How much money do you need to “live the dream” in retirement? I’ve been asking friends and family this question. Some have answered quickly with amounts between five and 20 million dollars. Yet, surprisingly, many had difficulty coming up with a single number.

What I learned is the “magic number” means different things to different people. For some, it was a measure of success, a validation for their hard work. For most, money represented security, assurance that they could take care of their families and retire comfortably.

Things get murkier when we try to find that “magic number” that will guarantee happiness. “People always assume that income and happiness go together,” says Toronto-based therapist and social worker Sari Shaicovitch. “In my practice I’ve found that, if basic needs are met, money does not play a huge role in people’s level of happiness. It’s satisfaction from personal relationships, whether through work, friends or family that lessens anxiety and makes people happy.”

There are a number of shortcut methods (see below) to estimate what kind of retirement savings you’ll need to “live the dream”. According Toronto-based financial planner Crystal Soutiere, these back-of-the-envelope calculations are too generalized and won’t work for everyone. “Each person is unique and what she will need to save depends on her lifestyle choices and life expectancy.”

Soutiere suggests that a good starting point is to look at your current budget and then start thinking about the future, then ask yourself: “How do I think my spending change when I retire? Do I want to be debt-free? Do I want to travel? Will I stay in my home or rent?”

“The process of asking yourself these questions is often more important than the plan itself.” Still, it’s never too early to start thinking about creating a retirement plan, she says.

So, let’s set aside the idea of money = happiness but, instead, focus on what it takes to have a financially secure retirement, one that would allow us to enjoy a comfortable lifestyle without financial anxiety. Is there a “magic number” for that?

There is no shortage of back-of-the-envelope shortcuts and each is based on different assumptions, although many build in an annual rate-of-return of 4% and a withdrawal rate of the same. Some of the “classics”, like the 4-Percent-Rule are being challenged by new economic realities, such as current low interest rates, potentially slower global economic growth, and greater longevity.

Here are some of the most common rules. Try them out for a quick sense of how close you are to your “magic number”. Keep in mind that many of us will also receive income from CPP/QPP, OAS, as well as company pension plans.

70% Rule

Calculate what 70% of your final year of employment earnings would be. That the annual amount that you will likely spend in retirement.
What amount of savings would you need to have in order to generate that annual income? This is the amount you will need to have saved at retirement. For example, if your annual employment income is $100,000, you’ll likely spend $70,000 (before tax) in retirement. To generate $70,000/year, you would need to have saved $1,750,000, assuming an investment growth rate of 4%.

Multiply by 25 Rule

What is your desired annual income in retirement?
Multiply that amount by 25. That is the amount you need to have saved at retirement. For example, if you want $70,000 annually, you’ll need to save, surprise! $1,750,000. (Based on the same assumptions as above.)

4 Percent Rule

This is considered the “safe” withdrawal rate from your retirement savings to prevent depleting too early. In your first year of retirement, you would withdraw 4% of the value of your portfolio. In subsequent years, you would adjust this amount for inflation.

300 Rule

Calculate your after-tax monthly expenditure (or what you’d like to spend monthly in retirement) and multiply it by 300. That is the amount you need at retirement. This is based on the stereotypical 4% withdrawal rate. For example, if you want to spend $5,000/month, you’d need to save $1,500,000.