2011 Retirement Calcs – Part I

It’s almost been a full two years since I’ve done a full redo on my retirement calculations.  Today I’m going to start redoing them, but I will caution I’m going to try something a little different and see if I can drift down that retirement age to 42.

To start with you need to know your spending, if you don’t know this you need to find out.  Previously I’ve always estimated by spending with the following formula: current spending – mortgage (because I’m going to have it paid off) – work expenses.  The reality is my current spending is only an estimated number, so in 2012 I’m going to track every penny of spending for that year to give me better data to work with.

Yet for now I’m going to just use my latest budget data: $3988 – $1840 (principle and interest only) – $79 (gas and parking) = $2069/month.  To make things easy I’m just rounding up to $2100/month or $25,200/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 $140/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.

One other comment on my living expenses, yes they are mostly covering just the basics since I fully expect to keep writing after early retirement and still get some income from that.  So that extra money will fund any trips I want to take which given my typical travel budget has been $3000/year and I’ve already exceeded that in profit from my business for 2011: I think that is a fine assumption.

Yet, I need to add a few items to $25,200/year figure.  First off I’m going to assume $1500/year in house maintenance and $1000/year in car depreciation and $1500/year in medical costs.  So in total I’ll need $29,200/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 federal deduction is $10, 527 per person, so with a clean income split via spousal RRSP and pension spliting that totals $21,054, which leaves $8146/year to come out of our TFSA accounts to pay no tax.  With TFSA contribution room of $5000 x 2 x 14 year = $120,000.  So that $8146 represents a required yield of 6.8% which is a bit high, but possible.  Worse case would be I would be out a little bit of living money to cover tax or have to work a little bit each year to cover tax (I ran a quick estimate one day it came out to less than $100/month).  In either case that is acceptable for these calculations.

Oh, some general notes on this series of posts.  All values are in 2011 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 42?  Well that we will calculate as I walk through my accumulation of assets over the next few posts and some other income sources (OAS and CPP).  Then at the end of this series 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.

10 thoughts on “2011 Retirement Calcs – Part I”

  1. I think your house maintenance is too low. The car depreciation is way too low if you will be buying new cars (even if you keep them for a long time).

    Don’t forget about disability insurance. I’ve heard that can be quite expensive.

  2. Mike,

    Car depreciation is for used only. It also doesn’t include insurance, gas or maintenance of the car which is rolled into my regular budget.

    The house values is strictly maintenance and doesn’t include any reno work. The value is meant to cover: furance, water heater, air conditioning, new shingles appliances and minor repairs over a 20 year cycle.

    I’m curious why you are suggesting disability insurance?

    Tim

  3. I still think your house costs will be higher.

    Roof
    furnace
    a/c
    water heater
    appliances
    windows
    siding (depending on the house)
    decks.

    For my house, all of those things would probably cost around $50k.

    I think disability insurance might still be necessary for two reasons:

    1) You’ve indicated that you still expect to earn some income in order to have money beyond the basic expenses. I guess it wouldn’t be essential, but your family might appreciate if that income was covered.

    2) If you are disabled, you might be a drain on your family resources – medical equipment/extra care. That could hurt the family finances quite a bit.

  4. Roof – $11,000 – 15 year = $733.33
    furnace – $6,000 – 15years = 400
    a/c – $2,500 – 15 years = $166.66
    water heater – $1,500 – 10 years = $150
    appliances – $3,500 – 12 years = $291.66
    Hmmm.. depending on the life span the estimated cost of these items would average out to $1,741.65 per annum not including the other items list by Holman. I think we have to assume that since Tim will have plenty of time off he will become very handy and will be able to conduct repairs on the appliances, roof and a/c to extend the lifetime of these items.

    Life span of the below probably 30 years or more but should also be considered
    windows –
    siding (depending on the house)
    decks.

  5. Mike,

    Ah, now I see your point. Thanks for the list. I’m missing windows from mine. Any one have ideas on how much that costs? I personally have never had to do it, but I know it can be alot of money. I don’t have a deck or siding hence I didn’t have either on my list. Yet perhaps I need some cash for the fence replacement? From Ross’s numbers I get some of them, but I had estimated the roof over a 20 year timeframe (seems to be the average in my area) as well as the furance over 20 years…not sure if that applies that much to newer ones.

