“Too little money makes people desperate; too much money makes people greedy” – Aristotle
In order to retire well, without worrying about running out of money, you must figure out how much you really need. The financial industry people will tell you a lot of stuff, but we must remember that they increase their profits by selling more financial products. These can include mutual funds, GIC’s bonds, stocks, IPO’s. life insurance and a range of other products. In many instances you will be asked to save as much as possible for as long as possible regardless of how much you need. But only you can answer that – what kind of lifestyle do you want?
There is a cool story that illustrates this.
A few years ago, a very rich businessman decides to take a vacation to a small tropical island in the South Pacific. He has worked hard all his life and has decided that now is the time to enjoy the fruits of his labor. He is excited about visiting the island because he’s heard that there is incredible fishing there. He loved fishing as a young boy, but hasn’t gone in years because he has been so busy working to save for his retirement.
So on the first day, he has his breakfast and heads to the beach. It’s around 9:30 am. There he spots a fisherman coming in with a large bucket full of fish! “How long did you fish for?” he asks. The fisherman looks at the businessman with a wide grin across his face and explains that the fishes for about three hours every day. The businessman then asks him why he returned so quickly. He’s worried that all the fish are gone.
“Don’t worry”, says the fisherman, “There’s still plenty of fish out there.”
Dumbfounded, the businessman asks the fisherman why he didn’t continue catching more fish. The fisherman patiently explains that what he caught is all he needs.
“I’ll spend the rest of the day playing with my family, talking with my friends and maybe drinking a little wine. After that I’ll relax on the beach.
Now the rich businessman figures he needs to teach this peasant fisherman a thing or two. So he explains to him that he should stay out all day and catch more fish. Then he could save up the extra money he makes and buy and even bigger boast to catch even more fish. The he could keep reinvesting his profits in even more boast and hire many other fisherman to work for him. If he works really hard, in 20 or 30 years he’ll be a very rich man indeed.
The businessman feels pleased that he’s helped teach this simple fellow how to become rich. Then the fisherman looks at the businessman with a puzzled look on his face and asks what he’ll do after he becomes very rich. The businessman responds quickly “you can spend time with your family, talk with your friends, and maybe drink a little wine. Or you could just relax on the beach.”
It’s a simple story, but depending on the lifestyle you want – you may be closer to retirement than you think. It’s easy to say money is not important but having been in the position of wondering how you are going to eat, I understand that having money is better than not. How much money is another questions but having the power to pursue your dreams comfortably is bliss.
Here is a basic formula you can use to help you calculate how much you really need to retire:
Total current income (your salary) – taxes – work expenses – all debt interest (be debt free before you retire!) + New lower tax expenses (investment tax vs. earned income tax) + costs of your hobbies and desired lifestyle = How much you need ever year after taxes.