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You’ve heard it before!  You should ‘pay yourself first’.  We often hear 10% is a good start.  Where does that number come from??  Let’s test it out with an example!

Jane is 30 and earning $60,000 a year, and she’ll pay about 20% in tax (that’s $12,000).  Jane now has $48,000 to spend!  She manages to save just over 10%, or $5,000, each year and places it in her TFSA.  If her income stays flat for 30 years, if we use a steady 4% rate of return (in reality markets don’t move in such a steady fashion), Jane will have almost $300,000 at 60 (see link to calculator tool below).   Using a slightly lower rate of return of 3% in retirement, this level of savings will only provide her with $1,250/month to age 90.  Combined with say $1,000/month in government benefits, Jane could generate income of $27,000/year.  The hope of course is that her income will indeed rise over time to help her manage inflation, and her savings rate will rise even faster, to facilitate a more comfortable future.

Let’s say Jane wants an annual income of $30,000.   She would need to get her investments up to $360,000 by either saving more or taking a little more risk during her working years.  This will allow for withdrawals of $1,500/month to age 90 (assuming a return of 3% until age 90) when including the same $1,000/month in benefits.

The conclusion?  Following the 10% rule likely won’t serve Jane very well!  Saving $5,000 / year is certainly a good starting point though.  What is your current level of monthly saving?  Do you increase it each year?  Make sure you have a plan that works for you!  If your planner is doing their job, you should be well on your way to getting to where you need to be.  Post your comments below or email for further assistance!

Check out this really helpful 3 minute video for other scenarios, and some helpful infographics:

A useful calculator:

There is 1 comment
  1. Rahim

    A persons individual yearly expenses plays a significant part in how much is required for retirement:
    – Person A has yearly expenses totalling $40,000 and requires $1,000,000 to safely retire off the income generate by this money without jeopardizing the capital amount.
    – Person B has yearly expenses totalling $20,000 and requires $500,000 to safely retire off the income generated by this money without jeopardizing the capital amount.
    As you can see lowering your yearly expenses makes a drastic difference in how fast you can reach your retirement goals. It’s more important then achieving higher investment returns.
    In both case, it doesn’t matter if they live to age 80, 90, 100, etc… The principal amount is not in jeopardy.
    The principal amount can be given to their family/friends/charity at death.
    4% yearly return on investments is a very reasonable value and is widely used.

    RK, Senior Mustachian

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