    Interesting points on the disability insurance. I agree more with #2, more than #1. I will have to look into the costs and decide about it. Thanks for the insight.

    Tim

  6. Hi!

    I think some of the lifespans can be longer than Ross took into account, at least that’s my experience. Also, some of the values depend on how big the house is and what are your local prices. For my admittedly smallish house, the furnace was around 3.5K and the roof another 3K, so those numbers can vary for your case.

    Roof: You may get 20 years from your roof if you are lucky. My 30 yo house had 2 layers of shingles, that gives an average lifespan of 15 years assuming there were no other layers I don’t know about. There are some leaks traces in the attic, so it was probably replaced as late as possible.

    The shingle warranty is 25-35 years, but that doesn’t cover labour, only the shingles (which are pretty cheap anyway). If it starts leaking, it may be cheaper and safer just to redo the whole roof. The parts & labour roof warranty in my area is 10 years, that tells me when to expect the problems to start popping up 🙂

    Water tank: my tank is 15 yo, and it had a 6-year manufacturer warranty. I guess it’s the cheapest they could install at the time. With really minimal maintenance, you can surely get better than that. If you want to pay the premium, there are also tanks with 12-year warranty on the market, not much more expensive.

    Furnace: I recently got rid of the original furnace installed when the house was built, 30 years ago. I replaced it just for efficiency reasons, otherwise it worked OK. My neighbour’s furnace died this year after 30 years of work, so 15 years seems to be on the low side – or maybe they were better built in the good ol’ days :-).

    Windows: pricey! I was quoted 1200+tax for a 9’x5′ window. With many windows, that can quickly add to thousands. But they don’t need to be replaced all at once, although this is the most convenient. With some maintenance (caulking, painting if they have wooden frames) they can last a very long time. I don’t know what happens with vinyl frames exposed to the sun, though.

    Regards,
    Vasile

  7. get a free quote for windows…just so you know. Hubby and I put our own windows in our last house at a considerable savings!!! Luckily he is handy and handsome…

    We live low….have our mortgage paid and just waiting for the unreduced pension…1.5 years, and have done a ton of calculating…and we have our monthly expenses at just a smidgeon over $3000…and this is not living large. We are in BC so we will have to pay medical premiums..i believe they are free in Alberta and Ontario…so that is an extra…and we will buy a dental policy so we have a planned $350/month for med and dental–which should include prescriptions (sadly my thyroid is under attack and must take meds for life)
    WE have allotted $600 for “spending”…300 each…so he can golf and i can hit the gym/yoga because health is very important..
    here’s hoping that a frugal lifestyle pays off….it certainly has so far.

    beware..things happen….i was very, very sick 5 years ago, hospitalized for 16 days, 6 weeks without food (had to have a tube feed…could have been very expensive if it were not for a sweet nutritionist who gave us cases of soon to be expired liquid food for free!!)…i had a ton of sick days from work so that helped but it was a very long time before i could work again….i had a later operation that really set me back….
    and i was the picture of health!! you just never know…

    looking forward to seeing all your calculations!!

  8. Hi there,

    I think you’ve missed one very important value off your calculations…

    Inflation.

    Which in real terms is currently wiping 3.5-5% off your starting pot (your pensions might be index linked?) per year.

    Inflation can be a real killer for those retiring early.

  9. Simon,

    Nope, I haven’t missed inflation. I deal with that more in Part II, but in summary my pension is defined contribution so there are no indexing of benefits.

    Tim

  10. Just a tip for reno costs. I buy a lot of stuff at local auction houses. I’ve seen sets of very nice kitchen cabinets go for $500 that would retail for $8k for the set. What happens is that when a customer buys a spec house and wants different cabinets, the builders sell the “old” ones at auction. $500 exterior doors for $50, windows, tile, countertops, vanities, sinks, faucets – you name it. Even furnaces and hot water heaters show up once in awhile. My hardwood flooring at auction was about $3k for 1600 s.f. We put it in ourselves, it was easy peasy to do.

    Our local vo-tech college has courses for the homeowner for DIY plumbing, electrical, drywall, cabinets, etc. for about $400 per course.

    Having said that, you probably don’t want to be doing some of these things into your 60’s and beyond although I’ve known many active seniors who do.

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