How much do you need to retire on $7,000 per month?
In previous posts on my site, I highlighted how much you need to save to retire on $5,000 per month AND $6,000 per month.
I’ll link to those detailed case studies at the end!
Personally, I think spending $6,000 per month, after-tax, is a great retirement spend sustained with inflation.
But what about if you wanted to spend more: what about $7,000 per month = a tidy $84,000 per year?
Inspired by even more reader questions, emails and comments since those other case studies were published, this post is about how much do you need to retire on $7,000 per month.
How much do you need to retire? It’s all about what you intend to spend
I believe retirement planning is a multi-step process that evolves over time.
I also believe to have a secure (and fun) retirement, you need to strongly consider your income needs and wants, including looking at your entire portfolio to see how that portfolio could fund your lifestyle, how hobby or part-time income could support your needs, and how you might be forced to navigate any sequence of returns risk.
Why is mitigating sequence of returns risk important?
Because timing in life – matters.
As you know, a retirement portfolio generally isn’t just a lump of cash. Any well-constructed retirement portfolio beyond some cash is very likely to include a mix of assets that deliver income, growth and thwart some inflationary risks. Ideally, the growth will replenish at least a portion of what you withdraw over time, making your withdrawals more sustainable over the period of time you’ve planned for…
But (and there’s always a but when it comes to any planning in life!), a major market drop or a poor sequence of market returns typically in the first five (5) years or so of retirement can really cripple any income needs and wants. If you must tap your portfolio to cover your expenses, and that portfolio is losing value as well; you have to sell more investments to raise a set amount of cash to fund your lifestyle.
This creates two major problems if you need to do that:
- Not only do you need to drain your portfolio faster during a poor series of market returns,
- It leaves your portfolio lower in value that can generate future growth and returns if/when the market recovers.
Check out this visual aid from BlackRock to clarify this risk:
How much do you need to retire on $7,000 per month? Ask yourself questions…
As you explore options for your retirement plan, here are some questions to consider:
- Can you pay off your mortgage (and other debts) before you retire? (I would vote a resounding “Do It!”)
- How much travel or discretionary expenses do you have planned? When?
- What health issues or taxes might derail your plan?
- Do you have any ambitions to change your location, if only temporary, or downsize your home?
Stephanie and Zack want to spend $7,000 per month in retirement – how much is enough?
In our case study today, Stephanie and Zack want to retire younger than most. Kudos!
Like other case study examples on my site, this couple intends to retire without any debt early next year. (Smart.)
Second, they’ve worked hard with high salaries to maximize contributions to their Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). They needed to. Without any workplace pensions to rely on and the desire to retire early, funding retirement is on them and them alone so they needed to be very aggressive with saving and investing since they landed some professional jobs at the age of 25.
Can they retire at age 51 with what they have?
How much do you need to retire on $7,000 per month, increasing year-after-year, due to inflation?
Here are Stephanie and Zack’s assumptions…
Retirement Assets/Liabilities and Assumptions:
- My fictional couple wants to retire next year at age 51.
- They have zero debt. Amazing.
- Like many people these days, they remain worried about inflation, so they’ve planned for 3% sustained inflation until age 95 for their spending.
- Stephanie and Zack keep cash but they also hold some GICs now that rates for GICs are higher. They keep their portfolio in a 90/10 stock/fixed income mix. While they own a few individual stocks they are mostly index investors. We’ll assume with their long-term 90/10 asset allocation they can earn about 5.5% annualized returns going forward throughout retirement but no more.
- Because they fired their financial money manager years ago, they pay next to nothing in ongoing money management fees.
- Stephanie and Zack will keep some cash on hand, but not very much, about $15k in total. They intend to rely on these GIC assets if they need some cash in a pinch. I have not included this amount in their drawdown plan.
- They will both take CPP at age 70 = 50% of max contributions (because they are early retirees and had only a few maximum contribution years towards this government benefit).
- They will both take OAS at age 65.
- Stephanie and Zack own their home in Nova Scotia. They have no plans to sell their house near-term nor downsize. Like some Canadians, they see their house in their 80s or 90s is part of their “nuclear” plan to fund any older-age retirement income needs.
- We’ll assume their Nova Scotia home is worth about $650,000 on the water. They anticipate the real estate should appreciate by 2% at mininum over the coming decades. Maybe it’s more, who knows?!
- A reminder they have no workplace pensions at all.
- CPP and OAS are both indexed to inflation.
