Monday, February 3, 2014

Working Out Your Retirement Magic Number

How much money do you need to save to retire? This is an important question that gets a lot of debate but few useful answers. We hear arguments over whether a million dollars is enough, as though there is a single number that applies to everyone. Here I offer an answer based on a proposed retirement spending strategy that takes into account your unique circumstances.

Lately, I’ve been writing a fair bit about a proposed strategy for retirement spending in retirement (first description, adding income smoothing, yearly spending percentages, experimental results using 100 years of investment returns). The focus was on turning a lump-sum portfolio into an income stream for retirement. But we can turn this around and calculate how much you need to save to retire using this spending strategy.

I added another page to the spreadsheet that computes the percentage of a portfolio that you can spend each year in retirement based on a set of inputs you supply. (To edit this spreadsheet, you need to go to the “File” menu and “Make a copy”.)  I added a second page to this spreadsheet that collects some more inputs from you and calculates your retirement magic number. I threw in some example figures, but you’ll have to change the values in the yellow boxes to customize it to your own situation.

The spreadsheet’s example figures are based on a couple seeking after-tax retirement income of $6000 per month (rising with inflation). They plan to retire at 55 and will collect $2000 per month in other income (rising with inflation) starting at age 65. Once retired, they plan to keep 5 years’ worth of spending in safe investments, and the rest in low-cost index stock funds that they hope will beat inflation by an average of 4% per year. Their target life expectancy is 100. Their retirement magic number works out to $1,636,000. So, for this couple, a million dollars isn’t enough. Your mileage may vary.

As with any retirement planning exercise, a challenge is to add the right amount of safety margin. I find that some people in their 30s tend to think they can get by on a very low income. While I could go back to living on $2000 or less per month, I don’t want to. I meet few people over 50 who find that their low spending in youth suits them now that they’re older. It’s certainly true that many people of all age groups waste money in ways that don’t really improve their lives much, but I think it is also true that older people have less capacity for ultra-frugal living than the young have.

As always, I’m interested in feedback on these ideas, particularly if you see any problems. I hope this spreadsheet helps some people, but as always, I can’t guarantee anything about the results it produces. Think for yourself.


  1. Nice addition to your spreadsheet Michael. I don't see any problems with your spreadsheet, I think it models your candidate retirement strategy nicely. It backs up and provides a more detailed foundation for a safe withdrawal rate of 3-4%

    A nice addition would be the ability to do the reverse calculation- plug in portfolio size and see what your spending could be if you had that much saved. I like to think about if I could live on my current savings if I didn't do any paid work.

    1. @Greg: The withdrawal rate starts in the 3-4% range, but increases with age. For someone who wants to maintain portfolio purchasing power all the way to death, a different plan is needed.

      It would be easy to add what you're asking for to the first page of the spreadsheet; just multiply portfolio size by the percentage beside your retirement age. I may add this at some point, but for now it's left as an exercise for the reader :-)

  2. I personally like a 'go-forward' approach, determine what your spending might be in retirement and build the model forward.

    In a few posts on my site, last year, I stated $4,500 (or $54,000) in after tax money is needed to retire in 2013 dollars.

    This is assuming I have no mortgage payment or any RRSP contributions during retirement.

    Factoring in an inflation rate of 2% between now and over the next 17 years, just for fun, that makes 2030 as my first full year of retirement and that $54,000 really costs about $73,000 in the future.

    I figure I need capital of around $2 M spinning off 3.5% dividends and distributions to cover those expenses. Capital gains should cover inflation, but then again, who really knows.

    I'm not sure I could live off of $2,000 per month. In another 20+ years, there is no way I could.

    Good work with the spreadsheet, I'm sure it will help people.


    1. @Mark: Taking inflation into account properly puts you ahead of many investors. Using a 3.5% withdrawal rate to start is quite reasonable. As some of the stocks don't perform up to standard over the years, you'll have room to dig into the capital portion of your portfolio.

  3. Hi, thanks for a helpful article. If I understand your intent correctly, you may have an error in the calculation for increased capital to make up for $2,000 per month shortfall between 55-65. I think you used a yearly interest rate but monthly draw in your PV calculation.

    1. @Anonymous: You're absolutely right. It's fixed now.

  4. Hi. I've been playing with your Withdrawal Rates/Retirement Magic Number spreadsheet. One question: does the "Retirement Magic Number" include or exclude the amount in the HISA?
    I really appreciate your blog and the work you do to help others.
    Thx, Kim

    1. Hi Kim,

      I'm glad you're getting use from the spreadsheet and are enjoying the blog. The Retirement Magic Number includes the amount in the HISA.