BF and I have been (and still are) discussing our future retirement plans.
How did this all come about? Innocently one day, as we were petting unicorns and singing Kum-ba-yah…
Okay. Seriously, he was hyperventilating slightly about making sure we have enough for when we retire, and not only that — to retire early to boot!
This freak out came about one night when he started reading an article on how less than 19% of Canadians have saved over $250,000 for their retirement, which in his world, is his MINIMUM level for retirement savings.
About 30% haven’t saved more than $25,000.
*BF starts hyperventilating with visions of cat food dancing through his head*
And the discussion began.
Factors to consider:
- Not going to retire in North America so cost of living in retirement will be lower
- May actually have family home(s) available in Europe to buy in full or rent at low cost
- If not, will probably stay renters for life — we’re not really interesting in owning homes
- Each of us will fairly contribute 50% to the retirement egg*
*Some people don’t find this fair, and want to base it on income %.
I agree if that works for you, like if one is earning $20k to someone’s $100k.
But we don’t have a high differential in our incomes, it’s all over $100k for each of us if we both manage to score contracts for a good part of the year.
Questions to ask when planning for retirement:
After you calm down your hyperventilating partner…..
1. At what age do you want to retire?
2. How much do you need to retire? (What are your plans?)
3. How long are we planning for as a lifespan?
Canadian Retirement Notes:
TFSA = Tax Free Savings Account (like a ROTH IRA? Someone correct me please.)
No tax break given now, more like a savings account, but you can save up to $5000/year under this plan and not pay any taxes on the profits.RRSP = Registered Retirement Savings Plan (like a 401k I think)
Given a tax break on your income now, but you will pay the taxes later when you withdraw the dough.Canadians, read here about the difference between the two.
#1 — AT WHAT AGE DO WE WANT TO RETIRE?
That’s always the #1 question in retirement planning: when do you want to call it a day?
He’d like to retire at around 50, perhaps 55.
Me, I always thought I’d work until 65, and have 40 years to save.
I am not really convinced I will (or want to) retire early, but I think to be on the safe side, I want to be uber conservative and plan for the big picture.
Put on top of that the fact that he’s also 10+ years older than me, and if he retires at 50, I’m going to have to retire at 40 to keep pace!
That is, if I want to, which I am not convinced of at the moment because I feel it’s too young.
Nevertheless, this is a good exercise for both of us to consider.
Still, I never say never.
Early retirement also poses another problem: I cannot withdraw anything from my RRSP until I am 65.
Therefore, if I retire at 50, I need to bank 15 years worth of cash and TFSAs to live, before I can release and draw upon my retirement funds.
#2 — HOW MUCH DO WE NEED TO RETIRE?
I am not taking Canada’s government pension plan into account here, because I am not expecting more than $300 a month from it, and that can just be a bonus to supplement my own personal plan.
So…. I always thought it was 75% of your salary, and in the good ol’ days, I could count on $60,000 a year.
That meant that I was aiming to be able to withdraw and spend at least $45,000 gross.
But then BF made a good point: right now, we kind of already live like pensioners (which we’re enjoying by the way, not doing as punishment or out of an OCD need to save).
We spend about $20,000 – $30,000 a year on net expenses which includes traveling, fun stuff like entertainment, renting a place, and splitting everything in half.
In total, $40,000 – $60,000 together as a couple.
So let’s just assume what we’re spending now is generally what we’d spend when we’re retired, around $20,000 each if we’re traveling a bit and sharing in the expenses 50/50.
BF: But I wanted to upgrade our lifestyle!
Me: Upgrade? By buying a fighter jet? Eating foie gras daily? What are we upgrading on?
BF: Well.. I mean what are we going to do when we’re retired? I wanted to travel more.
Me: I wasn’t planning on sitting around at home staring at each other 24/7! Of course we’re going to travel. How much more did you want to travel?
BF: Like take a month off. It’s going to cost around $4000 just for a trip for a month.
Me: But we’re not spending $4000 every month on a trip in your upgrade scenario right? We already do that on our current budget.
BF: True. Maybe we just stick to our monthly budget and travel more by traveling on the cheap to cities around where we’re retired.
Note: What about having those rug rats?
We are not taking kids or a family into account here, because I am assuming that my future offspring will NOT need to support me and vice versa.
