My wife and I have an audacious goal: to retire at the age of 50. It won’t be easy, and it definitely won’t happen without a bit of sacrifice. But how do you know when you’re financially ready for retirement?

The Secret to Retiring

Are you ready for this? The secret to retiring is to spend less money than you make. SHHHH DON’T TELL ANYONE.

Alright, so it’s no secret. But why, then, do 90% of Canadians have no idea how much money to save or how to get there?

Look, at a basic level, spending less than you earn is pretty easy. If you currently live paycheque to paycheque, you have two options: you can make more money, or you can spend less on stuff.

Of the two, spending less is the path of least resistance, as far as I’m concerned. Think about it: in order to save $100 a month, you need to spend $100 less per month on stuff. On the flip side, if you want to save $100 per month by making more money, you need to make an extra $200 per month to get there.

Why?

Because taxes eat a good chunk of your new income, and lifestyle creep will probably eat into another chunk. When you make more money, you’re probably going to start thinking “Hey, an extra bottle of whiskey this month is doable, I deserve it.”

Not talking from personal experience or anything…..

Anyway, yes; spending $100 less means you have to make a few choices about what you’re not going to buy. But it’s worth it, and you can start today.

So what’s the magic number I need to get to?

Well, there’s no one magic number – it’s different for everyone. But I can give you a formula of sorts to help you figure out roughly how much you need to have saved when you’re ready to retire.

Let’s start with the income you want to have at retirement. If you already have a specific number in mind, great. Many don’t. If you fall into that category and want to at least maintain your standard of living as it stands today, a good estimate is around 80% of your household income today. The reason it’s 80% and not 100% is that you’ll likely have fewer expenses when you retire – ideally, your kids have moved out, you have no mortgage, and you’re not spending money commuting to and from work every day anymore.

An Example

Alright, now for simplicity’s sake, we’re going to make a couple assumptions during this example. For one, let’s assume you want a household income of $100,000 when you retire. Sweet. Secondly, let’s assume that you want to live exclusively off the interest your money makes, so that you could live to 150 years old and still have money in the bank. Why? Because eating into your principle is like playing a game of Russian Roulette: you might have enough money to live until you die, or you might not, and then what?

Our third and final assumption is that you’ll make a very reasonable 5% return on your investment in retirement. You can’t afford to take the risk of having all your money invested in the stock market in retirement, and importantly, you need to invest in dividend-paying investments in order to be able to draw an income easily each month. Current rates of return for investments that fit this bill are around 5%, so that’s what we’re using.

Ok, let’s recap: you want an income of $100,000 a year, paid exclusively out of interest your investments earn, which stands at 5% a year.

So if $100,000 represents 5% interest on your savings, how much do you need to have saved when you retire? Well, to get there, you just divide the retirement income you want by your interest rate in decimal form. So in this case, it’d be $100,000 / 0.05. That gives you a savings goal of $2 million. Want to have $150,000 a year in retirement? You’ll need to have $3,000,000 banked.

You get the idea.

So how much do I need to save each month?

This one’s a little more complicated. It depends on a few factors:

• How much you already have saved up
• The average annual return your investments make
• How many years you have left until retirement

There’s no easy way to explain, other than to say that the longer you have to go until you retire, the less you have to save each month. It’s the power of compound interest, which I’ve written about in a previous post.

Let’s look at an example to give you a rough idea of how this works. Say you need to have $2 million saved up at retirement, and you have 25 years until you retire. Let’s also assume you’ll earn an average annual return of 8% on your investments during that time, and you currently have nothing saved up.

In this example, you’ll need to save around $2,100 per month to retire when you want to, with the income you want. But what if you already have $100,000 saved? In that case, you would only need to save $1,332 per month.

I know, it’s not exactly straightforward. Luckily for you, I’ve created a super-easy tool that will calculate for you exactly what you need to save each month. To get it, just sign up for my newsletter list, and I’ll send it to you as a thank-you 🙂

Wrapping it Up

Look, I get that personal finance and investments isn’t as exciting for everyone else as it is for weirdos like me who have a natural passion for it. But one thing we all have in common is that we don’t want to work our whole lives. We all want to retire as soon as possible.

And guess what?

The only way to get there is to spend less than you make, and start saving. You can do it on any salary. The important thing is that you get your head out of the sand and stop pretending like it’s a problem for future you. Because if that’s the route you take, it will be, and future you isn’t gonna like it one bit.