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 your what you need and want to spend is your “enough” number.
While optimizing the use of registered accounts like RRSPs and TFSAs for your financial future are very important consider what you are saving for. What expenses do you expect to have in retirement? Will you be taking trips? Buying new cars every few years? Renovating the family home? Are you saving to leave an inheritance?
Looking at our finances, here is a quick list of expenses (needs and wants) I have today (today’s dollars) and some of the same ones I expect to carry forward in retirement:
- Property taxes (~$350 per month)
- Home maintenance
- 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
- Contributions to savings fund/maintain 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 (max.) per month, after taxes, in 2013 dollars.
Here are the expenses I’m not expecting to have before I retire or in retirement:
- RRSP contributions
In my quick and rough example above, $54,000 per year after taxes is the sum of money 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. Some of this money needed (and wanted) will eventually come from government programs like the Canada Pension Plan (CPP) and Old Age Security (OAS) but for the purposes of these calculations, I didn’t count on that since I won’t be old enough in 2030 to collect either payment.
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?