This is just retirement planning for the two of us, not the whole family, and we are going to make more than $30,000 a year each on average, to be able to pay all the extra expenses that will eventually come with having a family.
#3 — HOW LONG DO WE PLAN ON LIVING?
Well, taking statistics into hand, women live longer than men and I am 10+ years younger than BF.
Chances are, I am going to need a lot more money saved than he does.
On the bright side, I also have 10+ extra years to save and plan for this eventuality.
If we retire early, let’s say BF at 60 and me at 50. I should expect to live until 90 based on my current lifestyle and family history.
That means I have to have enough banked for 40 years.
BF is probably going to live unusually long for a man, until at least 80 with his family history and current lifestyle.
He needs to bank 20 years of savings, and I think he’s already got that more than covered from what I gather.
He’s just being a worrywart.
With all that in mind….
HERE ARE MY CALCULATIONS
With my handy dandy retirement calculator in my budgeting sheet, have come up with these numbers:
Notes:
- Rate of Return: 5% — very, VERY conservative
- Years to live: 40 because I am retiring at 50, living until 90 as my best case scenario)
- Years I have to save: 23
I need to save at least $1600/month at least which is $19,200 a year.
Still, if I can save more, I’m going to do it.
But.. DAMN!!
MY ORIGINAL PLAN VERSUS MY NEW PLAN
Originally, I wanted to save about $1000 a month, or $12,000/year, but I was also assuming I had 40 years to save! Not the hypothetical 23 years.
I did not foresee NOT working for all of 2009, so I had no fresh income coming in.
That being said, I still managed to sock aside these amounts from my savings:
$5000 = TFSA 2009
$3553 = RRSP
Total: $8553
For me, it was a pretty good showing, albeit pitiful in comparison to my original goal.
Since I need to start ramping up on the savings just to get to my comfort zone, I need to make a new plan:
$5000 = TFSA 2010
$5200 = Cash & Equivalents*
$9000 = RRSP**
$19,200 to be saved
* Cash: I need this to be my hefty emergency fund as well in case I run into a repeat of 2009 with $0 in income.
** RRSP: I don’t actually know the exact amount as my taxes aren’t filed yet, but ballparking it, I think that’s what I will be allowed next year. Hopefully more.
STEP #1: ALLOCATING THE $20,000 DIVIDENDS
I need to make sure I keep enough cash flow in the business to operate as well as enough cash in my emergency fund.
I can’t put everything into retirement accounts that I cannot touch until I’m 65.
I need large amounts of money saved because I’m a freelancer without a steady cheque.
$5000 = TFSA 2010 in full
$12,000 = Cash & Equivalents saved in full*
$3000 = RRSP
$20,000 to allocate
*I need to replenish a large chunk of what I drained for 2009 in living expenses.
STEP #2: FIGURE OUT WHAT TO DO WITH THE EXCESS
Any money I make above and beyond will go towards:
- Topping off my RRSP (now that I think about it, I think it’s $11,000)
- Putting the rest into cash equivalents for my emergency fund
- Bank the rest and wait for the next fiscal year to top off my plans again
Wash, rinse, repeat x 23 years.
ALTERNATIVELY: CONSIDER PASSIVE INCOME
BF’s strategy is just to save as much as possible and live off the interest.
To get $25,000 in interest, giving at least 5% a year, you need to have half a million banked.
Assuming interest rates are at rock bottom – 3% – you need at least $700,000 banked to get $21,000 in interest a year.
Maybe if I can really bank away lots of cash now into a savings account I could foresee being able to live off part of the interest.
The only thing nagging at me is all that money for no real enjoyable reason. I mean, if I saved half a million, I am selfish enough to want to spend some of it on myself during my retirement years and life, rather than just split it among my kids upon my death.
So, that’s the new FB Retirement Plan that I’ve hashed out so far: to save around $20,000 a year.
Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
I am 71 and haven't started drawin off my ira will i pay a penalty
I am not from the U.S., so I don’t know, Susan.
But the rules in Canada say that if I don’t start drawing from my RRSP (it’s the Canadian retirement plan) by the time I am a certain age, I pay a penalty.
From what I understand about locked-in RRSPs, you can access them at retirement, which may be before 65. I received some locked-in retirement funds through my divorce settlement, and was eventually able to transfer them to my employer's pension plan, which I can access beginning at age 55. A caveat: make sure not to add any current RRSP contributions into the same fund, because they will be treated as locked-in as well.
