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Wednesday, February 10, 2016

Retirement Basics: Spending

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.

The Plan for Getting Out

Posted by Tim Stobbs on October 21, 2015

Recently I had a frank discussion with my boss about the fact I’m around two years out from leaving the company.  I didn’t provide an exact date, but we did discussion his question “How do I get you to stay around longer?”  I bluntly answered at the time “Working less. Like a lot less.”  So we started an investigation into options on how to get that done.

Unfortunately I came to realize just how hostile my workplace policies are towards part time work.  While I give my workplace full credit for being open to discussing the idea of part time work in actual practice the policies aren’t much good beyond getting perhaps 80% to 90% time rather than the full 100% of full time work.  I ran multiple potential scenarios on to see if 60% was doable, but most of the time the overall costs to the company made the option of doing this hard to justify as the polices are stuck in thinking of bodies not dollars.

In the end, I just went with the path of least resistance.  I’ll keep my current 90% time and then use our existing flexible benefit, which is equal to 3% of my pay, to fund a bit extra time to further reduce my working hours starting in 2016. The flexible account doesn’t require any additional approvals…I can just pick the option and be done with it.  Three percent sounds like a tiny bit, but when you start to add up all the time I already don’t work I started to realize something important…I don’t work that much.

The math goes something like this.  A standard 52 week year has about 260 potential working days (52 x 5 working days).  Yet I also get 12 days of stat holidays a year, so that real total is now 248 working days.  I currently get the following time off 4 weeks of vacation (20 days), 13 Banked Days off, and if I use the flexible benefit another 7.8 days or 40.8 days off when you add it up.  Yet because I work 90% time, those totals get scaled down by 10% to 36.7 days off, but in exchange I get another 26 days off.  Oh, I get another 3 family days a year that don’t scale on top of that.  So grand total that works out to 36.7+26+3 or 65.7 days off.  So out of the total working days of 248 in a year I’m not working about 26.5% of the time starting in 2016 or inverting the result I will only work 182.3 days next year.  So out of total year of 365 days that means I only work about half the time (yes I love my workplace for time off…it was one of the major reasons I came to the company).

So bluntly, I came to realize I really don’t need to reduce hours any further since I already don’t really work that much.  Instead I’ll keep up this nice coasting pace for the next year or two and just leave when I hit my savings target.  Isn’t it funny how when you go looking for something, you come to realize how valuable what you already have is.

Tax, We Pay No Stinking Tax

Posted by Tim Stobbs on September 30, 2015

Of course the title of this post is misleading…of course I pay some tax right now…actually a LOT of tax when you get right down to it. Overall the number shifts around but in the end we pay about 20% income tax after using ever tax credit and deduction we can claim (based on total income for my wife and I – mine being almost all the taxes paid). So when it comes to retirement planning reducing your tax bill can go a very long way to shortening your retirement savings goals.  After all if you pay less tax in retirement you need to save less in advance to retire in the first place.  So how on earth do you keep your tax rate in retirement hovering around zero?  Well that are a few different ways to get close to zero in Canada, but to be honest a zero dollar tax bill is difficult to get down to.

The first one is likely the most straight forward and hard to do depending on your spending. Your basic income tax deduction allows you to pay no tax on the first $11,327 you earn for federal tax  in 2015 (I’m going to assume your provincial rate is equal to or higher than that number for this post, but please do check here).  So a couple can take in $22,654 in wages and/or RRSP withdrawals and pay no tax on it.  So if you are willing to keep to a low spending rate this gets fairly easy to do.  Just a note, yes you will pay a withholding tax on an RRSP withdrawal, but it will be refunded when you file taxes the following year if you stay below this limit. Oh, and please note…I’m not including Canada Pension Plan (CPP) deductions in this post since in my mind it isn’t a tax but rather a pension contribution.

Of course, even my spending budget is more than $22,654 so get more money out tax free you next stop will likely be the TFSA.  After all this account rocks, you put in after tax money and any growth you take out is tax free.  Nice deal, especially for young people who can potentially mainly skip the RRSP and put everything for their retirement dollars in this account.  Obviously the draw back here is for older folk who don’t have much savings in these accounts.  In our case, my wife and I plan to take out about $6000/year from these accounts during our retirement years.  So adding that to the basic deduction amount I can pull out $28,654/year tax free.

Yet that is still slightly short of our target spending of $30,000/year.  So am I out of tricks? Of course not, the last particular trick lies in the fact for lower income earners that you can often get dividend income completely tax free.  For example, if you clicked on that previous link and checked out Saskatchewan’s marginal tax rates you would have noticed for 2015 the tax rate for eligible dividend income is actually -0.03% for up to $44,028. Yes, the tax credit is actually worth just slightly more than the amount you get (hence the negative rate), so it is possible to get some eligible dividend income tax free.  The key here is to know what your particular province allows you to do.  For example, Ontario is even richer on the tax credit so while the limit is a bit lower at $40,922 but has a rate of -6.86%.  Nice eh?  Of course the downside is during your working career you will pay more taxes on this dividend income, but once you drop your income down in retirement you should be paying less.

Now the fine print…this works well in broad theory, but if you play a tax calculator (like these) you might find it doesn’t work out just perfectly.  After all if you have some working income during your semi-retirement years you may end up paying some Employment Insurance premiums and CPP contributions.  This also tends to break down when you get higher income levels.  So once you push past that eligible dividend limit you start paying more taxes.  Sorry, that are limits on how well you can play this game.

So have you tested your income plan to see how much tax you will be paying in retirement yet?  If not, I would suggest giving it a try.  It can be educational.  Or if you are retired how low did you get for your income tax bill?