Retirement Numbers and Rules
Professionals from all walks of life and sectors have a knack for making the simple, extremely complex. Same goes for the financial industry. In the spirit of keeping things simple, I have updated some back-of-the-napkin examples about retirement numbers and rules to consider. These are good starting points for your retirement income planning journey but at the end of the day, when you need real math done, please consider a retirement income plan beyond these rules of thumb. I’ll link to my low-cost support at the end.
How much do you need to retire?
“It depends” is usually my answer.
Here are some updated retirement numbers and rules to consider answering that question.
Retirement Rule #1 – Rule of 20.
- The premise: for every $20 saved you can live off $1 in retirement.
Examples:
- On your retirement date: $300,000 saved and you can likely live off $15,000.
- On your retirement date: $500,000 saved and you can likely live off $25,000.
- On your retirement date: $1 million saved and you can likely live off $50,000.
This assumes your retirement date is in your early 60s, whereby you will also have government benefits flowing in soon too (e.g., Canada Pension Plan (CPP) and/or Old Age Security (OAS)).
Therefore, a 5% withdrawal rate with a $1 million portfolio is not an unreasonable withdrawal rate in your 60s, moving higher over time with inflation.
This rule makes some sense since you may recall the 4% safe withdrawal rate is still a decent starting point and more conservative at any earlier retirement age to ensure you don’t run out of money for the coming 30 years…
In fact, if you retire in your 60s, just following the 4% rule starting that could deliver years of underspending.
From the post:
So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.
“…the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!”
- The premise: take your anticipated retirement expenses (after-tax) and multiply this amount by 25 for your “retirement number”.
Example:
- I figure we could need $72,000 per year after-tax for our retirement spending with 3% sustained inflation starting in 2025 or 2026 when any part-time work is done.
- That means our “retirement number” is $1.8 million invested.
As someone who is a bit worried about having “enough” this rule could make sense but says nothing about variable spending needs.
A better approach, is likely following some sort of Variable Percentage Withdrawal (VPW) method.
I have a link below to some free VPW calculator tools in this post:
Retirement Rule #3 – Replace 50-70% of your income during retirement.
- The premise: take your 50-70% of your current full-time income and that’s what you’ll need in retirement. The thinking here is in retirement, some key expenses are gone: raising a family and/or paying your mortgage and/or saving for retirement since you’re in retirement.
Example:
- Let’s again use our desired $72,000 per year after-tax spending as our target, so pre-tax, while working, we are earning more than that today to cover our lifestyle needs.
The challenge I have with this rule is there is no accounting for inflation nor those dynamic spending needs I referenced above.
This rule assumes some spending today, ends in retirement: no mortgage, no saving for retirement but it is flawed in that it does not account for other expenses that may appear as a result: more travel, higher healthcare/aging costs.
I’ve included some of those considerations and more in our own Financial Independence Budget since I use a pretty robust inflation factor and conservative rate of return given we are close to 90% stocks and 10% fixed income/cash equivalents at the time of this update.
Retirement Numbers and Rules Summary
These are interesting rules of thumb but the most important work when it comes to determining your retirement number is figuring out what you’ll spend in retirement, and when.
Life can and does change.
So, consider my free playbook to guide your decision-making.
No course fee or newsletter to pay for below!
Without estimating your annual retirement expenditures and then revisiting those income assumptions year-after-year, I believe you can throw most retirement numbers and rules out the window – although these are decent starting points.
We have determined our financial independence budget that will begin later this year (2025) or early next year (2026). You will certainly need to determine yours too and I am happy to help anytime.
Any retirees out there want to comment? What rules of thumb did you start with to estimate your “retirement number”?
Mark
Want to your own low-cost retirement income projection?
Just reach out! I offer discounts when you do as a My Own Advisor reader for services that cost literally thousands of dollars less than the alternatives.
I am happy to offer discounts to DIY investors, by a DIY investor – anytime. 🙂
Check out my work along with my partner Joe at Cashflows & Portfolios.
My partner and I have been using various retirement projection tools over the years for our personal retirement income journeys and now we’re using these tools to help readers, DIY investors like you, with your personal retirement projections. We will answer your key retirement income planning questions like:
- Do you have enough to retire with your current lifestyle/spending?
- What will be your estate value based on your spending plans?
- Amongst your pension(s) or RRSPs or TFSAs or your taxable accounts, what accounts should you tap first to smooth out taxation impacts over time?
- Should you take CPP or OAS at age 65 or 70?
- And more!
Again, contact us anytime to learn more and get started.
Other popular case studies:
How much do you need to retire on $5,000 per month?
What you need to retire on $6,000 per month?
Mark
Mark
My name is Mark Seed – the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I’ve reached financial independence. Now, I share my lessons learned for free on this site. Find out what I did and how I reached financial independence to tailor your own path. Join the newsletter read by thousands.
