Finally, your magic number

Don’t know how much you’ll need in retirement savings? Try this free calculator

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by

From the April 2015 issue of the magazine.

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MONY02_APR2015-BOOK.indbI have a confession to make: I’m 44 years old, just 20 years away from retiring, and I have hardly any savings in my RRSP. Before you demand that I resign from MoneySense for incompetence, I should tell you that my retirement plan is 100% on track. In fact, I’ve just run my calculations through the world’s most sophisticated online retirement calculator, and it says I’m going to be just fine.

The software program I used is called ESPlannerBASIC, and it has just been made available to Canadians—for free—through a partnership between its creator, legendary economist Laurence Kotlikoff, and Jack Mintz of the University of Calgary’s School of Public Policy. It’s an elaborate financial projection calculator that allows you to enter the details of your particular situation, such as your age, your salary and when you hope to kick off your golden years. It then calculates how much you need to save each year, what your nest egg will be worth and how much you’ll need to live on. It automatically factors in Canada Pension Plan and Old Age Security payments, and also accounts for mortgage payments, your spouse’s income, taxes and other factors. It’s very, very cool.

One of the most interesting things about this tool is that, unlike your financial planner, it doesn’t ask you what kind of income you want in retirement. Instead, it tells you what your income should be. Sounds a bit presumptuous, I know, but as Kotlikoff explained to me last week at the calculator’s Canadian launch, there’s a simple but revolutionary principle at play here.

That principle is called “life-cycle consumption smoothing” and it holds that the key to effective retirement planning is to try to keep your standard of living as consistent as possible for your entire life. In other words, you don’t want to live it up while you’re working—spending all your money on fancy clothes and expensive cars—only to retire into poverty. But neither do you want to scrimp and save your entire life so you can live like a king for a decade or two before you die.

I agree with this approach to retirement wholeheartedly, because it allows you to cut through the twaddle you get from retirement industry types who have a vested interest in prompting you to over-save. For years now, some investment firms have been irresponsibly advising Canadians to aim for a retirement income as high as 80% of their working income, even though study after study shows that’s too high for most people.

The truth is you’re never living on 100% of your income—there’s always a certain portion that has to go to taxes, your kids’ education, the mortgage and other fixed expenses. During our prime working years, those expenses are particularly high, so most of us live on something like 40% of our pre-tax incomes. Those expenses drop once the house is paid off and the kids move out, so when you retire, you can live on a much smaller income, but still have the same standard of living or better.

This calculator takes that into account, so if you’re worried you’re not saving enough, head over to canada.esplanner.com to give it a try. In my case, the tool found that because I have an excellent defined-benefit pension at work and I’m currently trying to pay down a big mortgage, I’ll be just fine if I put off any serious RRSP contributions for a few years. I still plan to power-save in my RRSP once my mortgage is under control, but it was a big relief to see that I’ll be just fine even if I don’t. I’ll bet you’ll feel better after you see the real numbers too.

 

23 comments on “Finally, your magic number

  1. LOL, I laugh at your silly calculator that limits it to 50 and over.

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  2. Link doesn’t work.

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  3. I tried it and the detailed breakdown calculations were so nonsensical it wasn’t worth my time to contact the creators to alert them. Perhaps it needs a lot more testing with early retirees scenarios.

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    • Agreed.

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    • Agreed, I went so far and stopped because it was a time waster – I didn’t see the value it was going to provide because of the narrow pigeon holes! It does not allow for retirement at 55, which some of us have the privilege of doing. And there is no flexibility, or perhaps it is clarity of instructions, with regards to additional assets (cabin) Florida home, loans (car), etc.

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  4. Calculations are not clearly explained. What do the Savings numbers mean? Child year of birth on school calculation does not go back far enough.

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  5. Tried the calculator but it appears to be buggy. Set my spouses income this year to zero and his income the year before retirement to zero as he is unemployed and the calculator gave him $70K in income for the current year?? And no CPP although I entered the value. The website was not helpful.

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  6. I recently had a retirement review with a fee for service RFP as we are in our mid 50’s and find these calculations oddly incorrect. For some reason the program is dumping over $99000 in as CPP/OAS at my age 65 year and $110000 into my husband’s CPP/OAS. This is nuts since we would not get this amount in our cumulative lifetimes! based on a recent calculation with an RFP using our actual CPP histories, we will be getting between 65 and 72% at max, due to drop outs. As well, because we intend to use his joint last survivor pension option, I don’t see why we need any life insurance at all. In fact, our RFP confirmed that with our accumulated assets and sources of income we are doing exceptionally well and will be able to live on our current spending pattern comfortably. I track our spending religiously so know exactly what we spend and on what.

