Consider what you spend for your enough number
Earlier this year, I wrote one of the biggest retirement questions and potentially one of the most frequently asked retirement questions is “How much is enough”?
The answer to this question at that time was “it depends” but there is a better answer than that.
The “it depends” response was in reference to the latest edition of Diane McCurdy’s book How Much Is Enough? In her book Diane encourages aspiring retirees to separate needs from wants but I always look at these things together.
Determining what you need and want to spend…that is your “enough” number.
When it comes to our personal finances, we strive to max out contributions to our TFSAs (Tax Free Savings Accounts) and then contribute to our RRSPs (Registered Retirement Savings Plans). We consider this a powerful 1-2 long-term savings punch.
When it comes to spending in retirement you need to consider the following:
- What is your base spending?
- What other expenses do you expect to have in retirement?
- Will you be taking trips?
- Will you be buying new cars every few years?
- Do you want to renovate the family home?
- Are you planning to leave an inheritance?
Looking at our finances, here is a quick list of expenses (needs and wants) I have today and some of the same ones I expect to carry forward in retirement:
- Property taxes
- Home maintenance/condo maintenance if we downsize
- Home insurance
- Home utilities (e.g., heat, hydro, water, cable, cell phones)
- Saving for a newer car every 10 years / capital outlay for newer vehicle
- Car maintenance
- Car insurance
- Meager contributions to pad the emergency fund
- Food/groceries + any household supplies
- Personal insurance/travel insurance
- Saving for healthcare/healthcare expenses
- Travel and entertainment (~ up to $1,000 per month on average)
$4,000 – 4,500 per month, after taxes, in current dollars.
Here are the expenses I’m not expecting to have before I retire or in retirement:
- No mortgage / no debt.
- No saving for retirement, especially contributions to my RRSP or our RRSPs.
In my quick and rough example above, we figure we need about $54,000 per year after taxes to fund my retirement needs (and many wants) in today’s dollars.
Factoring in an inflation rate of 2% between now and over the next 17 years (if I was to make 2030 as my first full year of retirement) that $54,000 really costs about $73,000 in the future.
Let’s round to $75,000 per year just to be safe and add some buffer for my mid- to late-50s spending.
Some of this money is needed. That’s base spending on food, shelter and some transportation.
Some of this money is wanted for discretionary spending. That’s travel, nice dinners out and entertainment.
Thankfully beyond our investment portfolio, some income will eventually come from government programs like the Canada Pension Plan (CPP) and Old Age Security (OAS). However, for the purposes of our base spending needs, I’m not counting on CPP or OAS. I will be too young to retire and collect either CPP or OAS anyhow!
There are many variables that go into your “enough” number.
Check out these retirement essays – folks that have “been there and done that” to figure out their enough number. Figuring out what your retirement lifestyle might look like is probably the best way to get a handle on it.
What are you doing to determine your “enough” number? Using rules of thumb? Tracking expenses?