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Jenna's quick calculations show she'll need $2 million in savings. Is that really true?
So I’m going to compare the results of non-scientific calculations to the results obtained using professional financial planning software. This way, we can see the differences, check if you’re on track, and hopefully get you feeling good about your retirement.
Let’s start with some quick calculations. You’re trying to get to $70,000/yr. of gross income from age 65 to 100, or 35 years. By the way, $70,000 of gross income is about $56,000 a year after tax.
If we do some quick calculations to figure out how much money you’ll need to save by age 65 we might follow this thought process: With the new CPP rules, your combined CPP and OAS will be about $32,000/year at age 65, assuming you work to age 65. That means you only need to save enough money to provide you an additional income of $38,000/yr. for 35 years. That makes sense, right?
In your case, you are planning for a 35-year retirement so we just need to multiply 35 years by $38,000 for $1,330,000. Assuming no growth, no tax, and no inflation, you’ll need $1,330,000 by age 65. That’s already a lot better than your $2 million dollar figure.
It gets better. Today, you already have $200,000 saved and you are saving $20,000/yr., so over 31 years, between now and age 65, that is ($20,000 x 31) + $200,000 = $820,000. Again, no investment growth on the money. That’s not so good because my quick calculation showed that you need to save $1,330,000 by age 65 and you’re only going to have $820,000. You’re about $510,000 short! How are you going to make that up? Don’t panic though.
Let’s now take a moment to look at the results you’d get using financial planning software.
Let’s assume:
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