How much should you save for retirement?

This is an age-old question, and just about every money expert has weighed-in on it over the years.

If you don’t want to figure out exactly what the government is going to throw your way in the form of the Canada Pension Plan, Old Age Security and perhaps the Government Income Supplement, you may want to use a simplistic formula to determine how you’re doing.

I have heard everything from $500,000 to $2 Million when financial planners are estimating what someone will need to retire. When certain authors want to write in simplistic terms, given how many variables there are, they will use “income multipliers” that estimate how much money you should have saved in order to afford a certain retirement lifestyle.

As a rule of thumb these are dangerous, as they cannot replace the work a financial planner can do in providing more personalized advice. But, I will say, it’s better than nothing.

Author of ‘Money for Life’, Steve Vernon suggests the multiplier should depend on when you plan on retiring. For those retiring in their mid to late 60s, he suggest 20x your income needs. And even more if you aspire to retiring earlier…

– 20x your income needs if you’re retiring in your mid to late 60s or later
– 25x your income needs if you’re retiring in your late 50s or early 60s
– 33x your income needs if you want to be virtually certain you don’t outlive your assets and you want to leave money to children or charities when you’re gone

These numbers result in a huge savings requirement and are highly debatable – especially given the tax implications of different sources of funds, income splitting potential, the variability of CPP by individual (zero up to $12,460 annually), not to mention the variability of retirement expenses experienced by retirees and the value that might be held in a family home.

The fact is, how much you need in retirement depends. It depends on the lifestyle you want in retirement, where you will live, and the sources of income available to you – and don’t forget perhaps the biggest variable of all – how long you will live. It’s not an easy calculation – and, in fact there is no firm answer. Investment returns alone make it impossible to predict the future, so determining when or if you will run out of money is as much art as science. Don’t believe anyone who tells you any differently.

Author Charles Farrell in his book ‘Your Money Ratios’ outlines multipliers for those who want to know how they are doing at different ages.

In order to fund 70% of pre-retirement income throughout retirement, he writes you should have accumulated the following multipliers:
– 0.45 times your annual working income at age 30;
– 1.6 times your annual working income at age 40;
– 3.5 times your annual working income at age 50;
– 6.5 times your annual working income at age 60;
– 10 times your annual working income at age 70

It is little wonder most get tied up just reading all the conflicting advice.

My suggestion – don’t leave this to chance. Educate yourself. Speak with someone who can help you understand the impact of each factor, and can create different retirement scenarios for you. If income multipliers motivate you to save a bit more, and spend a bit less – great. But know that, as benchmarks, they may leave you wondering why you trusted something so simplistic when the rubber hits the road. Financial Peace comes from not worrying about the future, because you know what you need to do to look after it.

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