Retirement Calculations – Part I
Posted by Canadian Dream on February 9, 2009
Ok, it’s been close to a year since I sat down and crunched numbers on my early retirement plan. I’ve done a rough update, but I’m fairly curious where the numbers are now. So I’m going to run them again. Do to the length of this posts there will be no Green Spot this week. So with out further preamble let’s get started.
First off we need to figure out my baseline spending, or what I think I’ll be spending during my retirement years. In some ways this is fairly easy: current spending – mortgage (because I’m going to have it paid off) – work expenses. So it looks like this: $3040 – $1020 (principle and interest only) – $77 (gas and parking) = $1943/month. To make things easy I’m just rounding up to $2000/month or $24,000/year. In general I’m expecting my lifestyle to stay fairly close to what I do now, granted the kids will be mostly out the door at 45, but I’m just assuming my spending on them will just roll into my hobbies spending (currently about $160/month). I’m also assuming that being retired that I won’t be saving for my RRSP or pension or the kid’s RESPs anymore.
Yet, I need to add a few items to $24,000/year figure. First off I’m going to assume $1000/year in house maintenance and $1000/year in car depreciation and $1000/year in medical costs. So in total I’ll need $27,000/year.
Now I’m going to make one other assumption that could put things in a little doubt, because I’m not sure if I can do it. I’m going to assume I’m a very clever guy and managed to balance my RRSP’s and TFSA’s and taxable accounts to pay no income tax. The reality is this could take some work, but given my low income requirements it is entirely possible. Basic tax deduction is $10, 320 per person, so with a clean income split via spousal RRSP and pension spliting that totals $20,640, which leaves $6360/year to come out of our TFSA accounts to pay no tax. With TFSA contribution room of $5000 x 2 x 14 year = $140,000. So that $6360 represents a required yield of 4.5% which is fairly realistic.
Then to make things interesting I’m putting on an extra requirement of my travel fund of $3000/year from age 45 to 75. So that’s another $90,000 or so in savings required if you do the math. Yet if I look at it from a cash flow point of view at a 4% rate of return I need about $75,000 to generate $3000 a year. So I have two ways I could deal with this. Either simulate the larger draw on my savings during the first 30 years or just take off the extra off the top. I think for this exercise I’m going to do extra draw on my savings. It makes things more complex, but what the hell.
Oh, some general notes on this series of posts. All values are in 2009 dollars, so to achieve that I use real returns (which are just your normal return minus inflation), so all the return % may look low.
So how much am I going to have at 45? Well that we will calculate as I walk through my phases over the next few days and some other sources (OAS and CPP). Then on Friday I’ll run the numbers to see if this still looks like a good idea or what changes I need to make to my savings to have it happen.
Comments
10 Responses to “Retirement Calculations – Part I”Leave a comment, and if you'd like your own picture to show up next to your comments, go get a gravatar!
If you can cover the travel expenses with a sustainable withdrawal rate it would be nice to be able to keep using that cash for other things afterwards (maybe higher medical costs at that point?). Of course you’ll always be able to find a reason that you could use another $10-20,000 in your portfolio.
Fascinating! This is just the sort of information I love to read about! The fact that you’re in Canada makes it all the sweeter (and more relevant)!
Great post but isn’t $3000 a year a little low for two people to travel? I guess it depends on what kind of travel you are doing. For example, a hotel room in Europe is going to cost about $250 per night…that would drive up costs considerably! Also $1000 in house maintenance is a little low IMHO…we just got a new furnace that cost over $5000, our roof was really expensive, new washer and dryer will cost us $2500, our new living room window alone as $1500…and that’s just one thing per year (Maybe I’m jaded on this point because it seems like every year since I moved into my house we’ve had to do some major reno/replacement).
They say 1% of your homes value per year for maintenance etc.
for me that amounts to about 6K a year. I do a lot of work myself which reduces that number, but I can easily see it eating that much up per year with a roof here and a leak there and an appliance over there…
SP,
I agree that keeping the extra cash for potential medical is preferred.
Mintycake,
$3000 was picked as an average amount. Some years it’s going to be higher and other years there may not be any travel. House maintenance number is partly based on the fact I’m planning on building a ecohouse when I pull the plug so I will be living in new housing. Depending on the age of your house you should adjust that number upwards.
Adam,
1% strikes me as excessive over a long term average. As I mentioned it depends on the house age some what.
Tim
Canadian Dream:
I agree, some years I get away with near nothing and others I spend 2%. Very much dependent on the age of the home.
Is downsizing your home part of your plan at all? With no kids etc, could you not sell your family home and move into a lower maintenance condo and realize some of the capital sitting tied up in a larger detached home?
I know I plan on downsizing as our home is far to large for our needs in retirement.
Adam,
Good question. I’ll get to that in part III.
Tim