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How much does it cost to retire?

Hey, it worked.  Last month, I posted “What’s on your mind?” asking you to tell me what financial questions I could help you resolve.  Many thanks for your replies! 

I’ll start with one good question posed, because it probably crosses everyone’s mind with increased frequency over time:  How much money do I need to retire?

Since I’ve been a financial professional now for more than two decades, I feel well qualified to answer that question.  The answer is:  It depends.

Okay, I realize that isn’t a very helpful answer, even if it’s the truth.  Let’s dig a little deeper.

From a purely quantitative perspective, there are several rules of thumb in common use.  For example, some say if you’ve got 20 or 25 times your annual income in reserve that should do it. Others suggest you’re ready to retire if you can withdraw no more than 4% of your investment portfolio each year.  So, if you have $1 million in your investment accounts, you should plan to withdraw no more than $40,000 annually in a “successful” retirement. 

These and similar guidelines offer a decent starting point.  But bad luck happens.  Even if you’ve diligently saved up 20 times your income, if you happened to retire on the eve of a bear market or if you encounter large unexpected expenses, your handy rule of thumb could end up poking you in the eye. 

So, as much as I’d love to offer a simple, surefire equation, deciding whether you’re financially ready to retire actually requires some serious, personalized planning.  Here are some of the details I look at when helping clients financially prepare for retirement.

  • Estimated discretionary and nondiscretionary expenses.  Discretionary “wants” are often quite variable early on, but having a ballpark idea is better than nothing.
  • Estate planning goals.  How much (if anything) would you like to leave behind?
  • Expected time and earning capacity available for accumulating more savings.
  • Expected future benefits, such as CPP, Old Age Security (OAS) and guaranteed pensions.  
  • Additional sources of capital, such as a potential business sale, likely inheritances, or real estate downsizing plans. 
  • Current and projected investment values. 
  • Expected inflation and capital market rates of return – both a moving target! 
  • Estimated longevity – at least according to actuarial statistics and your own health.

Once you have all this information, and any other factors that may impact your plans, you can establish a far more realistic, “How much?” number. 

But that’s not the end of it.  In my experience, few families end up taking the same, steady inflation-indexed withdrawals, year after retired year.  Retirement tends to unfold in stages.  Your lifestyle needs might be higher in early retirement when you’re still more active.  As you age, your spending may slow down along with your pace.  Or, conversely, costs may ratchet upward if your health, the markets, or other curve balls come your way. 

Leading up to and in retirement, it’s also a good idea to revisit your “How much?” number yearly. If things are going better than expected, you may be able to let your guard down some, and live more largely.  If the opposite occurs, you may need to revisit your assumptions.  Are you okay with spending less?  Do you want to invest more aggressively? Are you up to returning to the work force?  These might not be ideal adjustments, but if you make them sooner than later, they shouldn’t have to be as drastic. 

So, how did I do?  Send me other questions on your mind, and the conversations will continue.