Oh really? That’s surprising. The lady at the bank told me: “no way, you pay a penalty of 20% on top of the fees you’d pay as an income tax on your RRSP”
One thing to remember too is the TFSA maximum is going to increase… so in a few years we'll be able to put in $6,000 then $7,000 then $8,000 🙂 So it won't be $5,000 x 20 years in my case, but might be closer to an average of $6,500 or $7,000 per year 🙂
PS totally off topic, but have you ever done a review or recap of your Portugal trip? I'd love to see where you stayed and what you did… am thinking Portugal or Spain would be a très cool place to visit next 🙂
saving: good
hyperventilating: not so much
Here in Forced Early Retirement Heaven, I've made the startling discovery that it's TRUE what they say…you don't need anything like as much as you think you'll need to live comfortably in retirement.
Because of that, an interesting corollary holds: with very light part-time work — possibly even just monetizing a hobby — you can earn enough to support yourself without having to draw down very much from your savings. I thought I would need to start pulling out 4 percent right away. But noooo. Nothing like it. As long as I can keep getting freelance jobs and lightweight p/t teaching gigs, I will be able to defer drawing much down from savings for a long time.
I have a decent retirement nest egg (for a U.S. American) but nothing like 800 grand. My financial adviser tells me that at a 4% drawdown it should last for 50 years. Since I probably won't live much longer than another 15 or 20 years, apparently there's little to hyperventilate about.
FB, I still don't understand the locking in your RRSP until age 65…
My goal is to put as much in my RRSPs, TFSAs and other savings now until age 55, then retire and use that money from age 55-60, then start collectin my pension from work and CPP, if I can work 18-20 years with my current employer.
I don't think you have anything to worry about… making 100K+/year and living well below your means, you will be rich by the time you retire 🙂
It is a grandfathered plan under my old employer. I cannot withdraw the money until I’m 65 … it’s in the rules of when I contributed to the pension 🙁
I find these calculations very frustrating because of the U.S. wild card called healthcare. It could be a million dollar problem, easy.
But if you're not going to retire in Canada, that might be a wild card for you too.
I am going to retire in Portugal for sure.
The hardest thing about retirement isn't deciding when you'd like to retire ("I think I'd like to retire at 30!"), it's choosing when to die. :-/
Great to see you guys planning for that far into the future. I've got a couple things you might need to consider. 1) Why do you think you cannot withdrawal from your RRSP until 65? You can pull money from it any time you wish, it gets added to your annual income and taxed at your marginal rate. Probably best to pull money out when your other sources of income are low, but in your case, things like CPP and OAS won't kick in until your 60's anyway, so those early retirement years 50-60yrs old are a great time to start withdrawals from your RRSP.
2) What about inflation? The $40k per year in your retirement years will probably only be worth 1/2 to 1/3 in today's dollars. One could argue you have considered this in your 5% rate of return, but that means you'll need a real after tax return of ~8% to achieve those goals. An extra factor to consider.
Those are good points.
1) My RRSPs are locked-in. If they weren’t, I’d be able to withdraw them out earlier, but as per locked-in rules, it’s until 65. Good call on that though.
2) Inflation wasn’t taken into account, which is why I’m thinking I need heck of a lot more than what I am calculating here. I need much more to save, just in case things don’t go as planned.
I’m secretly going to aim for: AS MUCH AS POSSIBLE, but I want to live my life too. The minimum should be $20k a year at least.
My real problem with all of it, is that I was expecting 40 years to save, but now with BF being older, and wanting to retire early, I don’t want to be the only person NOT retired too.
That being said, I’ve been thinking more about it, and perhaps I could keep working until 50 or 55, save up more money, and then my kids will be around their 20s at that time and out of the house, so we will be in better shape to retire.
That, and he can keep working too if he wants. This is all hypothetical…
Thanks for the great points!
Your calculations are simple enough to set up a target, but you are overlooking a BIG factor in your equations (unless I'm not seeing it in my old age :P). Inflation. That can easily understate what you need. In Canada it's probably safe to assume a 3% rate – 3% compounded 23 years = yikes. To make things even more complex, you can factor in the interest generated from your pool during retirement.
Anyways, just saying it's more trickier than saying $X * n years.
I'm assuming you guys are talking about retiring at the same time, right?
