The Easiest way to Plan for Retirement

Some people say the money is no better when we retire, but the hours are! But how much money is enough to retire on? Retirement planning can sometimes be difficult if we don’t know where to start, or how much to save.

So today I’d like to simplify the process and break it down into two commonly asked questions. Answering both these questions will determine if you are either on the right track to retirement or falling behind. You can use the handy retirement calculator further down the post to find out. Let’s start with the first question.

How Much Money Do I Need To Retire?

Assuming you’ll retire at age 65, here is the formula to figure out how much money you will roughly need to have saved up by the start of your retirement. By “money,” I mean investable assets which include your retirement accounts, investment properties, stock portfolio, annuities, etc.

 [1.019 ^ Number of years left until retirement] x [25 x (Current Annual Expenses – $14,000)] = Total Savings Needed to Retire

So for example, imaginary Laura is 40 years old and spends $30,000 a year. She wants to find out how big her investment portfolio will need to be when she eventually stops working 25 years from now.

[ 1.019 ²⁵ ] x [25 x ($30,000 – $14,000)] = $640,345

Using the formula Laura would need to have $640,346 saved up by 65 years old to retire. For couples and families, simply use the total annual household expense and replace the $14,000 figure with $25,000 instead.

This brings us to the second common question everyone wants to know:

How Much Money Should I Be Saving Each Year?

Laura has amassed an investment portfolio worth $100,000 so far. She currently saves $5,000 a year by making automatic contributions to her retirement account, but is it enough? She knows from the first formula that she needs $640,346 to retire by 65. She can use the following formula to calculate how much she needs to actually save per year.

0.05 x (Total Savings Needed to Retire – Current Savings Amount x 1.05 ^ Number of years left until retirement) / ( 1.05 ^ Number of years left until retirement – 1 ) = Suggested Annual Savings Rate 

Alas, it appears saving $5,000 per year is not enough for her since she’ll need to save at least $6,322.

[0.05 x (640,345 – 100,000 x 1.05²⁵ ] / [1.05²⁵-1] = $6,322

Use the following spreadsheet to experiment with your own retirement numbers. 

Download Freedom 35 Blog’s Simple Retirement Income Calculator Excel File. It has both formulas in it. 😉 (Alterative .ods version.)

Laura decides to increase her retirement contributions by $150 every month, bumping her total annual savings to $6,800. It’s important to make these changes early because increased savings will translate directly into decreased spending. If she can live on less money now then she will also require less savings to retire on in the future. Well done, Laura! 😀

So there we go. Two common personal finance questions answered with the help of some basic math. 🙂 Plug in your own numbers to determine how much money you need to retire, as well as the rate of savings needed to reach that amount. This knowledge will then allow you to figure out if you’re currently saving enough, or need to increase your retirement contributions like Laura did.

It’s important to realize that both formulas in today’s post only offer ballpark suggestions. The results have to be taken with a huge slab of Himalayan salt. I’ve assumed 1.9% as the annual inflation rate, and a fairly conservative 5% annual return on all investments going forward. The $14,000 pension adjustment in the first formula is a calculated estimate based on the average combined income of CPP and OAS benefits, which is $12,500 per Canadian pensioner, and S.S. benefits of $16,000 for the average U.S. retiree.

Other factors which can affect how much you need to retire in Canada or the U.S. include changes to tax policies or your marital status, your investment knowledge, employment history, retirement age, insurance requirements, and much more. Feel free to alter the equations in any way to meet your own personal criteria or set of assumptions. There’s no right or wrong method. It’s really up to you and your relationship with money. But hopefully, these basic formulas can offer a rough guideline. 🙂 Do you feel like you’re currently saving enough for your retirement?

On another note, I feel like I’m getting some new readers thanks to my friend Jessica who runs a podcast on her site, momoneymohouses.com.

If you’re finding me for the first time I blog about financial management, economics, investing, and other things they don’t teach in schools but probably should. I recommend starting with the best posts section. Thanks for dropping by my site and I hope you enjoy your visit. 🙂

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