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Wednesday, October 22, 2014

Retirement Calculations – Part I

Posted by Tim Stobbs 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

36 Responses to “Retirement Calculations – Part I”
  1. 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.

  2. 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)!

  3. Mintycake says:

    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).

  4. Adam says:

    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…

  5. Canadian Dream says:

    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

  6. Adam says:

    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.

  7. Canadian Dream says:

    Adam,

    Good question. I’ll get to that in part III.

    Tim

  8. Kevin says:

    It looks like you’ve really put a lot of thought into this, good job. My concern is that some of your estimated spending figures might be a little bit low. Specifically, $1,000/year in house maintenance is very unrealistic. Most planners use a figure of 1-2%/year of your home’s value. In your case, with a $340,000 home, that’s between $3,400 – $6,800/year. Of course, you won’t spend that much every year, but then one year the furnace will die. Or you might have a few years of nothing, then it’ll be time to replace the roof. The bottom line is, $1,000/year is not going to cut it.

    Similarly for car depreciation, $1,000 will be insufficient. Even if you and your wife make do with just one car, you will eventually need to replace it. At $1,000/year, that’s like intending to buy a $12,000 used car, and expecting it to last you 12 years. You might get lucky, and one or two cars will make it that long, but others will not. Also, you could get rear-ended and be forced into the situation of replacing a car before you were planning to. Is maintenance figured into that $1,000/year, too?

    Your $1,000/year for medical costs will be fine starting out, but as you age, this will skyrocket. Prescription eyewear, drugs, physio, various medical devices to help with mobility – you should definitely plan for this to rise dramatically as you age.

    Beyond that, I think you’ve really done a great job running the numbers. I just think you should “pad” them a bit more. Tend toward pessimism rather than optimism.

  9. James says:

    Just curious… what happens between the ages of 75 – 90 if you live to be 90?

  10. Canadian Dream says:

    James,

    I assume you are referring to the vacation fund (your question wasn’t clear). I didn’t put in any extra money for that period since I don’t expect to be traveling that much when I turn 75. Also if you skip ahead to Part V of this series I end up with an excess cash flow that starts at 65 (from OAS) so that would easily keep me traveling if I change my mind.

    I hope that answers your question.

    Tim

  11. Natalie says:

    How will you pay for your children’s education? That is not mentioned here?

    Natalie

  12. Susan says:

    I read your first article in the Toronto Star today with great interest. A lofty goal ahead of you, no doubt. Interested, as is Natalie, about your plans for your kids’ education. Are you contributing to an RESP?

  13. Eric Ray says:

    Nice to see another young person aiming for such lofty goals! I read the article with much interest. Like you, house wife, 2 kids, engineering field, in my 30′s the difference is I’m retired. Now, I’m going backwards and fine tuning RRSP’s and looking at TFSA’s.

    Looking forward to your series.

  14. david coates says:

    This is absolute voodoo economics. You are grossly underestimating future costs (cars, appliances, services, taxes, educations, medical and other costs all go up above the rate of inflation) and are a bit rose-coloured about your income, i.e. you won’t even make the $1 million over the next 10 years — let alone save it — to generate $40K a a year at 45.
    You have a much better chance of growing a unicorn horn.

  15. david coates says:

    Sorry, typo. It should have read “over the next 12 years.”

  16. Missy says:

    You’re planning to use OAS and other government supports for your early retirement plan, a plan which hinges on working the numbers to avoid paying tax.
    Hmmmm…can’t say I support that plan. Well, actually I guess I would be; supporting you, that is.

  17. david coates says:

    Missy, you don’t receive OAS payments until you are 65.

  18. Canadian Dream says:

    @Natalie, @Susan,

    Yes the boys have an RESP family plan. I will actually deal with that specifically in another article later this week on Moneyville.

    @ Eric Ray,

    Thanks for the motivation. I love to hear when people hit an early retirement.

    @david coates,

    You said “This is absolute voodoo economics” Wow that is a new one. After four years of people telling me how I can’t do this I don’t get many new reasons, so thanks!

