Quote:
Originally Posted by Doctorfever
Sorry if this has already been posted, but does anyone use the 4% method? It’s the simplest method for people like me (not a financial planner, and not really good with this type of stuff).
So basically you take what your expected expenses are for your first year of retirement. Subtract your income (pension, CPP) and whatever the number is, that should be 4% of your total retirement savings.
At least I think that’s how it goes.
So if I expect to spend $60,000 per year and have $10,000 pension my expenses are $50,000
I would need $1,250,000 to retire.
Seems like a simple formula, like retirement for dummies like me.
The hard part is saving enough. Especially with kids and a mortgage.  |
I use this for rough planning.
A few notes to be careful with.
Inflation - you need 1.25 million in today’s dollars not in future dollars so when plotting savings rates to get to the 1.25 million you need to discount your return by 2-3%
The study behind the 4% SWR is based on a 35 year retirement in the US if you retired at any point in roughly the last 120 years. As your retirement lengthens the risk of this method is greater.
Consider the impact on taxes and where that 1.25 million is held. In RRSPs you might pay around 20% in tax at 50k income plus pension. So if your after tax income needs to be 50k and most of your holding are in RRSPs you need to be careful.
OAS / CPP / GIS may or may not be around to the same degree as today.
It may also be conservative as in most cases a 4% withdrawal rate will grow in the first 5-10 years and never be deprecated. So if you count on dying some time you can deplete your capital.
And finally the biggest variable is your spending and that at least early in retirement is generally in your control. Change 50k to 40k and you just reduced the amount you need by 20%.