Posted by Tim Stobbs on March 31, 2008
Well last Saturday night I had a very interesting evening. My wife was reading about Earth Hour and thought it would be a fun time. I personally thought it would be a joke, don’t turn your lights on for an hour? Come on I’ve already hack down my energy bills to the bone. So I thought let’s try for something a little more interesting. So we decided to try to do an Earth Evening where we would avoid turning on the lights for the entire evening.
I have to admit I was surprised to learn a few things about myself during that evening. First off I’m really in the habit of turning on lights. Even with candles going in the house I still had the reflex to reach for a light switch a few times.
The second thing I learned was that our two times where we did turn on a light could have been avoid with a little more planning. The first was during a diaper change, where a flash light could have made due. The second was just before we were going to bed where my wife turned on a light because she blew out one of the last candles down stairs and didn’t have a light with her to come up.
I think the part of the evening I enjoyed most was reading to our son his stories by flashlight. He keep waving the light around so trying to read the actual story was much more challenging than normal.
So what does all this have to do with personal finance? Well it’s about discussing the value of social experiments. Despite the fact I didn’t think I would learn all that much from this little experiment I did learn I can live without power for my lights. So even if the parameters are artificial like not spending any more for a week where you remember to stock up the fridge before you start. It still can be useful to teach you about your own habits. Only by breaking out of your normal routine do you really see what you are doing and are forced to ask yourself “Did I really miss that?” By playing these little mind games with yourself you can determine what really is important to you and reduce or remove the unnecessary spending and complications from your life.
So here are a few ideas of experiments your might what to try yourself:
- How low can you go? Take any bill you get monthly and try to see in a month how low of a bill you can get. Ideas include: water, power, or natural gas.
- What can I live without? Try removing an activity from your life for a set period of time, such as eating out for a month. Then find out where did you miss it and why? What do you like about eating a home or what did you dislike?
If you have another idea of something to try or you have done please leave a comment and share.
Posted by Tim Stobbs on March 28, 2008
Alright after four long days we finally pull off this information together to see if I can retire at 45 (at least in theory). For your reference here are links to the rest of series:
Part I – Finding out your spending in retirement
Part II – Government Benefits
Part III – Company Pensions
Part IV – Retirement and Taxable Accounts
First a quick review of the numbers and when I expect to start collecting them.
From 45 to 60:
Here I only plan to use my taxable investment accounts, RRSP accounts and that $2000/year dividends I mentioned.
From 60 to 65:
At this stage we expect to collect CPP ($6660/year) and start to use my pension money ($2344/year) and keep using the RRSP, taxable accounts and dividends.
I’ll be keep using my CPP, pension money, RRSP, dividends and OAS ($12,054/year).
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 accounts and RRSP each year.
So now to make this all work I need to simulate a draw down of the money in the RRSP’s and taxable accounts. To keep this fairly simple I’m going to merge the RRSP into one pool of money and assume I can split the withdrawal amounts proportionally between the accounts (ie: the RRSP pool is bigger so it will cover more of the expenses). I dig out that same calculator I’ve been using all week and enter the following for the first stage ages 45 to 60:
RRSP (45 to 60)
Start at $224,652
Saving rate of -$1189.87/month (this is just that 58% of the $24,618/year in the spreadsheet)
At 4.0% for 15 years (I reduced the return to reflect a more conservative portfolio)
Results in $116,118.71
Taxable Account (45 to 60)
Start at $163,228
Saving rate of -$861.63/month (this is just that 42% of the $24,618/year in the spreadsheet)
At 4.0% for 15 years
Results in $85,085.25
Ok so far so good, but I still need to keep using this accounts from ages 60 to 65:
RRSP (60 to 65)
Start at $116,118.71
Saving rate of -$754.67/month (this is just that 58% of the $15,614/year in the spreadsheet)
At 4.0% for 5 years
Results in $91,746.70
Taxable Account (60 to 65)
Start at $85,085.25
Saving rate of -$546.49/month (this is just that 42% of the $24,618/year in the spreadsheet)
At 4.0% for 5 years
Results in $67,657.07
Well that isn’t bad so far, but now I’m on to the really long haul ages 65 to 90:
RRSP (65 to 90)
Start at $91,746.70
Saving rate of -$172.07/month (this is just that 58% of the $3560/year in the spreadsheet)
At 4.0% for 25 years
Results in $160,512.73
Taxable Account (65 to 90)
Start at $67,657.07
Saving rate of -$124.60/month (this is just that 42% of the $3560/year in the spreadsheet)
At 4.0% for 25 years
Results in $119,544.86
What?!?! How did my numbers increase? Simple I wasn’t pulling off enough money to out pace the interest. So that means I have excess money in my retirement calculations. So obviously I have a bigger buffer than I thought even with my 1% reduction in investment performance. As a point of interest I tried lowering the interest rate to see if I could run out of money on the taxable account in that last run of time (65 to 90). So at 0.5% interest I would still have over $36,000 at age 90. Basically as it stands I can’t run out of money regardless of how long I live. It also provides a nice buffer in case the government decides to cut back the OAS program on me.
