# How much do I need to save for retirement?



## slacker (Mar 8, 2010)

How do you answer the classic question: how much do I need to save for retirement?

I'm interested in finding out the parameters and constraints that YOU have used for consideration. I'll list some here to get started:

- current age
- expected retirement age
- expected lifespan
- opportunity cost to spending now vs in retirement
- current networth
- expected inflation rate
- expected return on investment
- withdrawal rate
- expected replacement income
- finally, savings rate

PS: on a related question, if I max out both TFSA and RRSP, would I be able to retire when I turn 65? (I'm 30 now, no house)


----------



## peterk (May 16, 2010)

There's a multitude of calculators that will let you input all of those parameters. I used excel and setup my own table, that way I can input various amounts year to year as I expect. For instance, I'm in school right now, when I graduate in two years I'm going to start saving agressively. Three years after graduating I'll get my PEng and probably make more money and be able to really up my savings. I intend to have kids somwhere around 35 probably, so from then on I imagine I'll be saving substantially less than before. You can account for all of this in excel

The real killer to watch out for is inflation. I think a million dollars today would be enough to generate the retirement income I want, but when I retire I'm going to need three million! to have the same spending power. So I built a table and adjusted my yearly savings targets until I have 3 million. My intended retirement age is 55. We'll see if I make it, that's based on a rate of return of 9% for my investment. I hope this rate turns out to be realistic.

With that 3 million, I've done the sinking fund calculation for out to 95 years, withdrawing 150k/year. This part is all very iffy though. Even slight adjustments to your rate of return over a 40 year retirement period will drastically change the outcomes. When you're working and haven't reached your target retirement amount you can always work another year or two. But once your retired and run out of money, you're SOL.
For example, with 3 million at retirement, if my investments generate 7% and inflation is 3% I'll just make it 95 before running out of cash, but if I would get just 1 more percent, 8, I would have over 10 million in the bank when I'm 95, if I got 6% I'd be broke by 85. For that reason, these retirement calculations, while fun to do, are largely superfluous

Whether you max out your registered accounts won't really determine if YOU have enough when you retire. By my calculations of expected income, I'll likely be able to keep my entire portfolio in registered. Especially if the TFSA contribution room will grow with inflation (anyone know if that's in the works?) 
I plan on saving about 25-30% of my income for my first 10 years, then probably 10-15 after having kids, until retirement.

One thing I do not consider is a house. I'm largely of the opinion that it might not be in the best interest of a young single person to buy a house. With likely a volatile career for the first 5-10 years, plus the cost of maintaining and selling a home you only plan to live in for a few years, I feel it's generally better to rent.


----------



## steve41 (Apr 18, 2009)

I have many clients (financial planners) They would take extreme issue with your 9%. 5% maybe, but 9%? No way. Also, even 3% for inflation is extreme. Plus.... not owning a house is really bucking the trend as well.

For what it's worth, I'd be tempted to temper some of those expectations.


----------



## osc (Oct 17, 2009)

yes, if you max out rrsp and tfsa you'll be able to retire at 65, and probably before. 
You'll be able to retire when your target annual retirement income minus oas/cpp will be below (Your expected rate of return at retirement minus expected inflation) multiplied by your total retirement savings. For example, if you need 30k/year with oas/cpp being $10k/year and expect a rate of return at retirement of 7%/year with inflation at 2%/year-> you'll need $400k. All these numbers adjusted for inflation until your retirement.


----------



## kcowan (Jul 1, 2010)

The main benefit in putting together your own spreadsheet financial plan is that you learn the assumptions and their sensitivity. In our case, it caused us to put off buying our place in the sun and rent for a few years until we could justify it.

It also caused us to track our expenses and take some steps to reduce repetitive charges such as cell phone plans and credit card fees. We now track our own COL since CPI does not apply to us specifically. This makes a big difference out 30 years.


----------



## peterk (May 16, 2010)

Thanks for the feedback Steve. I just crunched out Stats Can's CPI numbers, inflation over the last 20 years was 3.8% annualized, and 3.1% for the last 94 years. Obviously we are in a low inflation period of time right now, but I don't think it'll last.
Admittedly, my youthful optimism of 9% is a wish, I base it on a market growth of 6% and 3% dividend. However, in the end, it will be what it will be, and since I plan to always save as much as I comfortably can, no matter how my investments turn out, it is a larely irrelivent figure and will only affect the age at which I end up retiring.

