Jun 24, 2019
It’s a question that we get asked daily.
I remember growing up, people used to say, you need $1,000,000. Reach this amount and you have enough to retire.
Well, the reality is things have changed; and as you may know, there’s a lot of different types of pensions that exist.
Some retirees require additional money for extensive travelling, snow birding to the USA/Mexico or just to spend funds on kids or grandchildren.
Another important factor is that people are living a lot longer than in the past.
With such a variety of factors that impact a person’s need, we strongly believe at the Tetrault Wealth Advisory Group, there is no “one size fits all” approach.
Let’s analyze a simple retirement math strategy for you folks with some basic assumptions.
Let’s start with the individual who has no pension, who’s been living their life as an adult and earning a $100,000 per year.
This said person is living on $100,000 per year and now decides to retire.
One very general concept we can use is the assumption that this person will require 70% of their pre-retirement income. Now they need to get about $70,000 per year in retirement.
If we use what I refer to as the “Back of the napkin math” and take an assumed 5% annual withdrawal rate, this would mean they require $1.4 million accumulated by the time they’re 65 in order to retire.
Of course, your portfolio will hopefully generate additional dividends, income and growth as well.
If you have a good portfolio manager you can draw down at that rate.
If you are fortunate enough to have a “defined benefit pension”, you will likely have a large portion of your cash flow needing looked after, however there may be additional funds still required.
Let’s do some quick math. (*Financial Calculators)
For someone who’s getting $40,000 a year in future pension income, you’re simply contrasting the number you need at retirement with the pension and you’re funding the difference, with your registered or your non-registered assets.
In this case, an additional savings of $600,000 to fund the $30,000 difference at the same 5% withdrawal rate.
One of the major keys to a successful retirement is “Retirement Financial Planning”, and the earlier you can start the better.
Those scenarios are certainly a way to simplify something that is not always simple. Everyone has different needs, different lifestyles and different goals.
You may ask, “How much money do you need to retire at age 55?”
Perhaps you want to fund additional expenses, leave a legacy, or even charitable giving.
We want to ensure all your unique goals and objectives get built into your financial plan, because there is no cookie cutter answer to how much you need.
If you do have legacy needs, want to leave a specified amount to your beneficiaries or charity, where will this money come from and will you have the additional capital needed to accomplish this?
Let’s look at another scenario we come across often.
You have a husband, wife, who have been living their entire life on two significant salaries. This hypothesis assumes they are each making $250,000 for a $500,000 pretax income.
Occasionally, we get this high-income earning couple saying, “Oh we can live off $50,000 in retirement…”, but previously they were living on a $500,000/year lifestyle.
That is a drastic change!
We take a long, hard look at their budget and though this step is far from exciting, it’s important to know the income would be enough for their expenses.
Other factors can arise:
It’s crucial to look at your true cashflow needs because what is retirement actually?
It’s where you are drawing a cashflow from your pot of assets to replace your salary/income you previously had while working.
Now you’re going to be drawing down an income from the pot of assets that you’ve accumulated that needs to be done in the most tax efficient way possible. This needs to be done in a way where you want to enjoy and spend money, but also gives you the peace of mind that you will not outlive your financial resources.
At the end of the day, retirement planning is truly a cashflow projection.
If you’re not sure where to start, you can start using a 5% number based on the cash you’ll need at retirement and multiply this figure by 20.
If you need $100,000 to live at retirement, you can multiply that by 20 = $2,000,000. That’s using a 5% rate, no taxes factored in.
Of course, this is not an all-inclusive example.
At the Tetrault Wealth Advisory Group, we have a dedicated Wealth & Estate Planning Specialist, who will work with you to address all these concerns and work with you to plan for your retirement income that meets your unique goals in the most tax efficient manner.