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Friday, April 18, 2014

2012 Retirement Calculations – Part II

Posted by Tim Stobbs on November 27, 2012

Today we are looking at the accumulation of money in my age restricted accounts (pension, LIRA) as well as RRSP and TFSA.

I’m assuming a few key points here throughout this series. First my rate of return will be on average 7.0% (by the way this actually tracks fairly well with my RRSP performance since 2003 and my pension results since 2009) with a deduction of 2% for inflation.  So real return will be 5% compounded monthly and all calculations will be in today dollars (2012).

Also I’m basing all my values of my net worth in Oct 2012 so to keep things simple I will assume my years run from Oct to Nov.  I’ll be using this calculator again.

I’m also assuming that all my pay raises for the next 8 years are only inflation matched.  So basically when working in today’s dollars I’m assuming I just never get a raise.  This gives me a little buffer in case my estimated rate of return turns out to be too high.  Given the years I’ve been doing these calculations I’ve often got raises beyond inflation which I turn over into savings so at worst case it brings my retirement goal closer.

So in order to track a few different pools of money I’m going to have to run a few different accounts all at once.

Age Restricted

First off there is the age restricted money which includes my pension (can’t use it until I’m 50) and my LIRA (I can’t use that one until I’m 55).  To simplify things a little bit I’m rolling these into one pool of money.  I won’t be adding to the LIRA so over the long haul it won’t matter much compared to my pension plan. (Oh of interesting note I learned I can actually move about a 1/3 of my pension out of age restricted into a regular RRSP when I retire, which just gives me some nice flexibility if I want.)

Starting at $11,700 (LIRA) + $53,800 (Pension) = $65,500
Adding $1167/month at 5%
In 8 years (when I’m 42) I will have:$235,036

Now I can’t use this until I’m about 50 so I’m going to just assume no new cash and let it grow for another eight years.  So by then it will be worth: $350,341 at age 50.

RRSP

Again I’m going to merge my wife’s RRSP and mine to create a single pool of money.  Yes to do this right I should keep them separate but that’s a bit too much effort at this point.  Also my since the house is now paid off I’m going to be increasing our payments to max out my extra RRSP contribution room.

Starting at $30,300 (Tim’s) + $29,600(Wife’s) = $59,900
Adding $333/month at 5%
In 8 years I will have:$128,493

TFSA

In this case, our contributions to our TFSA accounts has been zero for the last year, I was focused on paying off the mortgage, but going forward we will be maxing our contribution room (or $10,000/year for both of us).  I  just saw the change to $5,500 per person starting in 2013, but I’m going to ignore that for now as I’m already done most of these calculations.  *sigh*  Also the effect is fairly minor.

Starting at $28,200
Adding $833/month at 5%
In 8 years I will have:$140,112

Ok, so I’m up to $503,641 in total by the time I turn 42, that’s a nice looking number.  I should note that I haven’t done anything with the taxable accounts yet.  I’ll get to that tomorrow.

Comments

10 Responses to “2012 Retirement Calculations – Part II”
  1. deegee says:

    Looks like you have quite a set of “reinforcements,” which is how I describe my age-restricted accounts such as unfettered access to my IRA, Social Security, and my frozen company pension. But in my ER planning I had to make sure I had even more money in my taxable accounts so I can get from my ER age (45, 4 years ago) to when I can begin tapping into those reinforcements. I have about twice the amount in my taxable accounts than I do in the reinforcements.

  2. Based on a 5% real return I could have retired permanently 12 years ago. But I do my projections based on a 0% real return. I’m definitely hoping for more, but I’m not willing to give up my salary until I’m condifdent that my money will last based on a 0% real return. But here’s hoping that your 5% return turns out to be correct.

  3. Jacq says:

    Nice to see someone else is as anal retentive as I am.

    In my experience and reading, most people who are really into saving and/or early retirement are excessively conservative. For 99% of the population, I’d suggest they think more about worst case scenarios. But for that 1%, it’s probably better to not be quite so pessimistic sometimes.

  4. Hazy says:

    That 5% real return seems abit high to me as well.
    But I’ve already pulled the plug,so maybe thats why Iam a little more cautious.
    I suppose if you are still on the road,there’s more time to make projection changes if necessary.

  5. Tim Stobbs says:

    @Michael James – 0% return…seriously. Wow, did you avoid any other conservative estimates and piled it all into your rate of return? That strikes me as excessively low.

    @Hazy – The five 5% is only during the growth phase of the portfolio, I kick it down to 4% for the long term (which you will see later this week). Also my saving phase is so short that I’m not that sensitive to a lower rate of return. I’ve run a few alternatives with lower rates and the worst case is I add one more year of work.

    Tim

  6. @Tim: Just to be clear, I use 0% real, not 0% nominal. My goal isn’t to predict the most likely outcome but to make sure I’ll be okay for all but the most unlikely outcomes. It would be sickening to be out of money at age 72 knowing that decades earlier I gave up a job that paid triple what I needed to live.

  7. Tim Stobbs says:

    @ Michael – Ah, thank you I feel slightly better about that now. I was initially thinking nominal, not real. Sorry about that. I still personally find that a very conservative assumption, but then again it depends on the context of your other assumptions. Thanks for the comments I enjoy learning about how other people approach these calculations.

    Tim

  8. Sarah says:

    This is news to me, but I don’t know if it’s news to you. The TFSA contribution limit is indexed to inflation and the 2013 limit is $5500. http://www.fin.gc.ca/n12/data/12-151_1-eng.asp

  9. Sarah says:

    Oh, I really should have read your post more carefully…

  10. deniz says:

    Oh, now I see. The OAS and such don’t start till later. I like this – first you pay off the mortgage, then you pay into savings, in order to retire early. Hmm… we’ve only got 100,000 or so left on the mortgage. Wonder if we could swing an extra 300$ or so a month…

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