How Much Is Enough?

I spent some time going through our finances over the week-end. And doing some refinement of our retirement plan.

Retirement planning is an interesting exercise as there are many scenarios that need to be analyzed. How much income is needed in retirement? How many years will an income be required? How much capital needs to be accumulated? What is the safest rate of withdrawal?

I have spent a fair amount of time going through the analysis. And I came across some interesting data points in my research. A starting point for me was to answer a basic question: how much is enough?

One way to approach that question is to look at various income levels. In other words, how much money do most people live on. The answer is surprising.

According to Statistics Canada, there were 23,408,890 individuals that declared some form of income. 2,323,290 made less than $5,000 in 2004. 19,297,350 made between $5,000 and $75,000. Only 791,580 people made more than $100,000 in 2004.

Expressed as a percentage:

  • 10 percent of Canadians earned less than $5,000 in 2004
  • 82 percent of Canadians earned between $5,000 and $75,000
  • 3 percent of Canadians earned more than $100,000
  • 0.48 percent of Canadians earned more than $250,000

In Ontario, average household income for families of 2 persons or more was $67,100 in 2002. This pdf report on the state of Canadian Family Finances is an interesting read.

So, assuming that you wanted to retire today with an average income of $67,100, and assuming that a government pension would provide about $12,000 then you would need a capital base of $1,100,000 to produce about $55,000 per year. Of course we would have to factor in inflation and maybe a Monte Carlo Simulation or two.

If you really want to go crazy on financial analysis, this website is a must see. I think I will just keep working.

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