    In regards to you concerns, I don’t think I’m being all that unrealistic about costs. Perhaps I’m a little low on a few of them, but like any other point in my life I will adjust my spending to deal with it as it comes up. Also I do intend to do some work post-retirement, so that will provide a nice extra cushion in case I do get it wrong.

    As to savings, if you read this series of posts I don’t plan on saving $1 million. I’m actually aiming closer to $750,000. My investment net worth is over $100K already and I will be done my mortgage in just over 2 years. So after that I can save about $3800/month so at 5% compounded for 11 years works out just around $850,000 so I even have a bit of a buffer.

    Missy,

    Actually I only need about 50% of OAS to cover my plan. The rest is just bonus if the program is still the same in 13 years (I’m betting on a reduction).

    In regards to paying tax. In reality there is nothing patriotic about paying taxes. It’s a expense like any other than you should try to reduce using every legal means you can. So if you can keep that down and your housing costs you are a lot closer to early retirement. Even if I paid tax on the remaining $6400/year that would only work out to about about $1664/year. So paying it is not a deal breaker on the plan.

    Thanks for the questions everyone. I hope I got them all.

    Tim

  19. david coates says:

    @Canadian Dream:

    With all due respect, I do find the subject fascinating and your approach instructional. But I think where you go wrong is that you are too optimistic about both expenses and returns. My wife and I took a similar approach about 15 years ago for a planned retirement at 55. It really wasn’t possible to save put away much money until the early to mid-90s because of the restrictions on RRSPs, no TFSAs then, much higher marginal tax rate, etc. And yes, we made it. By having two incomes.

    Your plan is perfect in theory, provided you stick to it and unanticipated things don’t throw you off course. But unknowables happen. Regularly. Like the technical analysts who can’t foresee a terrorist attack, recessions, a volcanic eruption, widespread bank collapses, you have no idea what form the next market hit will take. You need a 7% return after inflation to reach your goal. That takes risk.

    What is important to consider here are the growth of expenses, which you have grossly underestimated, inflation, and the psychology of saving. If you are saving for a goal 12-15 years down the road, it will be difficult to maintain your skinflint approach through the daily grind without rewarding yourself from time to time. Such as vacations, appliance upgrades, renos. Holidays for 4 at $3,000 a year will get you really low budget boredom and not much else. Your kids will not want to camp when they 13. And $24,000 a year in spending for a family of 4 is too little. It will be difficult to maintain frugality in the face of such relative abundance.

    Here’s where you’ve underestimated:

    Vacations, more like $5K-$7K a year.
    House maintenance, upgrades, more like $3K/year.
    Car depreciation/replacement, more like $3K a year.
    Education. You say that your boys will “be out the door” when your are 45. Sure they will, out the door to university at $25-$30K each per year. So you need to come up with $200K. You can’t do that with RESPs. And, when you need the money, as those of us found out in 2000-2003, it may have lost 30-40% of its value.
    Unless they live at home. Four adults in a 1600 sf home? I suggest you try it. Or not.
    Property taxes. You think you’ll be paying $3,000 a year in 11 years? Mine tripled in the past 10 years.
    Utilities/Services such as heat, hydro, phone, internet.
    Medical expenses. What if you get sick and can’t work?

    Realistically, I think you will need to budget for at least another $10K a year minimum, otherwise you and yours will feel you are beggaring yourself to the point of being cheapskates.Still, you will go a long to achieving your dream merely by the effort of trying. Good luck.

  20. david coates says:

    Just one thing I forgot. You have to wait more than 30 years for your OAS, not 13. Can’t count on it being the same that far along.

  21. Susan says:

    @Canadian Dream – I have to agree with your take on RESPs/higher ed that you wrote about in today’s Moneyville. I have two university degrees and while my parents did help me out by contributing to the cost of books and a portion of the tuition for a few of those years, I slogged away at a summer job each and every year, saving my pennies to put towards my tuition and other expenditures. It taught me not only about the value of money and how to spend it wisely, but it instilled a sense of self-worth and pride that I was able to leave university with zero debt.