Yet there is a hole in the above calculations. I forgot to account for my $90,000 vacation fund back in Part I. Yet I haven’t used any money from down sizing a house and my total savings here isn’t my total free cash flow for the year (I could still save more). So in either case I feel I have enough back up plans to cover myself (for those who are truly curious you could recalculate the above with an extra $3000 a year expense from ages 45 to 75 to see if I could do with any additional savings).
So how much is it going to cost me to retire at age 45? Well recall all of these calculations are in today’s dollars so at age 45 I should own my house and have around $475,000. So much for that million dollar price tag people keep going on about.
Have a great weekend everyone and let me know if I missed anything in the above.
Posted by Tim Stobbs on March 27, 2008
So far this week we have looked at your yearly spending in retirement (Part I), government programs (Part II) and company pension plans (Part III). Today we are going to look at RRSP’s, taxable investment accounts and Tax Free Saving Accounts (TFSA).
All of accounts are very similar in the fact they can be just about any investment product. The only real difference is how they are taxed. In a RRSP you get a tax refund on the income tax you originally paid for that money and then that money can grow tax free until you withdraw it (presumably in your retirement).
Despite the almost universal advice that investing in a RRSP is a good thing by most mutual fund companies and banks it actually doesn’t help some people. An RRSP is used to delay the tax not avoid it. So if your in the lowest income bracket already and you expect to be the same in retirement it really doesn’t give you much of a break (a TFSA might actually be a better choice). Yet as you climb tax brackets an RRSP becomes increasingly useful since you hope to avoid the high tax rate now and take it out at a lower tax rate in retirement.
Case in point my wife doesn’t have her own RRSP. Instead we buy her a Spousal RRSP which gives me a tax credit and puts the money in her name. The idea of the this is to split the RRSP’s I would normally buy between two people so when we pull them out in early retirement we can reduce our total tax paid on the money. So for example instead of withdrawing $20,000 a year in my name, we can split the money up and only pay tax on $10,000 each.
But can’t we split pensions now? Yes you can split pensions, but the government never said you could split an RRSP. In fact the only way an RRSP fall under those rules if if you covert it to a RIF and your older than 65. So keep buying those Spousal RRSP for early retirement.
In my case we have around $18,100 in my RRSP (I’m transferring in my old pension from prior to my employer being bought out) and $7900 in my wife’s Spousal RRSP. Using that same calculator from yesterday’s post, I input the following:
My RRSP is at $18,100
Adding $100/month personal plus $225/month from work group RRSP
At 5.5% interest (to keep it in today’s dollars just like yesterday)
For 15 years, I end up with $131,816
Spousal RRSP is at $7900
Adding $100/month personal plus $168.50/month from my work group RRSP
At 5.5% interest
For 15 years, I end up with $92,836So in total we will have $224,652 to help fund our retirement. Note I haven’t put in my tax refund here. I’m going to leave it out for now and see how I do in these calculations.
2) Taxable Investment Accounts
As I mentioned before a taxable account is similar to an RRSP with the choices you have to pick from. The major difference is how you are tax on your gains. You need to understand the differences between interest, dividends and capital gains. For details I suggest reading this. The overall summary is capital gains and dividends are better than interest in a taxable account.
Currently we are investing on average $658.50/month into our taxable accounts. Rather than giving me a headache and try to break out each account separately I’m going to treat them as one single account here.
Starting at $13,029
At 5.5% interest
For 15 years, I end up with $213,228.
Now out of this amount I’m going to assume I’ve got $50,000 of it producing dividends of $2000 per year when I’m 45. So that leaves $163,228 for general retirement use.
I’m not how I’m going to work the new TFSA account into my retirement plans. I’m considering for now just letting the contribution room build up until we downsize our current house later in life. That would then allow me a float fund which I could use to cover use in case I’ve made any mistakes during these calculations. Or additionally I might use some of the room to store excess saving so I have the option of either using now or possible extra fun money in retirement. Of course yet one more option is to build up a large cash fund in the account to provide some buffer to my main savings in case we enter a down market as I retire. For now I’m not planning on doing much but move over the high interest savings account to avoid the tax on the interest.
Alright in total from the above accounts I have $387, 880 to pay for most of my early retirement, plus $2000/year in dividends (which I’m going to assume keep pace with inflation). Tomorrow I’ll try to string this all together to show how I plan to retire at 45 with no where near a million dollars.