Retirement Calculations – Part V

Alright, so now I have all these pools of investments, so how exactly do I spend them is the real question.  So after playing around with a few different methods I put the numbers together in the following spreadsheet.  See the BASE tab to see the calculations.  Now note the data used in this sheet doesn’t match the last few days of numbers.  Why?  I didn’t want to do the hassle of calculating monthly compounding and by doing annual compounding only I’ve added an extra layer of being conservative (so hence the lower numbers).

Then I also dropped my rate of return after 45 down to 4%.  So on the CHART tab you will see my income versus spending chart.  The line goes up till 45 and drops down at 46, the reason is the change in the rate of return.

In the end if I could keep up the 5% rate of return I can pull the plug at 43, but given the number of conservative factors I’ve used it could be earlier than that.  Also if I assume everything goes to hell for a long while here and I have crap returns for the next five years I would still likely retire by 49.  So I’m retiring in my 40’s at some point, when that happens will depend on how life goes.  Overall I find that a comforting thought.

Perhaps another comforting piece of information I took out of my sheet was the fact at 65 with no other income than CPP, OAS and my pension I could bring in \$31,899.  So now I have some parameters to plan within for some sensitivity tests that I want to run on these numbers.

I’m planning on working on several different scenarios like: being semi-retirement at 40, what happens if OAS gets cut in half, and what happens to my target date as rates of return move up and down.  I’m curious what other ones you would run on your numbers?  Please suggest them in the comments.  I’ll try to get to these scenarios over the next few weeks and roll out the results from each one when it becomes available.

Note: No post on Monday (it’s Family Day here in SK).

13 thoughts on “Retirement Calculations – Part V”

1. Mintycake says:

Very cool series!
I’ve always wanted to do something like this for myself. I guess my question is how you guys live on \$30K a year…maybe it’s where you life? Here in the “Big Smoke”, even without a mortgatge, my husband and I are spending about \$55,000 a year (no kids). Mind you, \$20K of that is on travel so if we cut that out we’d be \$35K for the two of us which is more reasonable. We’re planning on starting a family and I really want to stay home and/or do part time work after mat leave. Would you be interested in using us as a “expenses in the big city” case study? (I’m always facinated by the Financial Facelift collumn in the Globe and Mail).

2. @Mintycake I don’t think it’s unreasonable to live on 30-35k per year (or even less, if you’re creative!), even in a larger centre.

I’m in Calgary, and our annual expenses for 2 people, no kids, with a mortgage sit around 32k. We could probably drop that down to about 25k a year if we really wanted to. Once the mortgage is gone (we’re paying it down fairly quickly), our expenses will drop down significantly. So it’s certainly do-able.

I personally find it’s just a matter of priorities, and really taking a look at what expenditures are real “needs” and which are “wants”. Not that we don’t spend on wants — but we do so carefully and mindfully. It makes the “treats” even more special when they’re not every-day occurrences.

In fact, after tracking our income and expenses for several months, we’ve decided to actually start putting aside a little more “fun” money for some more extensive renovations and some travel.

We certainly don’t feel deprived with our current spending — in fact, we find it hard to imagine spending more than we do — but travel and renovations are two areas that we’ve decided to focus a little more on.

3. No one is talking about it yet but don’t be surprised that the CPP starts to look like it is running into problems meeting its committments. If a worse case bear unfolds this could be a concern.

It may or may not be appropriate to run a “what if” using both the 1929 to 1954 and 1968 to 1983 circa time periods.

In any event, you will be way ahead of the pack because you have already learned to live below your means.

4. Katie says:

I looked over your chart – I also have been building my own charts for my retirement. However, based on my expenses today and factoring in inflation (something that I did not see in your spreadsheet), and find it very unreasonable to think that you could retire on \$30,000/year for life.

Katie,

All calculations are done in today’s dollars hence inflation is already accounted for (see Part I). Each person is different on how much they need. For example, even with a mortgage I don’t think I’ve ever spent more than \$40,000 in a year, so \$30,000 should be lots for me.

