In my last post, I introduced a tool that guides you to becoming a millionaire. I mean, who doesn’t want to become a millionaire, or more?
But what happens once you reach $1,000,000? What do you do now? Is $1,000,000 even your ultimate goal? Are you really financially independent with $1,000,000?
One of my first blogger friends, Sara, from Gathering Dreams mentioned this point about the tool from last week: “I wonder if the annual contribution should go to zero when you reach your desired retirement age?”
She brought up an excellent point, so thank you, Sara!
New Version of Our Tool
Sara’s comment prompt my fiance and I to FIRE up this tool (hmm… no pun intended).
So, now you have it — from a “millionaire” tool to a retirement/financial freedom tool!
Get your updated version here! I will explain later how to use it. Or you can skip over to the section below, “How To Plan Your Retirement with Our Tool.”
This newer version doesn’t only show you how to achieve $X amount of net worth (e.g. $1,000,000), it will also show whether you’ll have enough money to support your lifestyle once you decide to retire or become financially independent. That’s, of course, assuming your following predictions are correct:
1) Life expectancy
2) Average return on investments
As I mentioned in my previous post, nothing in life is guaranteed. You can certainly prepare for the controllable such as your earning power, when you start saving, and how much.
As for the uncontrollable, the best you can do is take on calculated risks (i.e. market returns and life expectancy).
Remember, you’re looking at long-term returns. I found this CNBC article where financial advisor, Ric Edelman says investors with long-term goals, such as retirement, should buy stocks now.
Financial Independence & Retirement Planning
Overall, how and when you retire will ultimately depend on how much you save and your desired lifestyle.
According to this article, “How Much Money Do You Need To Retire,” at Sun Life Financial by Kevin Press, he mentions what Cindy Crean, Assistant Vice-President, Private Client at Sun Life Global Investments (Canada) Inc. and a certified financial planner, says:
Everyone’s situation is so different that I don’t think you can apply an estimated percentage. For example, if you’re living in an expensive city like Toronto or Vancouver and you decide that what retirement looks like for you is to move to a smaller community, your expenses at retirement are going to be greatly reduced. You need to really look at what retirement means for you and what your expenses are going to be.
Generally speaking, Press says that you will likely spend less when you’re retired compared to your working years. That makes sense because, by then, your mortgage would be paid off. On top of that, your little rug rats will move out and become independent.
Or, maybe they will choose to move out because of your nagging!
Haha, just kidding!
Anyone a Rugrats, or All Grown Up (Sequel of Rugrats) fan?
Anyway, in all seriousness, Press provided in his article the 2016 Sun Life Canadian Retirement Now Report that shows the average retired Canadian lives on 62% of their pre-retirement income.
According to most articles you find online, financial experts will say you need about 70% to 80% of your pre-retirement income to retire comfortably.
Using 70% as an example, if you earn a salary of $80,000 before you retire, it is recommended that you’ll need 0.70*$80,000=$56,000 in cash flow per year to retire.
However, in this article by David Aston, he writes:
“I get so upset when I hear advisers telling clients they need 70% to 80%,” says Annie Kvick, a certified financial planner and associate with Money Coaches Canada in North Vancouver. “I’ve had clients come to me at 67 and they’re still working because their adviser told them they didn’t have enough. When I looked at how much they really needed, I found they could have retired five years ago.”
So again, depending on your desired lifestyle, this number will vary for different people. Let’s discuss more of this in the next section!
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How To Plan Your Retirement with Our Tool
Now, I can finally explain how to use the tool we created for you.
If you haven’t grabbed your free copy yet, here it is! Remember, it’s desktop friendly.
Whether you’re aiming to retire early or reach financial independence, you can use this tool as your guidance. Hopefully, this calculator will prompt you to start early and help you make better financial decisions.
Again, your plans may change down the road, but the spreadsheet should give you a rough idea of how much you’ll need.
But before you use the spreadsheet, ask yourself these questions:
1) How much will my desired lifestyle cost per year once I retire? Be honest with yourself when you answer this question.
For example, your mortgage may be paid off, and your kids become independent. But perhaps you want to travel the world and enjoy the finer things in life. This may result in an increase in spending (more than you expected) compared to a simple laid back lifestyle. So, it’s important to be true to yourself when you’re planning.
2) Starting today, how much do I need to save per month/year to reach my goal of 1)?
3) What is my assumed long-term rate of return on investments per year? Referring back to my previous post, John Heinzl, a writer from Globe and Mail, recommends 8%. However, I would recommend using 7%, in nominal terms. To adjust for inflation, I would personally go with 4% to 5%.
Let’s take a look at an example:
We will assume numbers are in real terms using a 5% rate of return.
Based on the spreadsheet’s example, suppose you start saving $1,200 per month at age 25.
Assume you start with $0 initial investment (as seen in “Initial Investment” field). In other words, you start off with no debt and no assets. However, if you already have $5,000 invested in the markets, input $5,000 in that field.
