# 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 1.05** ^{25 }**] / [1.05

**-1] =**

^{25}**$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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**Random Useless Fact:**

## Leave a Reply

24 Comments on "How Much Money Do I Need To Retire?"

Hmmmm … what about inflation? Also, I think retirement is 67 now 🙁

The formula assumes a 1.9% annual rate of inflation going forward. 🙂

You might have more realistic values if you swap the two numbers: 5% inflation and 1.9% returns.

Well, now I’m depressed. I’m not saving enough based on the fact I want to spend and travel when I’m retired. And to retire early at that. D’oh.

Maybe you can rent out your home and use the rental income to live abroad. 🙂

I think I’m getting savings fatigue.

Take a break from savings. 🙂 You are already well ahead for your age group. 🙂 Plus you can also trade options when you retire to supplement your income.

I never had too much problem with the saving part since I started early.

The investing part was a little trickier for me. I wasted a good 20 years before I finally understood what I was doing 🙂

Better late than never. 🙂

I am definitely not saving enough yet… but I was already well aware of that fact… I increased my RRSP contributions last month, so now I just need to double them… and learn to spend less…

Saving for retirement can be easier said than done. It’s also important to plan out what you might be doing once you retire. Retiring from work sounds great but it’s often better to have something to retire to. 🙂

I think I’m saving enough for retirement. What is actually harder for me to figure out is how much I should put in retirement-designated savings vs. other savings, especially if I’m looking to withdraw early for FIRE.

Yeah, that’s a difficult pickle to figure out. The formula in my post only works for those who plan to retire at, or around 65. Retiring in someone’s 30s or 40s will be very different because government pension support doesn’t kick in until much later. 🙂

Liquid, question after hearing the podcast.

How do you manage to coordinate the whole deal during the day, calling lawyers, bank, appraisers when you work business hours, teach in a college at night, tutor side hustle, and write so much content on this site?

Do you have any opportunity to travel?

Yes, my work allows for 3 weeks of paid vacation each year, which is nice. I visited San Francisco earlier this year to see some friends.

This may be a dumb question but what is the ^ symbol?

Sorry for the confusion. The ^ symbol is an exponent, or to the power of something. So for example, 2^3=8. I’ll clarify this in the article as well. 🙂

[…] Freedom Thirty Five blog revealed the best way to plan for retirement. In addition, Michael James detailed what you should do with that retirement money and how spending […]

I need to save – $8,184 a year… O_o

Or should I say, spend $9000 more per year. LOL.

I did this exercise quickly when you published this and just got the same result of like… $4,000 a year. Do that mean I can spend more??

You’re ahead of the game. Given your combined household income you can definitely spend more today to balance out your long term life time expenses. You’re only young once, after all. I’ve pulled back my savings from 30% of gross income years ago down to 25% now.

[…] great, simple retirement calculator spreadsheet & check on reaching that goal. My numbers came out as expected; $1.5 to retire & I am well ahead of the curve (need to save […]