Posted by Tim Stobbs on December 5, 2015
When planning your retirement you need certain basic things that just really can’t be avoided if you want to have a good plan. This isn’t to say your plan needs to be a 332 pages bound document with appendices, but rather you need to have an idea of what you want to do, how you will get there and what everything will cost.
Ironically when starting planning most people start the the wrong spot. We want to think about all the wonderful things we would like to do with our new found free time or we want a savings target to work towards. Wrong. Stop. Halt! Wrong idea folks.
What you really need to start doing is so basic it isn’t even funny. You need to answer the following question:
Where does your money go right now?
Yep, that’s it. Not hard right? Well expect it seems that most people don’t have a bloody clue where all the money goes each month. So let’s start with how many dollars did you save last month? Do you even know or have a clue on how to find out? I suggest starting to look at your transactions in your chequing account. What investments do you normally make and what do you save for? Kids RESP, did you put money aside for a house down payment? Also did you remember to include your pension deduction or group RRSP that came off your cheque prior to going into your bank account? After a bit of effort you should be able to find out that number, just don’t include any delayed spending such as saving up for a vacation or your annual house insurance bill.
Now the second part, what on earth are you spending your money on? If you look at your credit card do you even remember all that times you used it? After a month it can get a bit fuzzy, which is why I signed up for Mint Canada which pulls all that information together for me. Then I sit down with my wife and we classify the spending about once a month. It doesn’t have to be perfect, but it should help give you an idea on where the money is going.
The last part of your spending is going to be hard if you use it: cash. Cash is so easy to spend and not keep track of, so I installed a basic spending tracking app on my phone and then enter in a note when I spend cash. Other people like paper and keep a notebook. So people just keep receipts for everything and enter them in a spreadsheet once a month. Try out several different means to track your little spending. Just don’t worry if it isn’t perfect. I still miss the odd transaction myself, but typically it is under $5 in a month.
Now armed with this information you can do some fun calculations like: your after tax savings percentage. To calculate add up all your savings and divide it by your take home pay plus any pension savings. A month of data for this is okay, but a year is even more accurate.
So it would look like this: (savings including pension)/(take home pay + any pension savings taken off on your pay stub).
This one number is basically all you need to start your retirement planning as it will tell you how long you have to continue to work at your current lifestyle assuming you have nothing saved already or very little. The results go something like this (see here for more data points):
- 5% or less – I hope you like slavery because your job is going to feel like that for the next 66 years.
- 15% – You have a 43 year career ahead, so if your twenty this may be okay otherwise that could suck.
- 25% – It’s now down to 32 years which is actually potentially okay even if your 30 years old.
- 50% – Now we are talking, you are down to a mere 17 years of work.
- 75% – Holy cow, you are good at savings you could be out in a mere 7 years.
So now you can see the consequence of having a low amount of savings %, you will be working for a VERY LONG TIME! Of course if you already have some savings you can divide that by your yearly savings rate and deduct that off your years to work total. So if you save $15,000/year and you already have $30,000 saved you can deduct two years off your result ($30,000/$15,000 = 2). So if you got 32 years as your result, you would actually have only 30 years of work left.
The point here is to realize that by choosing not to save you are also choosing a long working career. Most people never realize this is the case and so you need to start here when you plan your retirement. That way you can actually see the results of your choices regarding spending. Now you can really look at your spending data from above and ask the question: is this worth it to me? The one thing made a huge difference to myself on what I spent my money on. Hopefully it can help you too.