How much is enough for retirement? April 2018 update and reader questions
We’re all told to save, invest and stay invested for the long-term. Sound advice for sure in our asset accumulation years. But most of us will want to spend what we’ve worked so hard for in retirement during our “asset decumulation” years.
We’re “not there” yet in terms of drawing down our portfolio but those days are getting closer. We’re more than halfway to this major financial goal that should fund most of our retirement expenses. When we realize this goal I have full confidence we’ll be able to leave the workforce for good or at very least work on our terms.
Thanks to various reader questions of late, I’m going to revisit our “how much is enough” question about any retirement planning. I’m doing so today in hopes of helping you figure out your “enough number”. I’ll highlight a few recent reader questions in this post that relate to this theme and over time, I’ll update this post as new questions come into my inbox. OK, let’s go.
Mark, how do you know when you’ll have enough? You write about dividend income and not spending the capital but won’t you consider drawing down your portfolio eventually?
In this older post, I estimated our general expenses in retirement might be close to $4,000 per month excluding any international travel (after taxes). Here is quick summary of those expenses:
- Home needs (property taxes, maintenance/improvements, utilities, contents/house insurance plus some contingency money) = $1,400 per month assuming no debt.
- Personal needs (gotta eat ($700 per month for 2 people), healthcare, household supplies, clothing plus some contingency money) = $1,600 per month.
- Auto needs (assuming we’re down to one car in a few years; auto insurance, maintenance, gas, contingency money and saving up for a newer car every 5-10 years) = should be no more than $950 per month.
I write about owning a million dollar investment portfolio not because it’s a nice round investment number (although it is) but because we believe the income derived from this portfolio value (excluding withdrawals; fixed income from our small workplace pensions; government benefits paid to us in the form of CPP and OAS in our 60s and beyond) should be enough to cover most expenses. This means we will have reached our crossover point. If we don’t have enough money to “live off dividends” then we’ll start withdrawing from our portfolio – which is just fine.
Using TaxTips.ca (no affiliation but free calculator!), you can calculate how long your registered money might last. Here is one example for early retirees who may want to consider drawing down their RRSP(s) before taking their Canada Pension Plan (CPP) or Old Age Security (OAS); and/or workplace pensions; and/or withdrawing any money available in other investing accounts. This is something we’ll probably do. Individuals or couples who have worked hard to amass a portfolio value of $500,000 by age 55 will be able to enjoy a modest income from their RRSPs before taking government benefits – benefits that make sense you defer in many cases.
Mark, I have read your articles about your journey to owning million dollar portfolio. I would be interested to know how you would invest if your RRSP (Registered Retirement Savings Plan) was maxed out; what would you do next?
Another good question. I can answer this question rather honestly because it is (the RRSP) maxed out. Although we have some work to do, to maximize contributions to my wife’s RRSP in the coming years (before early retirement) my RRSP has been maxed out for about three years now.
If you’ve been diligently contributing to your RRSP for many years like I have (and good on you too!), then I would strongly consider maxing out your Tax Free Savings Account (TFSA) as your next step. I mean, this account is an absolute gift!! I’ve considered our TFSAs as retirement accounts from Day 1. If you haven’t considered using your TFSA as a retirement account, this and other great things you can do with your TFSA are listed in the articles below:
If your RRSP(s) and TFSA(s) were maxed out, and if you had money left over, I would strongly consider paying down debt (e.g., mortgage, car loans) and/or funding your kids’ Registered Education Savings Plan(s) (RESP(s)).
In general, I believe it makes sense to maximize contributions to all registered accounts (RRSPs, TFSAs, and RESPs as main examples) before investing in a taxable account.
Mark, in what order are you going to draw down your portfolio? Why that order?
Geez, complex question to answer! Here is my thinking although it’s subject to change!
No portfolio withdrawals planned. Save, invest and hopefully, eventually – prosper! We hope to kill our mortgage while working full-time and eventually be debt free in another 5-6 years.
Stop working full-time in this decade; hopefully enjoy part-time work in early 50s. If we reach the aforementioned $1 million portfolio by or in our early 50s, as long we have no debt, we’ll likely start withdrawing from our RRSPs first. This will reduce the tax liability that is our RRSP investments before we take on any CPP or OAS. During RRSP withdrawals, we don’t intend to touch our TFSAs because that’s tax-free money we can defer into the future. We have a number of Canadian dividend paying stocks in a taxable account. We will spend dividends earned from that taxable account. We will take my wife’s workplace pension at age 55; move into Locked-In Retirement Account (LIRA) and draw it down throughout our 50s.
More RRSP withdrawals planned – spend it all baby! Continue to spend the dividends from our taxable account – start drawing capital down. Consider taking CPP and OAS at age 65 or maybe later. Take my workplace pension* at age 65. (As of today, that *pension will provide a guaranteed $28,000 per year at age 65, inflation-protected for life.) No withdrawals planned from our TFSAs; rather we’ll use TFSA income in old age – good health, body and mind willing. Spend my wife’s pension and likely exhaust it in our early 60s. Thank you dear!
70s (and beyond)
By our early 70s, our plan is to live off income from my defined benefit workplace pension, use fixed-income from our government benefits (CPP and OAS) and use TFSA (dividend) income to cover living expenses. If we continue to maximize contributions to our TFSAs like we have been doing, every year since inception, it’s not unrealistic that in 30 years our TFSAs will be earning tens of thousands of dollars per year; money that can be withdrawn tax-free.
How much is enough for your retirement? I can’t possibly know.
I can tell you via this blog where my wife and I are trending to and how we intend to save and invest to get there eventually. Maybe sooner than most if we’re lucky.
We’re far from being retired yet nor perfect investors but we feel the importance of planning for retirement. This makes the process of planning and re-planning very important. If you do the same, I have great confidence you’ll get to where you are going as well.
I hope this post provided more insight into our “how much is enough” question; it answered some of your reader questions and it provided some considerations for you. As I get more reader questions, I will continue to post some new perspectives.
Readers, what do you make of these answers? What further questions do you have for me? Retirees, what do you make of our plan knowing what you know now? What advice would you have for your younger self or others? Thanks for reading.