- Finally, Stephanie and Zack have amassed a lofty ~$1.7 million in portfolio assets at the time of this post. The majority of their assets are inside their RRSPs, the rest remains inside their TFSAs ($250,000 combined to date) and non-registered assets owned between them.
- They will also work, they need to, part-time in their 50s and 60s. Stephanie is going to continue to teach yoga to earn about $24,000 per year before taxes. Zack has decided he wants to drive for Uber every few weeks. He also believes he can earn up to $24,000 per year in his 50s and 60s. I’ve assumed they will stop this hobby income by age 65 when OAS kicks in.
How much do you need to retire on $7,000 per month results
After running some math, I can conclude Stephanie and Zack can retire – they have enough assets to spend $7,000 per month at 3% inflation until age 95 with $1.7 invested – provided they have some hobby income and that side-income that is sustained until age 65!
You can see from the financial assets chart above, Stephanie and Zack essentially “die-broke” at age 95 with only the real estate asset left to manage for the estate – as the real estate itself appreciates in value over time.
When it comes to cashflow, be warned with 3% sustained inflation, spending needs and wants go WAY up over time:
Spending $84,000 early next year, out of the retirement gate, is a very lofty spend indeed but that desired spend balloons to $130k per year at age 65 with 3% sustained inflation.
If they want to keep spending that way, great, but at age 88 that desired income spend doubles to $260k per year!
What happens if Stephanie or Zack don’t work until age 65? Can they still retire on $7,000 per month?
Stephanie and Zack will run into a modest cashflow shortfall if their side-income assumptions don’t work out in their 50s and 60s as planned.
For example, if only one of them works in their 50s and 60s, even if that one assumption comes true, they cannot meet their desired $7,000 per month spend.
Instead, they will need to consider spending closer to $78,000 per year (on average) starting at age 51 to avoid running out of money in retirement and incur a lifestyle shortfall:
How much do you need to retire on $7,000 per month without working at all?
In playing with some numbers, if you wanted to spend-it-all, assuming 5.5% rates of return and sustained 3% inflation, you’d need to have a whopping $2.15 M invested at age 51 to float your $7,000 per month spend from ages 51 to 95, assuming all assumptions come true of course in perfect, linear fashion!
How much do you need to retire on $7,000 per month results – drawdown ideas
Most couples, who have been smart and focusing on maxing out contributions to their TFSAs and RRSPs for decades on end (like Stephanie and Zack have), even if they have no workplace pension whatsoever, should be just fine in retirement to say the last although their desired spend of $7,000 per month might be higher than many couples?!
The keys beyond saving and investing with equities of course is keeping your money management fees away from greedy financial piranhas, being very selectful of your retirement drawdown order, and ensuring you’re smart with CPP and OAS benefits decisions.
As part of Stephanie and Zack’s drawdown plan some things for you to consider:
- This couple knows that while $1.7 million invested is a bundle by age 51 to say the least, most won’tand cannot save that much, it would be very important to have some spending guardrails in place such that if they didn’t need to spend this much they could get by anyhow with spending far less. The ability to ratch-down your spending wants in retirement, for potentialy a few years if needed, should be designed-in.
- While there is no perfect drawdown order (there are always pros and cons with income needs and balancing taxation and navigating inflationary pressures), it could make sense for many couples to consider a drawdown order of NRT (non-registered (N) first blended with slow RRSPs/RRIFs (R) withdrawals but ultimately leaving TFSAs (T) “until the end” to smooth out taxation over time with the outcome to enjoy a lower-level of average taxation as you age when you can least afford lumpy tax hits as your portfolio dwindles in value.
Note: TaxTips.ca has information related to age credits and age credit clawbacks starting here.
Thanks for your readership and do consider sharing this detailed case study with others!
I look forward to your comments, as always, on my content.
Do you have some ideas for a case study? Got something on your mind? Leave a comment and ask away. I will do my best to accommodate some more over time.
Disclosure: this case study and all images are for illustration and education purposes only.
How much do you need to retire on $5,000 per month?
How much do you need to retire on $6,000 per month at age 50?
Can this couple retire at age 55, with $800,000 in their RRSPs?
All figures, tables and assumptions above are for educational and illustrative purposes only and never implies any financial or tax advice. I look forward to posting more case studies over time.
There are other case studies on my Retirement page here.
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If you are interested in obtaining private projections for your financial scenario, check out all the details here!
I look forward to helping you out!