    I also have two young children for whom my husband and I have opened an RESP – our goal is not to necessarily pay for every last penny of their postsecondary schooling, but to be able to help them out when the time comes and instill in them the same understanding and appreciation for money that we received from our parents.

    finally, to @david coates, while I agree that Tim should try to plan for the unexpected [which it appears he is wisely trying to do] and that he should take into account a realistic view of how inflation could blow some of his fixed costs out of the water, I think you underestimate peoples’ ability to live on less. I grew up with my parents and sister in a house that was less than 1600 square feet, we NEVER took vacations that cost anywhere close to $5K-$7K and I certainly didn’t mind camping when I was a teen. I did not, and still do not, consider myself depraved in any way because I didn’t live in a big fancy house or enjoyed exotic trips – I had the most important thing I could have possibly asked for – a stable, loving family – all the other stuff is just frills.

  22. Canadian Dream says:

    @david coates,

    Sorry it has taken a while to get back to your comment David I’ve been a little swamped this week. I agree that people have to reward themselves periodically. But I agree a bit with Susan and take issue with your amounts.

    My $3000/year vacation amount is an average. So some years it is higher and some a lot lower. This typically shows up as we often will do a bigger trip every second year and between those years we visit family during our vacation. Your amount looks like a bigger vacation every year.

    Home upgrades can be expensive and if I was planning on having a older home when I retire I would have increased that dollar amount. Yet I’m planning on downsizing and building a new smaller house when I retire (paid by the downsize). So I won’t really need that much money per year for the a good long while.

    Cars. Well to date I’ve had the same car for almost 10 years. I certainly didn’t pay $30,000 for it as your rate suggests. I’m not hung up on new cars so I don’t mind keeping a lower amount.

    Education – I will assume everyone read that article on the Toronto Star and realize I don’t plan on paying for all of my kids post secondary education in the first place. Also I’m planning on not paying for living expenses so if they go to a university out of town that is their cost and choice. My bill will be no where near that $200K total you are suggesting.

    Four adults in a 1600 sq foot home? Easy. I’ve been there myself, I will say I didn’t mind at all. It does depend on the house layout, some suck and are bad for that sort of thing while others work fine.

    Property taxes – ah, that is an interesting debate. How much of an increase should I expect since they are often not related to general inflation? Well it depends on your local market. My is doing it’s boom right now (my house value has doubled in three years). Yet will it continue or drop off. It’s hard to say.

    Thanks for the feedback. You are a least making me think about these issues again.

    Tim

  23. david coates says:

    @Susan:
    Yes, people can live on less. I, too, grew up with three brothers in a smallish house, had camping holidays while growing up, and never took trips (you had to be relatively wealthy to fly to Florida in the 50s and 60s). Paid for my own secondary education. But economics have changed and expectations with them. If Tim lives in his house for 13 years without spending on renovations, it will look dated and shabby, which will hurt its resale value. Do you think his wife will put up with her house resembling a cat farm?

    As for holidays, I prefer DYIs and would not take a cheap all-inclusive to Cuba (you spend all your time trying to find a decent meal,lol!) But let’s do a simple March break of 1 week, 4 people from T.O. to Florida: flights $1,800, car rental $300, 2-br condo rental $1,500. Groceries and entertainment $300 (assuming 1 lunch and 1 dinner at a restaurant).
    Total $3,900. And that’s only 1 week and a budget holiday. And no Disneyworld thrown in.

    @Canadian Dream:
    Tim, about the car. It’s is not that one has or needs a $30K car, but that one’s annual driving expenses will range between $3K and $4,000 (depreciation, or savings to replace the car when it dies, gasoline and maintenance, as well as car insurance). The older the car, the less the depreciation, but more maintenance costs.
    In Toronto, the cheapest car insurance premium I can get is $1,500 a year for a non-work-use, fewer-than-5,000-kms-a-year policy. Ok, cheaper in Regina. Still, you need about $3K a year, not $1,000.
    As to education, most parents tend to foot the bill if they can afford it. As you will obviously be in a position to afford it when they are 17, it begs the question. Will your kids resent having student debt after graduation while you are relatively rolling in it? What of the status deficit among their peers ( no Nikes, no new clothes, no social life, always flipping hamburgers or hitting the books).
    They just might think you are being miserly.

