Retirement Calculator

The "Magic Number": How Much is Enough?

Retirement planning often feels like guessing. How much money do you actually need to quit your job forever? Is it $1 million? $5 million? The answer depends entirely on your lifestyle, but there is a widely accepted formula to help you find your target number.

This formula relies on the 4% Rule. It suggests that you can withdraw 4% of your total portfolio in the first year of retirement, and adjust that amount for inflation every subsequent year, without running out of money for at least 30 years.

The Power of Compound Interest

Albert Einstein reportedly called compound interest the "eighth wonder of the world." It is the engine that powers retirement accounts. It allows your money to make money, and then for that money to make even more money.

The most critical factor in compounding is Time, not amount. Consider two investors:

1. Start Early Sarah: Invests $500/month from age 25 to 35, then stops completely. (Total invested: $60,000).
2. Late Bloomer Larry: Invests $500/month from age 35 to 65. (Total invested: $180,000).

Assuming an 8% return, Sarah ends up with more money at age 65, despite investing one-third the amount Larry did. This is why starting today—even with a small amount—is the most important financial decision you can make.

What is a Realistic Rate of Return?

When using our Retirement Calculator, the "Annual Return Rate" input is sensitive. A small change here makes a huge difference in the result. What should you input?

• 10%: The historical average return of the S&P 500 (US Stock Market) over the last 100 years. This is optimistic for a pure planning number because it ignores inflation.
• 7%: This is the "inflation-adjusted" average. (10% gain minus 3% average inflation). Financial planners often use 7% as a realistic baseline for a 100% stock portfolio.
• 5%: A conservative estimate for a "balanced portfolio" (60% stocks, 40% bonds) or for someone nearing retirement who wants less risk.

Tax-Advantaged Accounts: Your Best Friends

Where you save matters as much as how much you save. Governments incentivize retirement savings by offering special accounts that shield your money from taxes.

In the United States 🇺🇸

• 401(k): Employer-sponsored. Contributions reduce your taxable income today. You pay taxes when you withdraw in retirement. Bonus: Employers often match contributions (Free money!).
• Roth IRA: You pay tax on the money today, but it grows tax-free forever. When you withdraw at 65, the IRS gets $0.

In Canada 🇨🇦

• RRSP (Registered Retirement Savings Plan): Similar to a 401(k). Contributions lower your income tax bill today. You pay tax on withdrawals.
• TFSA (Tax-Free Savings Account): Similar to a Roth IRA. You pay tax today, but all growth (interest, dividends, capital gains) is 100% tax-free for life.

The Danger of Inflation

Inflation is the silent killer of retirement plans. $1 million today sounds like a fortune, but in 30 years, it will have the purchasing power of roughly $400,000 (assuming 3% inflation).

This is why you cannot simply save cash under your mattress or in a standard savings account yielding 1%. Your money must be invested to outpace inflation. If your investments aren't growing faster than the cost of living, you are technically losing wealth every single day.

Common Retirement Mistakes to Avoid