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Tuesday, March 28, 2017

The Semi-Retired Calculations – Part III

Posted by Tim Stobbs on February 25, 2010

Are you all confused yet?  My wife had mentioned she was a bit unsure where the hell this series was going so I thought a time line might help sort things out.

  • Age 34 – Mortgage paid off, shift payoff money and mortgage payment over to savings.
  • Age 39 – Complete semi-retirement savings.  Now $18,000/year will come from investments to cover the basics like food, property tax, insurance the bills (power, natural gas, water, phone).  I quit my day job and do something else.  Between my wife and I we need to make only $9,000/year to cover the rest of our typical expenses.
  • Age 39 to 60 – Continue to work part time and assume I spend any extra money that we earn in excess of $9000/year.  The reality is we don’t have to do that.  If we find we are regularly making much more than that and not spending it we could then put the money back in the retirement pool and shift over to full retirement earlier than 60.
  • Age 60 – File for CPP and move into full retirement.

Today we are going to focus a bit on two parts of that time line: 39 to 60 and then 60+.  Now the first section of 39 to 60 will be hard to predict since I’ve tried to build things to be as flexible as possible.  I might end up working full time for a year on a project and then stop working for three afterward.  Or I might just work part-time for that entire period.  The point is the ability to do just about anything as long was we are making a bit of income.

Regardless of how we do it it should help rise up our CPP payments since I won’t have this string of $0 income years that have typically dragged down my benefit.  To play it safe I’m going to assume that we only get about $6000/year by taking CPP at 60 for both of us (my typical full retirement calculation).

So then at age 60 I’ll still have that $18,000 a year from investments, plus $6000 from CPP for a total of $24,000/year.  Which leaves me a little short from 60 to 65 (I’ve typically assume spending around $27,000/year).  So I can eat into my principle for a bit, which won’t be bad only about $15,000 in total.  At age 65 we both can get $6000 each from OAS for a total of $12,000/yaer, but I’m playing it safe and assuming we only get half of that or $6000/year for both of us.  So at 65 we should have an income of right around $30,000 a year in full retirement.

All in all it’s a workable plan.  Yet there is one little interesting fact in all of this.  I could just keep working from 39 until 42 and have the money build up to produce about $27,000 a year in investment income.  Then I’m not required to work at all from 42 onwards.  To be honest it’s not a bad idea.  I’m just not sure what I’m going to do.

I think it will heavily depend on how I feel about my job when I turn 39.  I might want to keep working or just reduce my hours to three days a week.  Or I might be sick of it and ready to move onwards.  The point is that last year or two of work just prior to retirement are your big compounding years, if you can hang on at all or don’t tap into that money it makes  a huge difference to your final portfolio value.  So choose carefully, the results will carry forward for a long time.

Comments

9 Responses to “The Semi-Retired Calculations – Part III”
  1. Middle Way says:

    I think you will know when you get there. With each landmark opens up the next group of choices.

    Right now I’m at 3 days a week and my next move will be to 2 days a week when our mortgages are done.

    Sure, if I stay at 3 days, then I’d make more money but I doubt I will.

  2. Randalynn says:

    I have a question for you about future health costs. Once you are over the age of 50 a person can expect their chances of developing a serious disease to increase (cancer, diabetes, heart disease, etc). Not all costs associated with this are covered by our health care, so I’m wondering what type of provisions you have made for perhaps needing costly perscriptions or some other expense.

  3. Rena says:

    Honestly, don’t you think that living on
    $24,000 a year is depressing? How can you travel, or take up some kind of activity. I look at my mother who is 84 and zipping around, who cooks for herself, runs a household, and is very frugal. She is still travelling and doing things and I know that if she only had $24K there is no way she could go and do things like she does. She even talks about those who have little, the women who worry every night about how they are going to pay their bills and cant really do anything because they have no money. Yes you can live on just a little but it certainly limits your options! (BTW my mom just came back from a 2week vacation in Panama, her 2nd trip in 6 months, she doesn’t get a pension from anyone, this is from her savings and dividends but she aimed for a much higher income than 24K). I really think you need to rethink this!!!!

  4. Canadian Dream says:

    @Middle Way,

    Actually I like that point of view. Each new level opens up more choices. Thanks.

    @Randalynn,

    The budget contains $1000/year for medical. If it isn’t used it just goes back on the pile and banked for future years. I might have to adjust that amount higher as I get older and develop any conditions. I’m also thinking my highly reduced stress levels and being able to eat right and work out for 20 extra years should help my health.

    @Rena,

    So your implying my life is depressing? If you take out my mortgage payment I’m already living on less than $24,000/year. Sorry I’m happy at this level. I take at least two trips a year and enjoy reading, writing, visiting friends and family, having dinner parties, wine making and doing some home improvement projects when I have the time.