CM,

Good point. I’ll add that one to my list.

Mintycake,

Sure. I can look at your numbers if you want. Send me an email via the contact form.

Breanne,

Thanks for sharing. It’s good to know you can live on a lower amount even in Calgary.

Thanks everyone,
Tim

6. Perry says:

Great blog. There are many good reasons for simple (thrifty) living.

I would suggest that you should think of this as a career transition, perhaps to self-employment, rather than “retirement.” Finding a job(s) that you want to do and also pays is ideal.

I’d greatly appreciate if you detail the meaning of each of your columns in your spreadsheet. The source of the numbers especially in the Balance section is not clear to me.

7. louieP says:

what’s the definition of, in Chart1,
Total Income and Est.Spending?
and why is Est. Spending no increasing per inflation over time?.

Thanks
Louie

8. Perry says:

In attempting to create a similar retirement worksheet for myself I learned a few things you might need to think about.
1. The RRSP and TFSA limits are not adjusting upward with inflation. So to keep everything in 2010 dollars you need to adjust your contributions downward.

2. The results are highly sensitive to the rate of return on your investments. Investment returns are compounded (geometric) so the results are especially sensitive to large drops in returns early on.

3. Large lump sum expenses (e.g. new car) are hard to model. Is your asset allocation including a pool of cash that you can use without risking equity withdrawal?

4. The difficulty of maintaining a frugal lifestyle when others do not should not be underestimated. You, your wife or your kids may rebel at a later point.

Good luck! Your posts have me thinking!

Perry,

Some excellent points to consider.
Re:#1 TFSA do have a provision to increase with inflation, but only in \$500 increments, but I think your point is still mostly valid. At best the increases are uneven and thus introduce an error into the model.
Re: #2 I’m very aware that actual investment returns are non linear and thus might blow my plan out of the water or speed up the plan. It’s impossible to predict so I take the average and basically hope for the best and adjust the plan as I go.
Re: #3 I do model the retirement fund at a lower rate of return since at that point I would shift some of the money into GIC cash to cover that very issue.
Re: #4 Actually I haven’t found the entire thing hard at all. Neither has my wife. The kids are young yet so that might change, but if they rebel that is less of an issue. Also I do pick up any after inflation pay increases over time which will provide a little more fun money as they get older.
Tim

Estimate spending doesn’t increase because inflation was removed from the calculations (hence real returns and today dollars). As to Chart 1 I’m a little confused on what you are asking about. Could you please explain it in a bit more detail? Thanks, Tim

11. Catherine says:

I was wondering what kind of estate planning and financial planning you’re doing related to the possibility of the early death of you or your spouse. Do you have life insurance over and above anything you’re provided with through work? Do you have mortgage life insurance? If you died soon after you retired, how would your wife’s financial status be impacted – would she be able to continue not working?

Somewhat related to this is a question about how your insurance coverage will change after you retire. Will you be purchasing life and/or medical insurance privately after you retire, or at least until you turn 65 and would qualify for the Saskatchewan Seniors Drug Plan? If you did not have private medical insurance after you retire and you or your wife suffered from a catastrophic illness, the costs of perscription drugs, for example, could become quite high, so I was wondering what kind of contingency planning you’re doing for that situation.

It may seem academic, but my own father died at 56 and a friend’s father died at around the same age, both after suffering from cancer for a number of years. The differences between the medical insurance (particularly drug coverage) and estate planning of each man led to dramatic differences in the financial quality of life of their spouses after their deaths.

12. Serge says:

Tim, I am not sure that I understand your BASE shredsheet. How do you calculate column #3 (Pension)? Is this money that you can put aside for pension? Since your annual income is not here, it is difficult to see the balance. I also do not know if the real return rate can be 4-5%, I would rather count on 1-2%, unless you want to take a risk. For convenience, I would even disregard the return money since it will be balanced with inflation. And lastly, I suspect that OAS depends on CPP and RRSP – more you have CPP and RRSP – less you have OAS, there are some treshholds.