Monday, July 25, 2016

Saving for Retirement how much do you need.

If we listen to the planners and financial experts some say we need about one million dollars, while others say we need 11 or 10 times our last salary. A new analysis from the benefits consultant Aon Hewitt tries to keep things simple:  it claims you need only 11 times your final working salary. That’s how much an average worker needs beyond Social Security payments to retire at 65, according to the report. The estimate takes into account inflation and future medical costs. It is based on the retiree maintaining the same standard of living.

Working longer makes a difference. At age 67, you would need 9.4 times final pay. Retiring early, of course, requires more savings—13.5 times final pay at age 62.

Author Lee Eisenberg tried to divine The Number needed to retire in his best seller. For many years, planners mindlessly set the target at $1 million, figuring that would be plenty. Rules of thumb like saving 15% of income for 40 years or accumulating an amount capable of generating 75% to 85% of your final working salary have been popular guideposts for a while

So if you don’t think you can save 11 times your final salary you might want to listen to the advice of Fidelity Investments. They say to be financially ready to retire by age 67, —  They are the nation's largest retirement-plan provider — you should aim to have 10 times your final salary in savings.

Here is the time line in which Fidelity suggests you increase your savings so that you can reach that magic number:
      In your 20s, put enough away so that by the time you turn 30, you'll have the equivalent of your salary saved.
      By 40, aim to have three times your salary saved up.
      By age 50, you should have enough saved to equal six times your salary.
      By age 60, your savings should be eight times your salary.
      And 10 times your salary by the full retirement age of 67.

The problem with retirement planning is that so much is unknowable. How long will you live? What will your investments return? What will the inflation rate be? The web has a bunch of good calculators to help you sort this out.

The other problem is that most of us are so far off from having 10 times their last year of salary saved, that they despair of even starting to save, which compounds the problem.

A better rule of thumb is to look at your current income and then aim for a replacement ratio of 50% to 60% for couples, and 60% to 70% for singles, assuming you have a paid-for home and your kids are financially independent. Better yet, we can use actual dollar figures available to us from the government. 

Typical middle-class Canadian couples can live comfortably on $42,000 to $72,000 a year ($30,000 to $50,000 for singles), again assuming no mortgage or child costs.
When planning for retirement, many of us forget to calculate in the benefits we get from the government. In Canada we have our Canada Pension Plan if we have worked, we also receive Old Age Security and if we are eligible the Guaranteed Income Supplement. The chart below takes those amounts into consideration for planning. So planning to save between $275,000  is easier to contemplate for someone in their thirties or forties  then having to save over one million.  

1.  Typical middle-class income before tax. Assumes a paid-for home.
2.  Typical annual amount for Canada Pension Plan and Old Age Security based on retiring at age 65, assuming a fairly long career at average salaries or better. (CPP and OAS are adjusted to pay more if deferred, and CPP is adjusted to pay less if started earlier.) We’ve assumed no employer pension, but this should be included here if you have one.
3.  Approximate amount that can be withdrawn from initial nest egg if retiring at age 65, with only a small risk of outliving the money, based on a rough consensus of experts
When starting your calculations remember there are items you will spend less on, more on, and some that will not change. Lets take a look at some of these expenses:

The following are probably items you will no longer need to spend money on after you are retired:
      buying a home
      raising children
      education costs
      saving for retirement

The following are items you will probably spend less money on:
      alarm clocks
      purchasing automobiles - you will probably be driving less, so your vehicle will last longer
      auto insurance - may be cheaper if you are not driving to work
      auto gas and maintenance
      other forms of transportation if you did not drive to work
      life insurance - may not be needed if you have no mortgage
      disability insurance
      eating out

Your spending on the following items will probably not change:
      house insurance
      home maintenance (until you're too old to do it yourself)
      cell phone
      cable vision or satellite
      internet access
      household furnishings


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