House wise, I of course will buy a house, just not in my early years I don't think. I would like to put 50% down and not have that amount be more than 50% of my assets, which will put my target house-buying age in the mid thirties. Really the controlling factor will be when/where I end up taking a job that I will consider a long term career move.


----------



## pacman (Sep 6, 2009)

steve41 said:


> I have many clients (financial planners) Also, even 3% for inflation is extreme.



Steve

What do you think is reasonable to plug in for inflation for the next 30 years?

ps. Really really like Steve's program. It is very comprehensive.

pacman


----------



## Scottlandlord (May 27, 2010)

Where do you want to live?

What does retirement mean to you?


----------



## John_Michaels (Dec 14, 2009)

How much? My current expenses / 3%-4% SWR +10%.
Some expenses will go away and will be replaced by new ones.


----------



## steve41 (Apr 18, 2009)

pacman said:


> Steve
> 
> What do you think is reasonable to plug in for inflation for the next 30 years?
> 
> ...


 Sorry, outside my pay grade. I am a programmer, not an economist. The various western governments made a concerted pledge 20-30 years ago after the big runaway inflation scare to control inflation in the 2-3% range. They seem to have succeeded. The talk now is the danger of deflation.... pick your poison.


----------



## kcowan (Jul 1, 2010)

steve41 said:


> Sorry, outside my pay grade. I am a programmer, not an economist. The various western governments made a concerted pledge 20-30 years ago after the big runaway inflation scare to control inflation in the 2-3% range. They seem to have succeeded. The talk now is the danger of deflation.... pick your poison.


And then you have to decide whether the official figure applies to your unique situation, which is the only figure that matters.


----------



## steve41 (Apr 18, 2009)

It turns out, I treat inflation in my program as two distinct entities... 'official inflation' as the government reports it, and a 'personal inflation rate'.... the rate at which your own personal consumption rate varies. The former governs how the CPP, OAS, pension, tax bracket indexing behaves, and the latter governing how you personally consume.... your beer&grocery index.

Most users set these at the same number, but some _do_ vary them.


----------



## rubytaurus (Sep 14, 2010)

*I think about a house*



peterk said:


> There's a multitude of calculators that will let you input all of those parameters. I used excel and setup my own table, that way I can input various amounts year to year as I expect. For instance, I'm in school right now, when I graduate in two years I'm going to start saving agressively. Three years after graduating I'll get my PEng and probably make more money and be able to really up my savings. I intend to have kids somwhere around 35 probably, so from then on I imagine I'll be saving substantially less than before. You can account for all of this in excel
> 
> The real killer to watch out for is inflation. I think a million dollars today would be enough to generate the retirement income I want, but when I retire I'm going to need three million! to have the same spending power. So I built a table and adjusted my yearly savings targets until I have 3 million. My intended retirement age is 55. We'll see if I make it, that's based on a rate of return of 9% for my investment. I hope this rate turns out to be realistic.
> 
> ...


I think about the last thing you say is the house. i agree on this.


----------



## Scottlandlord (May 27, 2010)

I know of some people who have a very nice system worked out.

They spend 6 months +1 to keep their Canadian residency. And the rest is spent is Latin America and South America. While back in Canada, they keep their costs low in buying everyday items carefully. It's also a great way to see the grandkids/kids. And then almost 6 months on the beach in environments that are very economical and happy.

Of course my one friend happened to become infatuated with a local lady...that became expensive because he had a Canadian wife.


----------



## Eclectic12 (Oct 20, 2010)

peterk said:


> [ ... ]
> 
> One thing I do not consider is a house. I'm largely of the opinion that it might not be in the best interest of a young single person to buy a house. With likely a volatile career for the first 5-10 years, plus the cost of maintaining and selling a home you only plan to live in for a few years, I feel it's generally better to rent.


If you have a volatile career, then yes. Though I didn't do badly renting rooms, paying down the mortgage early and selling after 9+ years for a 75% gain.

Then too - after watching my relative, the executive be transferred to the Chicago, come back to Toronto and then up to Orilla, all at about the 15-20 year mark - the volatility may not end when you think.


----------

