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Sunday, April 26, 2015

What’s It For?

Posted by Tim Stobbs on February 18, 2015

You have likely already been reminded you should be investing some money in your RRSP today.  How do I know that?  It’s the season for it so most people via the 1000s of ads out there are told they really should be investing their money.

Yet I’ll offer you a more basic question than: RRSP or TFSA, stock versus bond, or even index fund or actively managed…..the question is: why?

Pardon?!?

Why are you saving and investing the money at all? What is the purpose of the investment?

*silence*

Need a hand? Perhaps the answer is: to retire.  Which is a good idea, but what does that look like?

*longer silence with confused look*

Far too often we save blindly because we fail to really understand what sort of lifestyle you want in your retirement.  After all, depending on the lifestyle you want that will drastically change how much you should be saving and how early you can retire.

For example, let’s say you have a couple who is in their 50s and they have been really good savers and have $500,000 in investments and a paid off house.  Do they need to work any longer?  Perhaps it depends on the lifestyle they want.

If they choose a modest life of mostly hanging around the house, being involved in the local community helping out with a few organizations, reading a lot of books and playing with the grand kids, they don’t really shop a lot and when they do they tend to buy high quality items that last a long while…well depending on the exact numbers they could retire in a just a year or two.  Yep, if they don’t need much income, perhaps $24,000 a year, they could potentially retire shortly.

But if they want to travel the world for four months of the year, enjoy shopping a lot and are real foodies that enjoy all the finer things in life.  Again it depends on the exact number, but if they spend like $5000/month.  They may very well have to keep working until they turn 65 or later.

It all depends on the why.  Why are you saving?  What sort of life do you want to lead and what is stopping you from doing that at least in part right now before you even consider retiring?

The illusion is that someone one choice is better than the other, when it fact, what matters most is which one appeals most to you.  If you have never really spent on $5000/month when you were working, what on earth do you think you will be doing when you retire?

What do most retirees end up spending? It varies but on average they spend $30,000 to $40,000 a year.  That’s it.  No huge lifestyles of the rich and famous, but rather a modest but happy life having lots of time to do those things you enjoy.

You could do less than that if you want, especially if you consider your mortgage was paid off.  So if you aimed for $30,000/year target you could be retired rather easily on $750,000 in investments.  Yep, that’s it. Forget about the million dollar mark, you don’t need it.

So if someone tells you they need at least $2 million or more to retire…I would ask why?  It won’t change the answer in some people’s cases, but more often than not they don’t understand the why and end up with overly large targets.

Instead, take the quicker way out…think about what you really want from your retirement and then plan around that.  The more detail you can provide the better plan you can make.   It won’t also be easy to do, but in the end you at least know exactly why you are putting money into your RRSP or TFSA.

What are you saving for?

Saving Contributions 2014

Posted by Tim Stobbs on January 23, 2015

So this week I should have finished maxing out one of our TFSA already.  If you recall in December’s net worth update I pointed out I put some of that money aside.  Then by Feb we should finish off the other TFSA account contribution for the other account.  So where do I put the money for the other 10 months of the year?

Well you see that is actually turning into a small issue as I’m running out contribution room on where to put it.  We made an effort last year to finish off as much as my RRSP contribution room as possible into my wife’s spousal RRSP.  Now the only tax sheltered account contribution room we will have left is about $20,000 in my wife’s name.  So I have to play around with the tax implications of her buying RRSP in her name as she doesn’t make much money per year so I’m not sure if the tax savings are really worth it.  After all if we drive her income to zero with RRSP contributions, I don’t know if her basic income deduction will transfer to me…I’ve literally never tried that before.  So if anyone knows, I would appreciate some advice.

So we will be back to non-registered investment accounts at some point in the year, which is just fine. Overall I expect by age 40 we should have approximately $100,000 in non-registered savings (give or take a bit). The longer term plan for the non-registered money is fairly simple, after I stop working at my day job I will drawing down the non-registered accounts first and also move what we can over to our TFSA accounts for anything that produces taxable income (like a GIC).  The idea is to keep our income tax bill as low as possible so we will likely keep dividend paying companies in the taxable accounts and any cash savings will eventually end up the TFSA (even if they don’t start there).

