Posted by Tim Stobbs on April 20, 2007
Today marks the final day of the How Much Do You Need to Retire series. For those of you who missed the previous entries check out:
I apologize for the long posts this week, but the good news is the math is mostly done and now we find out if you can make your retirement dream come true. First a quick review of the numbers and when I expect to start collecting them.
From 45 to 55:
Here the only accounts I’ll be using is the taxable account and our RRSP’s ($6270/year). My RRSP’s are the baseline while the taxable account will have to pick up the slack.
From 55 to 60:
Here I’ll continue to use the RRSP ($6270/year) and taxable accounts, but I’ll start using my pension money($13,154/year).
From 60 to 65:
At this stage we expect to collect CPP ($8300/year) and keep using the pension and RRSP money.
I’ll be just using my CPP, OAS ($11,800/year) and pension money.
In order to make this clear I put together a spreadsheet to show how the money is being used at each stage. The far right column is what is required from the taxable account to meet the short fall from age 45 to 60. Please note since I’m not tracking the tax bill at this stage I just combined the RRSP into a single column.
So if you scrolled down to the bottom right corner you would notice the total required from the taxable account is $244,430 which is higher than my predicted savings of $226,773. So my dreams are shot right? No, this is where I went wrong last time. I didn’t model the draw down of the money.
So taking that $226, 773 and reducing it to pay off the mortgage at that time would cost me around $31,000. The I dig out that same calculator I’ve been using all week and enter the following:
Start at $226,773 – $31,000 = $195,773
Saving rate of -$1723/month (this is just that $20,680 in the spreadsheet with a negative sign)
At 4.0% for 10 years (I reduced the return to reflect a more conservative portfolio)
Results in $38,153
Then for those last five years I require $7526/year or $627/month. So that would mean:
Start at $38,153
Saving rate -$627/month
At 4.0% for 5 years
Results in $5,015 left over.
So there you go. It is possible to have me retire at 45 based on my current assumptions which also include a 1% buffer on my rate of return (all numbers are in today’s dollars). An alternative to reducing your investment performance is just adding 10% margin to you spending every year. The only problem with my numbers is I haven’t accounted for a vacation fund, which means just a bit more savings over the years ahead.
An obvious question now is will I obsess over these numbers to ensure I make this dream come true? No not really. I’m just happy knowing it is possible. After all I know there will be unplanned expenses over the years, changes in income, inflation changes, investment under and over performance and most likely at least one more kid. A retire calculation is only a educated guess of how much you need, it by its very nature can’t be correct. There are simply too many assumptions this far out. Any comments or ideas on how to improve this mess of calculations is welcome.