I’m in a place where I’ve spent the last 10-12 years saving like a chipmunk before an ice age. I’ve been fortunate and have a decent chunk saved up. I’ve got another 15-20 years of work ahead of me but want to find a bit more balance between saving and living during that time.
How does one forecast retirement targets vs current value? In other words, how can you calculate when it’s ok to decrease retirement savings without compromising too much?
Here’s an idea. I’d be interested to know if it makes sense. Let’s assume the 4% withdrawal rate from another comment. Let’s use some numbers for illustration. Let’s say you want to spend $50,000 each year without working. You’ll need to earn between $55 and $60,000 before taxes, depending if it’s coming from RRSPs or interest or dividends. Let’s assume $60,000 pretax. At 4% withdrawal, that requires $1,500,000.
If you’re not at your target ($1,500,000) yet, keep spending your usual amount ($50,000) and save as much as you can. Once you reach your goal, if you’re still working, increase your spending to match the sustainable amount (4%). Let’s say you earn $120,000 after tax. In the year after you reach your capital goal, you spend $50,000 and save $70,000. Let’s say your investments grow by 5%. The following year you’ll have $1,648,500. So you spend $52,224 net ($65,940 gross) and you save $54,060. Because from now on, you can spend $52,224 after tax every year.
If you work another year, your capital will grow to (assume 5%) $1,787,688 and you can spend $56,634 net ($71,507 gross) sustainably. This would be one way to view your goal, reassess each year and adjust for changes in cost of living and lifestyle creep. It’s something I’ve thought about, but I’m far from implementing. Does it make sense to you, OP? Do other readers have feedback?
Depends on what you plan to do with retirement.
I plan on working until I can’t walk no more, like Joe Biden.
So I’ll do all the experiences as I go. Save for the things I need as I go, and invest the rest asi go.
You’re looking for what’s typically termed financial independence. There are many blogs on the subject, Mr Money Moustache is one of the most popular, and I like Millennial Revolution for their Canadian flavour. You’ll find quite a lot of information there (MR’s investment series is quite informative).
For a broad forecasting assumption, a 4% safe withdrawal rate is common, which means you can withdraw 4% of your portfolio on any given year with a high probability that your portfolio will outlive you. That essentially means you need to save 25x your annual spending (in retirement).
There is so much nuance to it it’s easy to get overwhelmed. Early Retirement Extreme has a series diving into the math and probability of withdrawal rates, with a multitude of simulations. There’s FIREcalc, which can help with planning but can get complex.
To make it simple, I’ve not put hard limits or goals on savings. Disciplined spending will get me there. Invest in low-cost whole-market index funds, don’t put too much pressure on yourself, and enjoy the journey.
