02/27/2014 05:36 EST | Updated 04/29/2014 05:59 EDT

How Much Money Do You Really Need to Retire?

Do you become a different person when you retire? Will your values, sense of humour, and pastimes change? Probably not. So why do many investors focus on amassing as much money as possible for retirement instead of considering what their liabilities will be and planning appropriately?

When investors understand their financial liabilities -- the expenses they will need to cover once they retire -- they are better-equipped to change their saving strategy and eliminate fears of not having enough money for retirement. In contrast, a focus on "the number" alone, can make retirement planning extremely stressful. An Allianz study found that 82 per cent of respondents 44-to-49 years old with dependents feared outliving their money more than death.

The best solution is a liability-driven approach that focuses on an investor's exact needs, and mirrors the strategy used by pension fund managers.

Most investors have a fundamental misconception about retirement planning: That it's about maximizing your returns. Instead, investors should focus on risk management: what's the amount of volatility you're willing to accept to get the performance on your account and ensure you won't outlive your money?

Thoughtful retirement planning begins by calculating your true retirement liability, which can prove challenging for many individuals. You may think that you have a complete picture, but focusing on your expenses will help you to reframe the retirement question from "How much money do I need to retire?" to "How much money do I need from year-to-year, or even month-to-month?"

Your lifestyle then and now

A recent survey by Angus Reid revealed the majority of Canadians expect to live until age 85; that's 20 years past their expected retirement age. However, only 26 per cent of those surveyed thought they were saving enough toward retirement. Giving these statistics it's unsurprising that one of the main concerns for retirees is making their money last longer in retirement.

You'll need to have a rough idea of how much it will take to maintain your lifestyle in retirement. With some careful planning and a little luck many of your working life expenditures should vanish in retirement such as your mortgage payments, childcare costs, educations fees and other expenses of maintaining a busy household.

Remember to talk to your financial adviser about your future housing needs. If you're an empty nester or expect to be, it may make sense to downsize so that you can take advantage of the equity that you've built up in your home.

If you're nervous about making your money last through retirement, be judicious about non-essential purchases.

These are just some of the things that everyone should consider when planning their retirement, but they're nowhere near the whole picture. Health care, food, and entertainment should be added, plus travel and anything else you plan to spend money on in retirement.

It's important to figure out what you want to do in retirement and how much will it cost. Remember, the key is to consider how much income you need each year rather than "How much do you need?"

How to figure it out

It can be daunting to relate your retirement liability back to your investment strategy, but here are a few steps that can help:

Get the right attitude. The statistician George Box wrote that "all models are wrong, but some are useful." This is true of retirement planning, too. Often the value of constructing a plan is not in the conclusion, but in the enhanced understanding of the problem you construct.

Get the right partners. A thoughtful financial adviser is your best partner in arriving at a comprehensive solution. In some cases, their value may be most clear around emotional subjects, such as whether to sell the family home or buy that new convertible.

Get the right range of estimates. It's likely that even if you knew with certainty how long you would live and how much you would spend, a financial adviser wouldn't be able to perfectly estimate your retirement liability. The best way to overcome that is to get a range of estimates and reevaluate annually.

It's never too soon or too late to start preparing; having a plan will protect you against panic and rash actions. Take the first step, build a good model, and then watch how much less scary retirement seems.

Robert Stammers is director of investor education at CFA Institute and editor of its Inside Investing blog.


  • Keep Working
    The simplest way to boost retirement savings is to hang onto your job. Staying employed for longer keeps your income and company benefits coming in and prevents you from dipping into your financial safety nets like retirement and Social Security benefits. One way to stay on the job is to redefine how you think of work says Ritter. "One of the things that we've started advocating is something we refer to as 'practiced retirement,'" Ritter says. "...Take the money that they were saving for retirement and start spending it. Go take that cruise...this idea of 'I stay in the workforce, but I also get to start playing' makes staying in the workforce a more palatable decision." If you're looking forward to bidding your job adieu too much, consider alternative work situations like moving to part-time, telecommuting or freelancing. Changing up where you do your job and how can drastically affect how long you're willing to stay employed.
  • Trade up your home
    Cashing in on home equity can free up some serious change, but before going that route, carefully consider how you're pulling funds out, says Gerald Wernette, director of retirement plan services consulting for Rehmann Financial wealth management firm. "One option is reverse mortgages," says Wernette. "...You're able to pull the equity out of your house. You've really got to scrutinize those, what is the internal embedded interest rate that you're being paid? What are the terms of that contract?" A better option might be downsizing your home by moving to a cheaper place and either selling or renting your previous abode. If you have extra space, you may be able to generate additional income without moving by renting part of your home through sites like or
  • Delay Social Security
    You can tap your Social Security benefits at age 62, but every year you wait increases your benefits, says Ritter. For example, a person earning $50,000 annually who takes their Social Security at age 62 would draw approximately $1,050 per month in benefits. A person just five years older with the same income would draw more than $500 more per month, according to the Social Security Administration's benefits calculator. "The biggest problem most people face is not that they run out of money three years after retirement; it's that they run out of money 23 years after retirement and they're still going to live another seven years," says Ritter. "...If you take [Social Security] later, you've made a decision that better manages the bigger risk that you face, which is running out of money before you've run out of life."
  • Tap life insurance
    "If you've got what's called a whole life, universal life or variable life, all those policies have internal cash value build-up," says Wernette. "...the cash value in that policy can basically be another one of the pots of money you can draw on for retirement." Permanent life insurance policies offer plan holders the ability to borrow against the cash value of the policy or withdraw their funds after a certain time period, but there are catches. Life insurance loans usually don't need to be paid back, but they do come with limits on the amount you can borrow and interest rates that can substantially reduce the policy's death benefit. Permanent policy holders can also access their policy's cash reserves by withdrawing premiums they've paid into the plan tax-free, but withdrawing interest collected on the policy counts as taxable income, according to the IRS, and you'll probably pay hefty surrender charges.
  • Evaluate your priorities
    One of the most effective ways to score immediate cash is to examine your spending habits, says Ritter. "There are two ways to approach this: There's the big-ticket approach and there's the daily lifestyle approach," he explains. "...If a large portion of your monthly income is going towards big-ticket items, [like if] housing costs are taking up 40 percent of your [income] or transportation is taking 25 percent, making coffee at home to save $3 a day is not going to solve the problem." Big-ticket spenders need to make changes where it matters, whether that's going from being a two-car family to one, downsizing your annual vacation, or reducing the amount you're spending to support adult children. People who are blowing their income on smaller money sucks like fancy cable TV packages or meals out can bank big by changing daily habits.