How to calculate your retirement number
Canadian boomers are falling behind when it comes to meeting their retirement goals, suggests a new study.
Most feel they’ll need a nest egg of about $658,000 to feel financially secure in retirement, but have so far only set aside something closer to a third of that, according to Bank of Montreal research.
What’s worse, almost three quarters of them are so worried about this shortfall that they expect to end up working part-time right after they officially retire.
But don’t hit that panic button just yet. The truth is, the savings target they’re hung up on may actually have very little to do with you.
Rather than focus on one magic number, financial planner Charles Farrell suggests you’ll be much better off measuring yourself against some key ratios if you want to avoid problems down the road.
It's crucial to understand how your income, savings and debt are related, and how the ratios must change sharply over time if your retirement is going to play out according to plan, says Farrell, the author of Your Money Ratios: 8 Simple Tools for Financial Security.
Financially healthy families and individuals’ situations will look quite different at different ages, so it's important to review guideposts such as debt-to-income and savings-rate-to-income to see if you’re on track for a healthy retirement.
Your debt-to-income ratio, for instance, compares how much you owe with how much you earn. The lower your ratio, the more you have to save or spend on other things.
Generally, a ratio in the mid-thirties is considered to be the threshold. Lenders prefer people with considerably lower ratios, preferably in the teens, so that’s where you want to be early in life if you can.
Your retirement replacement ratio — the percentage of pre-retirement income you’ll need to live well in your later years — seems to have crept up over the years. But the typical range is in the 50 to 70 per cent range, so consider splitting the difference.
Looking to replace 60 per cent of your family's pre-retirement income at age 65? Farrell suggests that everyone, at every age, should save 12 per cent of their income annually. In his calculations, that figure doesn't change, but the amount of savings accumulated relative to household income clearly does.
He expects 30-year-olds to have 10 per cent of their income amassed in savings, including retirement plans. The money you’ve set aside at ages 40, 50 and 60 should be 1.7 times income, three times income, and 8.8 times income, respectively.
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