If you’re part of the 9.8 million baby boomer Canadians who are nearing retirement, you are probably asking yourself, how much money do I need to retire?
There’s no one-size-fits-all approach that will work, since everyone’s situation is different. But here are a couple of rules of thumbs to keep in mind, that could give you a rough idea of how much money you will need to retire.
Multiply your income needs by 25
The multiply by 25 rule is simple. If you have calculated you’ll need a certain amount of income per year to retire, you have to multiply that amount by 25, and that is the number you will need to retire.
For example, if you calculate you will need only $20,000 of income per year on top of your CPP and OAS when you retire, then you will need approximately $20,000 multiplied by 25, which is $500,000.
This is a fairly conservative estimate, and it equals a 4% withdrawal rate of your investments every year. Withdrawing this low rate almost assures you that your money will last for the rest of your life.
Use 70% of your last-year income
Another measure you can use is to take between 70% and 100% of your previous year’s income to figure out how much income you will need in retirement. If you had an $80,000 yearly salary the year before retiring, you might need 70% of $80,000 per year during retirement, which is $56,000 per year.
It’s commonly stated that you will need less income in retirement, but depending on what your plans are after you retire, you might need more or closer to 100% of your last year’s salary.
As an example, if you calculate that the number you need is $1,000,000, what are the best ways to reach your retirement number? One proven way to hit your number is to start investing early and to invest in income-generating companies.
For example, take a great company such as BCE (TSX:BCE)(NYSE:BCE), better known as Bell.
BCE doesn’t demand intensive research. Canada is one of the world’s most protected telecom sectors. Telecom giants in Canada can maintain high operating margins. The industry is part of an oligarchy where the major carriers, including BCE, face little competition.
As a consumer of telecom products in Canada, you might complain about the high costs, so why not become an investor and cheer those costs instead?
If you were a 45-year-old investor 20 years ago, and you’d invested $10,000 in Bell at that time, and now you’re ready to retire at 65, your initial investment with dividends reinvested would be worth $55,994. This amount is almost six times your initial investment.
This calculation doesn’t take into account taxes, but if you invest in BCE in your TFSA, it would be worth that full amount if returns are maintained in the future.
BCE is one example of an excellent stock you can purchase to hit your retirement goal. Make sure to diversify your stock holdings properly, and calculate your retirement needs carefully to enjoy your golden years without any stress.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.
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