Let’s also assume you want to start withdrawing money from your nest at age 55, your desired retirement date. For simplicity, let’s say your desired lifestyle will cost you $3,500 per month (“Monthly Withdrawal” field) once you retire. This automatically calculates to $3,500*12=$42,000 per year (“Annual Withdrawal” field).
Now, if you scroll all the way down, you will see that as you spend $42,000 per year until age 100, your portfolio will still grow and work for you. At age 100, you will see that your portfolio still grows to $2.038 million (“Investment Balance” field). Wow!
However, check out this CRAZY thing…
What if you increase your monthly spending (“Monthly Withdrawal” field) from $3,500 to $5,500 per month? Assume everything else is unchanged except for this field.
Note that this new lifestyle translates to $5,500*12=$66,000 per year. Again, we’re still assuming an uncertain rate of return of 5% per year, in real terms.
Look what happens when you increase your monthly spending by $2,000 (i.e. from $3,500 to $5,500)!
This simulation tells you that your nest would be used up by age 81, going onto age 82!
By age 82 onward, you would have nothing to support your future spending, assuming that you still live.
As you play with this spreadsheet and plan your retirement, you will notice that your output/result (i.e. “Investment Balance”) is extremely sensitive to your inputs (time, savings, withdrawal, rate of return assumption, etc.).
With that said, save yo a$$ by making sure your inputs are sexy! That is…
– start saving and investing as early as you can (controllable)
– hustle yo’ a$$ off (the younger, the better) to earn more and make that moo-la work for you (controllable)
– learn how to save (and spend) money the sexy way! (controllable)
– develop a RICH mindset (very controllable)
– take on calculated risks with your investments (uncontrollable, but be wise with your decisions)
In the above, we mentioned that there are many input variables you can control (saving, earning more, developing the right mindset, etc.). But there are also things we cannot control such as the stock markets.
Another thing you cannot control nor predict is how long you will live. This is defined as longevity risk.
To learn more about longevity risk and retirement income planning, read this summary from the CFA Institute.
Despite these uncontrollable events, it’s still important to learn what they are and incorporate them into your retirement planning. I know $hit happens, but you should do what you can to protect yourself.
Additional Resources for Your Retirement Planning
Aside from your own savings, it’s also worth mentioning that there are other forms of aid to help boost your retirement. This may include your company match and/or Social Security (in Canada, our Social Security is the Canadian Pension Plan and Old Age Security).
You may choose to opt out Social Security from the spreadsheet to give yourself some cushion. I personally wouldn’t rely on it to fund my retirement. But when you’re planning for retirement, don’t forget that this exists — especially for those who are running close and need as much help as they can get!
For the American readers, I found this article at The Motley Fool, “Here’s What the Average Retired American’s Budget Looks Like,” written by Brian Stoffel. Within this post, there’s a section that talks about the $16,122 Social Security bonus most retirees overlook. This same article also directs you to this other link that reveals a few Social Security “secrets” you may not be aware of.
If you’re Canadian and want to become familiar with our retirement system, I recommend you to visit Enoch @ Savvy New Canadians. His Retirement category is packed with retirement goodies! While you’re at it, don’t forget to subscribe to him for your free e-book, “Retirement 101: A Complete Guide To Canada’s Retirement Income System.”
Many people dream of becoming a millionaire, so they make that their target number. But is a $1 million nest egg even enough to retire? Yes and no since it really depends on your desired lifestyle. Some people are able to retire happily with $500,000 while some may require $5 million!
In other words, there’s no one-size-fits-all.
Whatever that number is, you can use our tool to find out how much you need to retire comfortably. To give you a rough idea, you’ll need to input the following numbers into the spreadsheet:
1) Age you start saving (the earlier, the better).
2) When you plan to retire or reach financial independence.
3) How much you plan to save per month. If your savings plan fluctuates, you can convert that to yearly savings, and manually input it into the “Annual Contribution” field.
4) Your return on investment assumption.
5) How much you plan to spend per month during retirement. Similar to 3), you can adjust your numbers to annual, and manually input this into the “Retirement Withdrawal” field.
Nothing is set in stone. I mean, who knows, you may even change your plans over the years. But overall, we hope this tool will help you reach your goals.
Over to you
So, readers, are you excited to plan for retirement and/or reach financial independence?
What’s your planned lifestyle?
Are you looking for a simple laid back retirement life?
Or, are you looking forward to driving a Ferrari and travelling the entire world in style? Man, I wonder how much I’ll need to save in order to roll in that kind of lifestyle?? Ah, time for me to crunch in the numbers!!
Again, here’s your free retirement calculator! Happy planning, you fin$avvy readers!
Disclaimer: I am not a certified financial advisor or planner. I’m just a fun and cute fin$avvy panda carebear who loves talking about money and finances. You should not treat this as professional advice. All content on my blog is for fun, and a way to document and share my financial journey. Before making any financial decisions, please consult a professional advisor or planner.
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