Doing it yourself

Retirement

The most common question we get is, “How much money do I need to retire?” We usually respond with another question: “How much money do you need to spend each year?”

The answer to that question – and the answer is entirely up to you – is the critical ingredient when it comes to formulating an answer to the original question. We cannot tell you what sort of lifestyle you want to lead. That is inevitably your personal decision. Some people are happy with a paid for house and $2,000 a month to spend. Others insist that $100,000 a year is what they really want. You must decide what's right for you.

Once you have done that, a ballpark estimate for how big your portfolio needs to be isn't too hard. First, if the estimate you have made is after tax spending, you need to bump it up a little to get back to pre-tax figures. Adding 25% is roughly right; you can refine your estimate by using Ernst and Young's tax calculator.

Now deduct what pensions you will receive in retirement, because your portfolio won't have to produce that income.

The historical evidence is that you can take roughly 4% from the starting value of an investment portfolio, raising it each year by the inflation rate, without running into disaster. History is not a perfect guide to the future, but barring nuclear war, natural disasters, or complete economic collapse, 4% should be your guide.

A simple example: Mr. Magoo wants $40,000 per year after taxes to spend in retirement. Before tax, it's about $50,000. CPP will pay $6,000, OAS $5,000, and his company pension $11,000 per year. His portfolio needs to generate $28,000 per year in retirement. At a 4% withdrawal rate, his portfolio should be worth at least $700,000.