Of course I know I should have a substantial sum of money that generates its own income, off which my spouse and I will live, when we retire. But what is the right amount to have, or even a range? I've heard $1,000,000 but that just seems so huge and unattainable. Is that the magic number? If not, what is?
We don't plan on living lavishly when we retire, and plan on moving into an assisted living facility in Canada when it makes sense.
There's a bit of working backwards that's required.
This is a summary of a spreadsheet I wrote which helps to get to the answer. What you see here is that at age 25, one might have saved about a half year's salary, assuming they worked 5 years. The numbers grow exponentially to at 65, about 15 years salary saved. This will allow a withdrawal of about 60% final income each year using the 4% guideline. More will come from Social Security in the States to get closer to 100%.
The sheet start with assumptions, a 10% per year rate of saving, and an 8% annual return. Salary is assumed to rise 3% per year.
One can choose their age, enter their current numbers and their own assumptions. I had to include some numbers and at the time, 8% seemed reasonable. Not so sure today. What I do like is the concept of viewing savings in terms of 'years salary' as this leads to replacement rate. Will $1M be enough for you? Only you can answer that. But the goal of 80-100% replacement income is reasonable and this sheet can be used to understand the goals along the way.
(note, the uploaded sheet had 15% saving rate, not the 10 I thought. I used 15 to show a 10% saving along with a 5% match to one's 401(k). Those interested are welcome to enter their own numbers. The one objection I've seen is the increase to salary. Increases tend to be higher in the first 20 than the second, or so I'm told.)
For most people, a million dollars is about right. Here's the back of the napkin math that you should consider to find your own estimate:
If you take 1 and divide it by 2, that's roughly the size of the nest egg you'll need to live indefinitely. For example, if your retirement investments are earning 5% a year, and you want to live on $50,000 a year, you would need a $1,000,000 nest egg (50,000 / 0.05)
Note that you don't have to make any assumptions about how long you'll live. The whole idea of a nest egg is that you live off the interest it earns each year without ever dipping into the principle. It's the gift that keeps on giving!
When you die, you can pass it along to children, charities, etc.
I would focus first on maxing out your RRSPs (or 401k) each year, and once you've done that, try to put another 10% of your income away into unregistered long term growth savings.
Let's say you're 30 and you've been doing that since you graduated 7 years ago, and maybe you averaged 8% p.a. return and an average of $50k per year salary (as a round number). I would say you should have 60k to 120k in straight up investments around age 30. If that's the case, you're probably well on your way to a very comfortable retirement.
One more thing to consider is that $1M today is not the same as $1M 30 years from now because of inflation.
Consider that just 30 years ago (1980) the average house price in the US was only about $69K and a new car cost around $7K on average.
When you retire, it isn't much of a stretch to assume that you could be paying $1.5M for a typical house, $100K for mid-grade car, by the time you retire in 30 years.
Of course, over the rest of your working life your salary will likely increase due to inflation too, so that will help. In 1980 the average US income was around $19K/year.
So even though that number seems huge, it is because it is denominated in currency that has been devalued significantly.
Here's another answer on the topic: Saving for retirement: How much is enough?
An angle on it this question made me think of: a good approach here is to focus on savings rate (which you can control) rather than the final number (which you can't, plus it will fluctuate with the markets and make you nervous).
For example, focus on saving at least 10% of your income annually (15% is much safer).
If you focus on the final number:
The way it works in the real world is that you save as much as you can, but there are lots of random factors and unknowns. Some people end up having to work a lot longer than they hoped to. Others end up able to retire early. Others retire on time but have to spend less than they hoped. But the one thing you can often control (as long as you have an income and no catastrophes, anyway) is that you spend less than you make.
There are three numbers that matter in that calculation:
1) How much do you expect per month from in pension/social security/or other retirement programs?
2) At what age will each of you retire?
3) How long will each of you live?
4) What will your annual expenses be when you retire?
Unfortunately #3 is the most important of the three and the hardest to know with any certainty.
