What Is Your Magic Number for Retirement?One Giant Step
One plus the interest rate (stated as a decimal) divided by the number of times interest is compounded by year to the power of the number of times the interest rate is compounded by year times the number of years. All multiplied by the amount of the principle.
- A = final amount
- P = principal amount (initial investment)
- r = annual nominal interest rate (as a decimal, not in percentage)
- n = number of times the interest is compounded per year
- t = number of years
This is what has been swirling in my head for weeks now. The calculation that tells how much money deposited today will be worth in t number of years.
Of course it’s all hedging isn’t it?
We’re assuming we won’t save another dime once we leave Canada. That probably won’t happen. We have no idea when we’ll have to stop working, or what working will look like between now and then. We can’t predict when either one of us will die or how many years we’ll have to finance between retiring and dying. I don’t even want to talk about dying. We don’t know how much money we’ll spend per month once we stop working so we can’t calculate how much we’ll need. We don’t know what interest rates will do. Or the stock market.
If you ask the ‘experts’ they all say you need 80% of your current income in retirement. But my current income supports me quite nicely here in the Western world. In an expensive part of the Western world. What if I lived somewhere else? Thailand, Columbia, Chile, Saskatchewan, Nova Scotia, Belize. What would that look like?
Then I start thinking that it’s doable. That our savings could grow to be enough to support us in a modest retirement. That it’s likely that we would still be able to save once we leave Canada. That we won’t get paralyzed by fear and stay here because it’s easy.
That’s my biggest fear. Bigger than that we won’t have enough money. My biggest fear is that we won’t go because we can’t see a clear path to the end. And then I realize that I can’t see a clear path to the end from right here. Staying here is no guarantee that it all works out. The only guarantee then is that I haven’t done what I wanted to do.
I’ve been peppering friends and acquaintances with the ‘how much do you think is enough to retire?’ question.
The answers are varied. Some will disclose a number. One million dollars is a popular sum. Others try to suggest some formula outlining how much they think they will spend per month times the number of years between retirement and death. Many duck the question being either uncomfortable with the question or not wanting to disclose their own finances. What is with our culture and its inability to be transparent with finances?
So, we came up with a number. Based on what we think monthly expenses might be ($4000/month), when we think we’ll ‘retire’ (let’s say 65 years old), and taking a wild guess at when we’ll die (I don’t know but we don’t seem to live terribly long in my family…80?).
Based on our pension plan contributions so far it’s likely we’ll have a pension income of about $1500/month between the two of us. That’s a yearly income of $18,000 over 15 years is $270,000. So we only have to have $450,000 saved by the time we’re 65.
Hmmm. That’s still a big number. But here’s where that calculation at the top comes in. I’ve worked it nine ways to Sunday and have just about got myself convinced that if we save $200,000 before we leave at a rate of 4% interest over the 20 years until we’re 65 then we’ll have almost $450,000 in the bank.
And then it just comes down to how long it will take to save $200,000. Well $125,000 as we already have about $75,000 saved.
Two years? Three years? Four years?
It’s maddening. Do we really need that much? Do we really need to wait that long?
My next steps are to connect with people who have made the leap. How are they managing this question? Is it blind faith that it will all be okay? Trust that it will work out? Do they have a plan? Have they saved? What’s their number? Is my number too big? Too small? Does it all differ depending on how old you are now?
For once in life, the math is probably the easiest part of the whole thing. It’s what goes on inside my head that drives me crazy.
I would really love to hear what you think. I put the numbers out there in the spirit of transparency and because I’m looking for advice. Are you saving madly for retirement? Are you a traveler or expat who has faced the same questions? What’s your number?
One way to prepare for a trip away is to try the foods of the countries you will be visiting. We’ve been slurping ramen noodles and enjoying sushi in preparation for our upcoming trip to Japan. If I lived in Perth I might try this Japanese restaurant for a tast of the fine dining aspects of Japanese cuisine.