A Retirement Calculator That Makes Sense

Retirement planning experts roundly agree that you should have at least 30 years’ worth of retirement funds available to you. People are living longer, working later into their lives, and increasingly in need of expensive medical care as they age.

Effective ways to stretch your retirement funds 

If you find yourself well shy of the 30 years’ worth of retirement funds figure, it's time to reassess your financial plan and make the appropriate changes. There are several ways to tackle shortfalls in retirement, each of which requires a degree of sacrifice. 

For example, cutting annual expenditures during retirement will increase the longevity of your retirement funds. Alternatively, you could contribute more aggressively towards your retirement funds, while keeping annual expenses capped. The most effective retirement strategy is a combination of both: increasing retirement contributions and decreasing annual expenses.

Future planning is sacrosanct. While many of us do not have the necessary insights to make informed investment decisions, there are experts catering precisely to this need in the market. For example, Wealthsimple facilitates retirement planning by using a combination of sophisticated technological tools and resources such as a retirement savings calculator and the expert insights of retirement gurus to facilitate a workable plan for each client. These calculators answer all the hard questions such as ‘How much is needed to retire in Canada?’, ‘How much will be available to me when I retire?’, and ‘How many years will my retirement savings last for?’

All of these retirement-based plans are predicated on individual needs and preferences. Fortunately, all of this is done in a low-cost environment with automated investing services. A popular retirement rule is the 4% guideline. According to this, you can use up to 4% of your savings annually for all living expenses and enjoy a retirement stream for up to 30 years.

Figures above 4% can adversely affect your financial well-being, given the volatility of the financial markets. Expenditures over 4% invariably reduce the longevity of your retirement savings. It is by no means a guarantee that your retirement savings will last for 30 years; it reduces the likelihood of that occurring. Nobody wants to run out of money during retirement, particularly when they are too old, infirm, or unable to work. 

Thanks to financial planner William Bengen, the 4% rule came about through extensive statistical analysis of past market behaviour, notably the 1929 Wall Street Crash and the oil price shocks of the 1970s. The 4% rule needs to continually be adjusted for inflationary purposes to ensure that your money buys you the things you need to survive during your retirement years.

How to get to that magical retirement figure?

Clearly savings alone will not yield the necessary figure needed for retirement purposes. Savings do not grow enough to provide for retirement purposes. Investments can meet your retirement needs. To hit your retirement nest egg, you’ll need the right mix of investments in your financial portfolio. This portfolio will determine whether you meet your 30-year requirement. By diversifying your portfolio to include the right combination of bonds, stocks, funds, foreign currency, alternative investments and other options, you can position yourself for a successful retirement. 

Naturally, the older you are the more risk averse you are with your savings and investment options. Younger people who start early have a greater propensity towards high-risk investments with strong growth potential. Regardless, it is possible to calculate precisely the right mix of financial instruments and investment options to drive your retirement planning requirements. If you kept all of your money in a fixed-interest-bearing savings account, the yield would be so low, it would likely be outpaced by inflationary factors. 

In simple terms, this means that the purchasing power of your money would be degraded and worth less in real terms. Two classic examples serve as great starting points for retirement purposes: $300,000 and $500,000. $300,000 can last for 30 years if you only spend $10,000 a year during retirement. If we use the 4% guideline, you would get $12,000 a year for 25 years. This figure is insufficient by today's standards, but could be a great supplement if you own your own property!

Image sourced from Pixabay