Yeah. Unless I decide to keep working another 10 years. Seriously, I might just do that.
Or 5 and 5.
I love this post! Most retirement articles seem to assume that you and your spouse are the same age.
Like BF, my hubby is 10 years older than I am. It's made planning for our retirements very interesting, because we have different timespans to be worrying about ("schedules" if you will), and very different risk profiles for investing.
I think I might keep working for another 5-10 years. I just.. feel it’s too young to call it a day at 50. But we’ll see. Maybe my priorities will change.
The key is I have to be prepped and ready for whatever happens.
Good luck with your savings plan! 20k a year is too conservative for someone expecting make over 100k, no?
btw i was just curious, if you didn't manage to get a contract for the whole of 2009, was there anything that prevented you from getting a temporary 9-5 or a part time gig? please don't take this the wrong way, I'm not patronizing you in any way, just being curious. feel free to tell me to mind my own business!
Oh that’s my minimum 🙂
And I don’t make $100k/year every year. So it’s hard to say. If I did, I’d put that down as an exact amount, but nothing is guaranteed. I’d like this to be my set amount for the year as a goal to reach, but my real goal is: as much as possible.
As for getting a part-time gig or a temporary 9-5, my french wasn’t strong enough to work here in Montreal, and the jobs like at Starbucks, are for people who can speak the bare minimum in the language.
For a more concrete reason: I simply didn’t want to because I didn’t have to. I made the choice to just relax and see as things came up instead. If I went another year 2010, without working.. I’d definitely have picked up something to stem the flow.
Great points. Thanks for wording the comment correctly. I don’t mind questions/curiousity/criticism, as long as it isn’t done in a rude, attacking way and you did it perfectly 😀
You are doing much better than most people in the US who typically (there are exceptions) have only 2500 in the bank saved. Due to our HUGE amounts of consumerism along with trying to one up the "Joneses" who ever the heck they are. I have had a discussion with the hubby but, it went much worse on trying/wanting/needing to start an IRA fund he flipped out and freaked out. I understand I wont be able to touch it until I turn 65 but, it still would be nice to just start one since I am currently about 10 years older than the hubby with a kiddo. Good luck with the saving and plan and the BF.
Thanks!
Should really consider saving in general.. I mean, it kind of worries me to read your comment about him flipping out about an IRA.
It’s just basic savings, no? Good luck with that!!
Hi FB – just wondering if you have considered that due to inflation your budget today will probably not be enough 30 years in the future. Of course the interest rate will ease some of the inflation effects, but with an average inflation of 2% in the last 20 years this would eat still quite a bit of your buying power.
Yes, great point 🙂 I have to work that into my budget, but the good thing is that
A) I don’t HAVE to retire at 50, so I have some flexibility there
B) I am planning on saving “as much as possible” and $20k is my minimum, but I am expecting to bank at least $100k/year, as I make around $240k/year if I keep this contract.
I am curious about your comment that you can't withdraw from your RRSP until you are 65? Does your plan specify that? I know when my husband was out of work, he withdrew money from his – we had to pay income tax on it, but we were still able to withdraw it.
Yes, it is locked in until I am 65 🙁
Interesting post! I don't know if you've discussed this already (although I've been reading your blog daily for about 1 year now…) but have you guys talked about Marriage and Kids yet? I think having those discussions (and then actually making them reality) can better shape your retirement goals. Not to say you shouldn't be saving up for it, but its just that Retirement seems a bit far off for BF to start hyperventilating. But I can't talk. I freak out if I don't know what I'm going to eat for lunch…lol! And I didn't bring lunch today, so I'm pretty much sweating bullets right now.
Oh I am saving for kids and a family too, but I’m earning about $240k/year as my gross, which means I bank at least $20k for retirement and the rest is general savings.
BF just freaks out in general. Esp when he’s thinking about how close HE is to retirement. In my head, I am a good 30 years off. He’s like.. 10 years off if he wants to retire young 😛
yeah. I'll be working til I die :S
Hubby and I regularly have this convo. We're fortunate enough that he has an honest-to-jebus guaranteed pension (hurray for gov't workers), a good matching program on his 401k (5%) and since we bought our house so early in our lives, it will most likely be paid off by the time we're 40, 45 at the latest. Still, I'd like to see us put more away for retirement (aside from his 401k, we have nothing at the moment)