    Good try, but this little program is a ‘Beta’ version at best.

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  7. After three attempts at using – I received a long, long list of what appeared to be complaints that I did not give enough information, even though I filled out each frame completely – not worth the effort to try it again. The complaints were in a red box with a red X in the top left corner

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  8. These types of calculators that only set a company pension as DB, as in estimated monthly pension income, don’t work for the majority of Canadians that are on Defined Contribution plans in the private sector. (If they have any plan at all) I agree with the other comments about if being confusing. I got to the end and wasn’t sure what it was telling me.

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  9. I ran a quick check against my own spreadsheets and planning tools (monte carlo and deterministic estimations) and it did come out quite close to my own calculations. It looks interesting and I will be looking at it more closely.

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  10. Very strange. It allocates $115K in income from CPP in the first year of retirement, then a mere $395 for each following year. It does not estimate OAS clawback levels nor does it show mandatory RRIF withdrawals, as far as I can tell. The current income tax calculation is way off: $37K on $95K income?! Or are they including other things like property tax, GST, etc. Perhaps worst of all … it’s not secure in any way (no https). I’d feel much safer using a spreadsheet. There are many available. I like David Trahir’s.

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  11. Poor excuse for a retirement calculator. Best one I have ever used is the Canadian Retirement Income Calculator. It can be found at the gov’t of Canada web sight. http://www.servicecanada.gc.ca It will even tell you how much of a claw back you will have on OAS. Easy to use.

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  12. I had all my numbers ready, and its not very specific! How about other investments, like recreational property, or paying off your primary home early? This was a waste of time, sorry!

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  13. I agree that retirement funding should be based on expected expenditures not percent of current salary that funds big buck stuff like work lifestyle, mortgage and kids schooling. Tried the calculator, result = 10 minutes of my life that I will never get back. Nothing magic here.

    This thing is something that only a PhD could come up with and think that it makes sense, it definitely does not make much sense to me.

    Some examples: Only allows RRSP draws starting at age 62, so much for Freedom 55. The tables are weird and unexplained, asks for inflation but does not show where it is factored in. Asks for estimated CPP/OAS, you enter combined but result adds on the OAS automatically. so over stated. Tax rate seems ridiculously high. Capital on open investments seem to deplete but does not show why.

    Thanks but will stick with my Excel model, it has clarity and is based on accepted mathematics and common sense. I can also change the variables and see the effects.

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  14. I am in my 30s and currently earn ~$70K/year and save $20K/year. I spend $17K/year on rent.
    The calculator says my savings rate should be $3K/year, and my retirement income should be $15K/year, less than what I currently spend on rent.
    I did not find this useful.

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  15. This “calculator” does not even remotely work.

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  16. Been retired ten years,,Here is what you need for a happy retirement ..#1 Good health. .Don’t got that .What else really matters.? .# 2 The roof over your head be it ever so humble .OWN it No mortgage ..No renting Own it.. #3 Make yourself happy ..Don’t look to your kids/Spouse whatever ..Wake up and be grateful that you lived this long /Healthy ..Never ever let anyone drag you down ..Be your own best friend..

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  17. Interestingly enough, I found this article after writing a blog post about the same thing (http://dividendgangster.com/2015/06/07/investing-roadmap-part-2-how-much-do-you-need-to-retire/). “Life cycle consumption spending” is a common sense approach: what do I need at retirement to live the way I do *today*. Looking at it any other way (e.g. pauper now, prince later; or prince now, pauper later), is simply short-sighted and bound to bite you in the end.

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  18. I’m 48, I have two Government pensions, no debt, RRSP’s and TFSA’s; I was told that I need to save an additional $27K/yr. Soooo, one of us is doing it wrong, Duncan.

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  19. If I could save $28K a year (as recommended), I wouldn’t be concerned about retirement calculations.

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  20. Best online retirement calculator? I think not. Does not differentiate between DB and DC pensions, only has entry for DB, which is almost non existent in the private sector now. I entered my DC pension current value as additional RRSP which should be accurate from a tax viewpoint, but I’m guessing most people who will be using this calculator don’t have the financial knowledge to make that kind of conclusion themselves.

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