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Sunday, September 21, 2014

2012 Retirement Calculations – Part I

Posted by Tim Stobbs on November 26, 2012

With a little over a year since I’ve updated my retirement calculations I thought dusting them off and checking how close I’m doing would be a good idea (my current target is to retire at age 42).  Today I’m going to start redoing them for a week long series of posts.

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 it was paid off) – work expenses.  The reality is my current spending is only an estimated number, so after tracking my spending for a while I’ve got at least some data to confirm that I’m in the ball park (Thank you Mint Canada for making that easy to do).

As I recently posted I have to be somewhat careful with the data I use from Mint but for this series I’m going to leave our spending on the kids in that amount and aim for $25,800 a year or $2150/month.  Now that number obviously doesn’t include any mortgage payments, but I still need to deduct my direct work related expenses of parking and gas which is $79/month.  Giving me a baseline of $2071/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 earning some income in early retirement.  So that extra money that I earn will fund any trips I want to take which given my typical travel budget has been $3000/year.  So yes I’m willing to work that little to do my traveling.

Yet, I need to add a few items to $25,200/year figure.  First off I’m going to assume $2000/year in house maintenance and $1000/year in car depreciation and $1500/year in medical costs.  So in total I’ll need $29,700/year.  For those keeping track that means my spending estimate when up $500 over last year calculation (or 1.7% inflation).

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 $10,822 per person, so with a clean income split via spousal RRSP and pension splitting that totals $21,644, which leaves $8056/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 $8056 represents a required yield of 6.7% which is a bit high, but possible.  Also if I keep the shortfall in income coming from dividends in a taxable account, that should also be tax free due to our low income (technically it would have a negative tax rate of 0.3%).  In either case that is acceptable potential error for these calculations if I end up paying just a little tax.

Oh, some general notes on this series of posts.  All values are in 2012 dollars, so to achieve that I use real returns (which are just your normal return minus inflation), so all the return % may look low.  Also it means I won’t be discussing inflation at all during this series, since I’ve already deducted it from my investment returns. I typically assume a 2% value for inflation since that has been the average for most of my lifetime.

So am I on track for freedom 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.  I’ll also cover a really quick method of estimating your retirement savings target and compare that to my long version of the calculations.

Comments

3 Responses to “2012 Retirement Calculations – Part I”
  1. Paul says:

    I came across your article in the Toronto Star… and although I respect your dedication to your finances, I believe you are being held back by your plan to retire at 45.

    My wife and I retired at 35, and are now free to pursue our dreams and interests and hobbies.

    We were “mortgage free” after 3 years, because we had an alternate plan than yours.

    Your retirement plan relies on the financial markets… but in my research, the baby-boom generation is about to retire, and with all the baby-boomers beginning to pull money out of the stock market rather than putting money into the stock market, it looks like the biggest crash of all time is a certainty. How can the markets increase when there are more people pulling money out of the stock market than there are people putting money into the market?

    My plans avoid the stock market completely.

    If you’d like to hear more from an alternate view, we should talk.

    All the best,
    Paul

  2. Daryl says:

    The federal government just announced that TFSA contribution limits will be 5500 next year so that should help reduce your required rate of return.

  3. Tim Stobbs says:

    @Paul,

    Oh, I think you are correct that the markets won’t be going up much in the short term, but I really don’t trust any other investment classes either like real estate or gold. So I believe you have to pick your poison.

    @Daryl,

    Thanks for that. I just noticed that yesterday as well, it tosses a minor wrench into my calculations, but not that big of a deal.

    Tim

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