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
• clothes
• 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)
• groceries
• telephone
• cell
phone
• cable
vision or satellite
• internet
access
• books/subscriptions
• household
furnishings
• entertainment
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