    To address travel specifically I should have mentioned I keep travel money outside of the main budget to avoid over saving. Let’s be realistic most people at 80+ don’t travel a lot so to have travel money for every year of your retirement is somewhat over kill (obviously in your mom’s case that is different). So we just keep a slush fund for travel (around $50 to $100K) and a list of places to go handy.

    Tim

  5. I think the most important thing to keep in mind is that when one decides to retire, regardless at what stage you get out of the rat race (no pun intended) and what your expected income is going to be, chances are you will still have to budget you money and track it diligently.

    How many people do you know that have retired with great pensions and with solid companies, but still have to watch their monthly income closely even though the house is paid off, etc? The answer is most people for sure.

    Keep in mind, when you’re retired and your house is paid off, and you’re earning say roughly $20,000 in investment income and you’re not working, believe it or not, that’s not far off a $60,000+ salary! You won’t be paying into EI, CPP, and other federal and provincial taxes. A lot of the securities you will have in your portfolio will also provide better tax treatment. You also won’t be commuting back and forth to work. And your mortgage is paid off too. That leaves you with the $20,000 range of total income after expenses! It could be a bit tight to manage, but it is still very likely manageable!

    I left the workforce in early January, and I’m still on the same tank of gas since January. I walk a lot to pick up groceries because I have a lot of time. I do stupid little things like finding ways to reduce my telephone and utility bills and ways to save more money and track my investments. It’s a way of life when you hang up the skates – for me at least.

    I think Canadian Dream is on the right track to say the least. In my view, the most important thing is the mortgage to get out of the way, and he will have that out of the way by 34 yrs of age. Opportunities abound when the home is paid off. One of the great tax havens is the fact that any capital gains from the sale of your home is tax free so if it’s paid off and you want to move to a smaller home or make some money, its all gravy on the sale.

    Nice three-part series Canadian Dream. I think Part III really clears up your full intentions from a PF standpoint and I commend you on your efforts thus far.

    P.S. Forget the 39 ti 60 range. It’s GOTTA be from 39 to 45. Keep livin’ the dream Canadian Dream! :)

    Best of luck
    The Rat

  6. Rena says:

    I’m sorry, I didn’t mean to imply that your life was depressing…I meant that you and your wife may find it very depressing living on that amount in the future with no way to increase it. I know a number of 80+ people still travelling, healthy and having fun and so I don`t necessarily think of the elderly as being in a nursing home(which those who do live in find expensive and worry about paying for). My mother kept my Dad home with Alzheimers and many times she said that had she not had the money saved there was no way she could have given him the care he needed…one example: every 2 weeks a podiatrist for his feet ($50) + taxi ride ($50) since he couldn’t travel on the bus, and a whole bunch of other needs. As a tax preparer I see lots of older folks living on small incomes and I see the sacrifices they are making. I just feel that perhaps you should look at a higher amount…I am not saying that you should stay in a job that you dont like etc There is so much out there. So many older folks now wish they had kept working. They miss the feeling of being needed…I congratulate you on your accomplishments and I enjoy reading your blog. I do hope that you succeed and that you realize your dreams! I am truly sorry that you feel attacked by my comments.

  7. Canadian Dream says:

    Rena,

    Apology accepted. I know you didn’t entirely mean your comment that way I just wanted to point out I live a fairly low cost lifestyle right now.

    As to a higher amount. This was just a scenario analysis, my more default case actually has me with $27,000/year investment income at 45 and still working part time, but I don’t use the working income for anything. So depending on what comes in I would end up making more. I for sure would make more at 65 with CPP and OAS coming in and boosting my income closer to $45,000 if I include OAS for both of us.

    Thanks for your comments. I do appreciate frank discussions and concerns that people have with the plan.

    Tim

  8. Kerry says:

    I found your calculations to be quite interesting – I’ve just started reading your blog, so I don’t know exactly how old you are now, but in general do you expect that Gov’t pension (CPP/OSA) are really going to be as good as they are now? Personally I’m doing my retirement saving with the assumption that CPP will collapse, and OSA will be reduced. Given the current population shape I believe that my parents will enjoy their retirement in a gov’t funded way that I simply won’t.

    Basically, I’m wondering if you have a backup plan? Or if you will be able to live on your budget if CPP and OSA are not what you currently expect?

  9. Canadian Dream says:

    @Kerry,

    I’m closing in at 32. Depending on your age that could be a valid assumption. CPP is more likely to hold out in the long run as at least is has investments, unlike OAS which comes out of general revenue for the federal government.

    I always have had several backup plans. You can read more about them in the archives, but in general my biggest one is the house equity. I don’t use my home equity for anything so I can always sell it and rent as a back up plan.

    Tim

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