  24. Larry C says:

    Hi Tim,

    I congratulate you on your approach to spending and saving and I’m quite certain you will be quite comfortable financially as you age. Eight years ago, I was your age, married with 2 very young children. A significant difference is I live in an expensive suburb of Toronto. My wife and I have always been very good at saving money, which is a good thing. However, you know what they say about too much of a good thing. As the children grew older (they are both under 10 today)we had to decide whether we would give them experiences or stick to our strict saving plans. Experiences are expensive: ballet, swimming, karate, figure skating, skiing for daughter; piano, bowling, baseball, skiing for my son; Disney world; The Lion King; the Toronto Symphony Children’s Series; Blue Jay game. Seem like a lot of experiences, but my kids are among the least programmed kids in their peer groups. To see my daughter excel in ballet or listen to my son play a beautiful piece on his piano is priceless. My son has a knack for computers; there is a wonderful computer summer camp for kids where children learn robotics, animation, and programming; cost $450/week. My daughter is such a natural swimmer, she has been asked to swim for the local swim club; not sure about the cost, but it won’t be cheap. These are the choices you will have to make as your children get older.

    The second point I wanted to mention; in one Star article you mentioned you saved money buying mushroom soup. My question is why on earth would you be buying canned mushroom soup? You’re buying processed soup that is high in fat, salt and god knows what else. Spend more money on good quality food for you and your family. That means hormone free, antibiotic free meats, free range eggs, and certain organic fruits and vegetables. I know you mentioned your love to garden so you probably have a wonderful supply of healthy veges.

    Once again, I think you are doing a good thing by watching your spending and this will give you more time to be a good father, husband and community member. Just giving a few suggestions from someone who very much follows your same path, but just a touch older. Good luck.

  25. Canadian Dream says:

    Larry C,

    Thanks for your comment. I agree I will likely shift some things around as I go along. Also my plan doesn’t include any raises for me beyond inflation. So as the years go along I will start generating a surplus to fund some additional activities and experiences for my family.

    As to the soup comment. I do actually invest some money in farm fresh eggs and fresh veggies from the farmer’s market. I’ve converted over the majority of my garden to a strawberry patch this year since I knew I won’t have much time over the summer to work in the garden.

    Thanks for the advice and take care.
    Tim

  26. Canadian Dream says:

    David Coates,

    Oh too funny. I didn’t realize you meant depreciation, insurance and gas with your $3000/year. I’m actually close to that amount in my budget (~$2800/year), but I’ve got it filed differently. That $1000/year is depreciation ONLY. Ok, we are closer than I thought with our thinking. Thanks for pointing that out.

    As to education I might help out around their education as they go through school, but more than likely more indirectly. I want them to have some responsibility for some of the costs, but I will help out with little things like their first grocery bill of the year. I’m not worried about the status deficit since university typically has such a wide spread of economic backgrounds from kids who are barely covering the costs with loans and jobs to the trust fund kids who drink their tuition in the first month and need to ask for more money.

