crazy here as this might make your total look way higher than it needs to be. Just to give you a idea of what I’m getting at: every extra $200/month you want for hobbies is going to cost you approximately $60,000 in extra savings. Also I don’t recommend including travel here. I’ll get to that in a minute.

If you have an ongoing medical condition which you spend money treating regularly you want to also add an estimated yearly cost for that as well. So any medications or equipment that your regularly use and also remember to add an estimate of your yearly dental and eye costs as when your not working you will have to pay out of pocket (or buy coverage for these).

When the math is all done you now have an estimate figure of yearly costs in retirement.

For example your numbers could look like this:

Take home pay $3200/month
– retirement saving $200/month
-work expenses $130/month
-mortgage $1020/month
-kid $100/month
= $1750 Base Amount

Base Amount $1750/month * 12 months/year = $21,000/year
Add in one house and one car + $2000
Add in hobbies + $2000
Add in medical + $500

Total amount to live in retirement $25,500/year.

Now once you have your number you can divide that by two if your doing this with your spouse. So that would be $12,750/year/person. Now take your new yearly income and do an estimate to determine your tax bill. So let’s use some rough numbers.

If the basic tax exemption is $9600 that would mean only $3150 a year is taxable per person. Let’s assume a 26% combined federal and province marginal tax rate. So the tax bill for each person would be $819/year (remember you won’t be paying any CPP or EI). So add that back in to your total amount to live $819*2 + $25,500 = $27,138.

The reality of that last calculation is a bit over simplified. It depends on where you are getting your income from. For examples dividends have a significantly better tax rate (like around zero) at the lower income levels if you hold them in a taxable account. So if you are getting $2000/year from dividends you could reduce you tax due by $2000*0.26= $520. So my total would reduce to $26,618. The flip side of this would a portion of your nest egg would be permanently tied up holding shares to produce those dividends so if you assume you are getting an average 4% yield that would mean you have $2000/0.04=$50,000 tied up and can’t be used later on in our calculations. In this example I’m going to assume $2000/year in dividend income just to show you what happens.

Therefore my yearly total now drops to $ 26,618.

This amount represents how much you need to live for your current lifestyle in retirement. If you want more than that or less you will have to adjust the calculations above to account for that. For example, some people want their retirements to be a more lavish lifestyle so they would boost their hobbies amount. This is ok, but keep in mind each extra you have in retirement requires more savings which means an early retirement is more difficult to obtain.

As I mentioned early I do not suggest including travel money in this amount. Why? After your 75 birthday you are likely going to start slowing down a bit and not traveling as much. So if you include a set yearly travel amount your going to end up with an artificially high number because your assuming your traveling until your assumed death age which isn’t all that realistic.

Instead your better off just starting a slush fund for travel. Take your yearly estimated travel spending and times it with the number of years you expect to be traveling. For example, if you want $3000/ year for travel from age 75 to 45 you would need $90,000 ($3000 * 30). When calculating how much you need to retire early you just add this amount to your total later on in our calculations.

Now come back tomorrow as I continue to revise my retirement calculations while looking at government programs to help you retire early.

15 thoughts on “How much do you need to Retire – Version 3- Part I”

  1. This is a very interesting article on calculating the requirements of retirement. However, I would argue that it would make you feel much more comfortable if you had a little bit more of a buffer in the event that the markets really slow down or decrease such that you don’t end up taking a large portion of principal in any given year.

  2. Hi Tim, I’m reading your weblog lately, because I am also very busy with thinking about saving some money for later and such.

    I do have a question for you. Since a plan for retirement usually concerns a long timeperiod, do you include inflation into your calculations? After all, what you can buy now for 1000 dollars, you’ll need about 1800 dollars after 30 years with 2% inflation.

    So your 26,618 today, will that be enough for later when you are retired? I’m curious about your vision about this.

    Thanks and keep up the good work! 🙂

  3. Patrick,

    I’ll show you want I do in Part III, but in summary I prefer to always work in today’s dollars. So when I calculate a rate of return I just deduct the inflation section right off the top (ie: a 7% rate of return drops to 5% in the calculations if I were using 2% inflation).


  4. Good thoughts on calculating retirement! I like how you think.

    I just plan for $3 million, and a 4% yield to replicate a $100-$140,000 income depending on what interest rates will be like then.

    I live off that amount now but work. But, I figure by then, I won’t have as many expenses i.e. mortgage, so it’ll really be enough!

  5. Ajay,

    Yes, but it depends on your spending habits while you were working. For example, if you have a paid for house that could save up to 25%, then deduct kid/work expenses 10% and then reduction in CPP & EI contributions and tax at a lower rate for another 15%.

    Best of luck,

Comments are closed.