Perhaps the only thing I’m debating in my head is where do I open up the non-registered accounts?  On the one hand I like to keep our fees low and the other hand there is a certain ease of access if I put the accounts with our existing bank.  So I’m curious what other people have done and why did you pick that option?

Freedom 40 in 40 – Part VII

Posted by Tim Stobbs on January 21, 2015

Ah money, the beloved discussion point on this blog.  Today we will have a look at my plan around the money to leave my day job at age 40.  Perhaps the key thing here is to keep in mine I can’t possibly be fully financially independent at age 40, instead I’ll have to accept a semi-retirement option.  Which works just fine for me anyways.

So with that in mind I took at look at our spending and broke out what our baseline spending would be without including money for my wife’s Rider season tickets, gifts and donations, our annual vacation and half our normal spending cash per month (or $100 each per month).  The total for this came out at around $22,000 a year.

Then if take my investment net worth at the end of December 2014 of around $329,000 and add $4000 month for three years at 5% return you end up with: $537,000.  But then I still have four more months to save which should add another $25,000 to that total bring it up to $562,000.  Which at a 4% withdrawal rate would net me just over $22,000 a year.  Ya, I’m good right.

Uh, no.  There are a few holes that kick in around all of this.  First off, if I leave my day job at 40 I still have kids in the house who need RESP funds to pay for some school and I need some cash to cover their day to day costs.  Their RESP current has around $52,000 already in it.  I’m targeting having at least $80K in it.  Between our contributions and their grant money we put away about $434 per month.  So in three years we should have saved about $75K in total, which leaves me $5000 short.  Then we typically spend an additional $140/month on the kids for activities, clothes and other stuff that comes up.  So I figure I need to have that extra money for another 9 years or so at that point, which leaves me with another $15,000 hole.  So in total the kids are missing about $20,000.

Yet on top of that I still need to save about two years of spending for one of my backup plans which puts me in the hole for another $44,000.  So grand total I’m short on just the obvious stuff by $64,000, which if you divide that by 40 months would mean I need to save another $1600/month or $19,200 a year.  So in short, I’m screwed.  I can’t make this work with my current assumptions.  So is the dream dead? Not yet.

So what can I do to make this work?  Well this is where I step off my usual assumptions for a moment and consider a few adjustments like: am I comfortable with slightly higher failure rate of my plan if I go with a slightly higher withdrawal rate of 4.5%?  Given I plan to do some work for income anyway at this point, I would say yes.   Well working backwards then if you want $22,000 of income at 4.5% that means a starting pot of cash of at least $504,000.  Compared to my expected savings of $562,000, that cuts down my hole to just $6000.  Which is a lot more reasonable to save.

Another adjustment that I can consider is the fact I have always beat my assumption of a raise equal to inflation.  I only assume I’m contributing $48,000 a per year to the plan when in fact I routinely contribute over $50,000.  So in that case if I can push the upper end of my normal amount of contributions for the next 40 months I think I can average saving $5000/month.  At that rate I could potentially have just over $600,000 at age 40.  So if I back out my missing $64,000 and times the remainder by 4%, I get $21,444 a year which is almost on target (or a 4.1% withdrawal rate).

An additional factor also kicks in here.  My wife always planned to keep working for a while even after I left my job which I have never really added to these numbers.  So between her current work and some minor income from me we can easily bridge that missing spending money, vacations, gifts and her Rider tickets which comes out to about $8000/year.  This also provides some extra spin off benefits when it comes to collect our Canada Pension Plan as we won’t have a this huge string of zero income dragging down our benefit calculations.

But in general the margin on this plan is noticeably thinner so I may have consider cracking open the house equity to shore up the plan in the long term. Which I can live with as I did plan to downsize the house someday, but I might just consider doing it a bit sooner overall. Yet with our winters in Regina there is an additional motivation to move somewhere else in Canada. ;)

So overall I have several different ways I can try to make it work.  In the mean time, I need to save as much as possible push to average about $5000/month in contributions.  Then towards the end I need to see exactly where my numbers are falling out and determine if I’m comfortable with that level of spending and also what amount of work I’m willing to do to make up the short fall.

Questions?  By the way, this is also the end of this series…I return to my normal posting as of this Friday.