    Thanks for the discussion. It has been interesting.
    Tim

  27. Eldon A says:

    Thanks for your responses so far on a topic near and dear to me, as I am retiring on December 30/10 at age 55. I have been fortunate to be a crown civil servant(some would say ‘simple’ servant) and be blessed with a indexed pension of 50k. Even so my net income per month will be reduced by over 1k from now on. I have 160k in RRSP/savings and as such can maintain my standard of living (more or less) by taking approx 750$ per month out of it. Even doing this and not counting in any interest, I could supplement my pension each month for a total of about 17 years with the principle. I would then be 72 and will have been in receipt of CPP (since 60 and OAS since 65). As the government pension plan is tied to the CPP I MUST take a reduced pension at 60 as when I reach 65 the govn pension is cut back almost dollar for dollar for what you receive from CPP. I have gone through your process of tring to calculate my monthly expenses and have tried to be realistic with how much money it is I need however what I have not counted on is the further education of my youngest two who are in university and almost in university. I hope to pick up work as a tradesman after retirement but on a pt time basis only. I am assuming the kids will continue to work through university and we will help as much as possible. My wife will continue to work pt time. Great to read your and your readers comments.

  28. Mike says:

    Hi, read your series over at the TheStar but their comment system is broken. I have a question.

    You say you have an $88, 000 mortgage you intend to have paid off by early 2013, well it’s the end of 2010 so that leaves you about 2 years to pay off almost $90, 000. Yet you make a bunch of conflicting statements such as:

    “This seems enough given that I spend about $40,000 a year now, which includes $15,000 a year for regular mortgage payments.” This $15, 000 number makes sense because you have paid $60, 000 in the past 4 years.

    You also say you have an accelerated mortgage payment of $3800 a month, or $45, 600 per year.

    So you’re either paying $15, 000 per year, or $45, 600 per year in mortgage, I don’t know which one.

    If $15, 000, how do you plan to pay of a $90, 000 mortgage in 2 years? if $45, 600 how do you estimate your TOTAL spending at $40, 000 when your mortgage alone is more than that?

  29. Canadian Dream says:

    Mike,

    Sorry I don’t mean to be conflicting, but when you cut a 1000 word article down to 750 some things get lost. I will try to clear things up.

    Actually the $3800 isn’t the accelerated mortgage payment. It is the total savings after the mortgage is paid off. The $15,000 is the regular payments and then I’m doing a bunch of double up and lump sum payments to shove as much money as I can at the mortgage for the next two years.

    The $40,000 expenses includes the regular mortgage payment of $15,000 so I only need about $25,000 in other expenses for a year. So $25,000 plus $45,600 is about $69,600 and tax and that is basically my income.

    I hope that helps, if not please let me know.
    Tim

  30. Mike says:

    Well that explains it.

    Forgive my ignorance but I wasn’t aware you could just dump extra cash into your mortgage whenever you felt like it…

  31. Canadian Dream says:

    Mike,

    Actually your extra payment options for your mortgage depend on which bank you are with and their particular options. My bank allows me up to 15% of my mortgage value in lump sum payments at any time during the year. Some other banks I know only allow you to do that once a calender year so read the fine print on your mortgage agreement or ask your bank about what options you have.

    Tim

  32. Billie says:

    Well done, very nice to see someone who has done what my wife and I have.

    I’m 51 my wife a few years younger, our son is a teenager. We have saved more than the $750k, paid cash for our house, and put aside $100k for our son’s University education. My wife has a defined Pension Plan, and our monthly expenses on our house, true overhead is only $850. That is heat, hydro, taxes, insurance the fixed monthly costs.

    Formula you ask? Don’t borrow money, don’t go in debt and live within your means. Canadians feel entitled to have all the stuff right away. That’s not the way it works in reality. Unless, you want to service debt. Oh, we aren’t Dr’s or Lawyer’s if that’s what you are thinking. We are typical wage earners in Canada. Lived in an apartment until we could pay cash for our house. At the same time we lived large, traveled everywhere, did all that before having a child. Here’s my advice – DON”T BORROW MONEY! LIVE WITHIN YOUR MEANS! If you have to borrow money to buy something that just tells you that you can’t afford it.

  33. Dawn says:

    Agreed that the formula is simply “live below your means” and “don’t borrow money”. However, saving to buy a house in cash doesn’t seem realistic.
    By the time I would have had the cash for a house, the price of the house has increased and I paid someone else’s mortgage in rent for all those years.
    Maybe, it is more like “don’t borrow money for items that depreciate”.
    Just a thought.

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