Part I - Finding out your spending in retirement.
Part II - Government Benefits
Part III - Company Pensions
Part IV - Retirement and Taxable Accounts
I apologize for the long posts this week, but the good news is the math is mostly done and now we find out if you can make your retirement dream come true. First a quick review of the numbers and when I expect to start collecting them.
From 45 to 55:
Here the only accounts I'll be using is the taxable account and our RRSP's ($6270/year). My RRSP's are the baseline while the taxable account will have to pick up the slack.
From 55 to 60:
Here I'll continue to use the RRSP ($6270/year) and taxable accounts, but I'll start using my pension money($13,154/year).
From 60 to 65:
At this stage we expect to collect CPP ($8300/year) and keep using the pension and RRSP money.
From 65+:
I'll be just using my CPP, OAS ($11,800/year) and pension money.
In order to make this clear I put together a spreadsheet to show how the money is being used at each stage. The far right column is what is required from the taxable account to meet the short fall from age 45 to 60. Please note since I'm not tracking the tax bill at this stage I just combined the RRSP into a single column.
http://spreadsheets.google.com/pub?key=p
So if you scrolled down to the bottom right corner you would notice the total required from the taxable account is $244,430 which is higher than my predicted savings of $226,773. So my dreams are shot right? No, this is where I went wrong last time. I didn't model the draw down of the money.
So taking that $226, 773 and reducing it to pay off the mortgage at that time would cost me around $31,000. The I dig out that same calculator I've been using all week and enter the following:
Start at $226,773 - $31,000 = $195,773
Saving rate of -$1723/month (this is just that $20,680 in the spreadsheet with a negative sign)
At 4.0% for 10 years (I reduced the return to reflect a more conservative portfolio)
Results in $38,153
Then for those last five years I require $7526/year or $627/month. So that would mean:
Start at $38,153
Saving rate -$627/month
At 4.0% for 5 years
Results in $5,015 left over.
So there you go. It is possible to have me retire at 45 based on my current assumptions which also include a 1% buffer on my rate of return (all numbers are in today's dollars). An alternative to reducing your investment performance is just adding 10% margin to you spending every year. The only problem with my numbers is I haven't accounted for a vacation fund, which means just a bit more savings over the years ahead.
An obvious question now is will I obsess over these numbers to ensure I make this dream come true? No not really. I'm just happy knowing it is possible. After all I know there will be unplanned expenses over the years, changes in income, inflation changes, investment under and over performance and most likely at least one more kid. A retire calculation is only a educated guess of how much you need, it by its very nature can't be correct. There are simply too many assumptions this far out. Any comments or ideas on how to improve this mess of calculations is welcome.
9 comments:
Great series of posts CD!
I found that the most challenging part of these calculations was making a good estimate of income required for retirement.
If you can collect a few years of spending data you will be in an excellent position to make this estimate. In this reqard, I found that keeping it simple makes it bearable. We still do it even though we are retired.
Did you factor into your equation the increasing costs as your kid gets older, if you decide to have another kid, and education expenses?
CM,
Thanks for the advice. I'm glad you liked the posts. They were a lot of work, but I think worth it.
Anon,
I left enough buffer in the basic spending requirements to cover a kid or two for a few years. After I ran the run down model on the big pool of cash I ran it on my RRSP money and I estimate I have an extra $30,000 based on the current model. As to education funding, I currently use any government money I get for the kid and dump it into an RESP, so that should provide a nice pool of cash to help cover some education expense (at least $25,000). I have never intended to pay for all my kid's education. As I found I personally learned more about money after my own parents stopped paying for my university degree.
CD
Hey Canadian Dream,
CanadianCapitalist has offered some recommendations for upcoming Canadian Tour of Personal Finance blogs.
Care to drop by and comment?!!
Thanks,
Monty Loree
Excellent series CD. This is exactly the kind of info we need to plan for retirement, early or otherwise.
It's good to see the details and analysis to see how other people approach retirement planning issues.
CD,
Do you have any knowledge or forecasting the success of your retirement strategy with the mathimaticall principal called "Monte Carlo".
It's the idea that there is no average return, so it tries to run your investment scenarios against historical variability thousands of times to tell you how likely your investment strategy will be to succeed for X years. (that's my understanding at least)
I don't think most people use it in their calculations or are even aware of what it is.
I've seen some retirement and planning software that offers this feature and thought it seemed very relevant for long term planning and "what if" situations.
I'm sure it could the topic could cover several posts, but I thought I'd ask what you know of it, if you can recommend any specific software and if there is a reason you would or wouldn't use it.
A free online tool is available along with some interesting articles from a retired software developer at:
http://www.flexibleretirementplanner.com/
Thanks very much for your input
I like the way you have planned this all out - but $25K a year?! I didn't see where you live, but I guess it's not anywhere near a major city like Toronto, Vancouver, Calgary, etc where property taxes alone are $4-5K a year. I don't know why you would like to live below the poverty line for the rest of your life. No car? No travel? Lots of KD I guess.
I agree, $25,000 a year is nothing today. Just paying Property Taxes, utilities, phone, etc is expensive or are you planning to live off the grid. What about Medical expenses? If you aren't covered by a health plan at work, you need to get some kind of insurance, Medicare doesn't cover everything. Have you considered dental costs, tranportation?
It's nice to want to retire at such a young age, but I think you have seriously understimated the annual cost of doing so.
Anon,
$25K a year is for Regina, SK, Canada. Property taxes are around $3500/year. You have to keep in mind that $25K/year is almost completely tax free and if you have your house paid for you can actually live that cheap fairly easily with a car and some travel.
As for health costs not covered I'm not planning on buying insurance. Why? I barely have any costs as is right now. Most years my medical bills for the entirely family are below $1000 per year before I put in any claims to my current coverage.
As to how to live on that amount of money. Well if you take my current spending and strip out the mortgage payment and retirement savings I'm only spending about $1850/month of after tax money and that is with a small kid. So living on $2000+ a month without a kid should be very possible for me.
I live well, but I refuse to waste money on things I don't care about. So I get the most out of every dollar I spend to get the life I can afford and want.
CD
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