Some time ago on this site 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 is usually: it depends. It largely depends on what you’ll spend in retirement.
I was thinking about that subject recently including some needs and wants, and forecasting where (I hope) some our retirement income will come from. Here is what crossed my mind in today’s dollars:
Needs per month – Home ($1400)
- Home maintenance ($300 per month)
- Property taxes ($350 per month)
- Home (core) utilities (heat, hydro, water) ($325 per month)
- Home insurance ($125 per month)
- Internet ($100 per month)
- Cell phones ($100 per month)
- Contingency/buffer (TV?) ($100 per month)
Needs per month – Personal ($1600)
- Food/groceries ($600 per month)
- Healthcare ($200 per month)
- Household supplies ($200 per month)
- Clothing ($200 per month)
- Contingency/buffer ($400 per month to cover various entertainment)
Needs per month – Auto ($600)*
- Car insurance x2 vehicles? ($200 per month)
- Car maintenance x2 vehicles? ($100 per month)
- Gas (max $200 per month) x2 vehicles?
- Contingency/buffer/saving for a newer car every 10 years ($100 per month)
*Depending upon where we live, in the city or outside the downtown core, do we really need two cars? Probably not. We could likely go down to spending $300 or so per month with one car.
Needs per month – General Savings Fund ($400-$600 per month)
Wants – Travel and Major Entertainment $X?
In today’s dollars, assuming there is no mortgage, no more RRSP contributions, we self-insure and there are no major variations in our fixed expenses I figure general retirement spending could be around $4,000-$4,200 per month after taxes in today’s dollars. I’m sure we can retire on less but this is just an estimate. I’ve got a number of contingencies listed above as well.
The wildcard in our retirement planning comes from mainly wants.
Depending upon our health and desire to travel more money will be needed to retire on. Where will our retirement income come from to blend our needs and wants?
Source # 1 – Pensions
When I started my job with my current employer almost 14 years ago I was offered a choice for my pension plan – defined contribution (DC) or defined benefit (DB). I chose DB. When my wife started her job she was offered the same choice and chose the DC plan instead (based on advice from her Investors Group Financial Advisor before I knew her. Yes, this is a true story). Our hope is that pension income will fund a good portion of retirement expenditures. I am hopeful our pensions will provide us with about $20,000 per year (each) starting at age 55 or 60.
Source # 2 – Registered Retirement Savings Plans (RRSPs)
Ever since I read David Chilton’s The Wealthy Barber it reinforced the lesson of pay yourself first. In my 20s the RRSP contributions were rather lean but I made up for some lost time in my 30s. Later this year I hope my RRSP will be fully maxed out. We hope to contribute more money to my wife’s RRSP in the years ahead.
I figure we’ll need a nest egg of >$500,000 inside our RRSPs (combined) to help fund our retirement (remember a modest portion of this money is really a government loan). So, conservatively taking $300,000 as our own capital, I figure that should yield about $12,000 per year in passive income without any aggressive drawdown of capital. This money will supplement any pension income to cover fixed expenses.
Source # 3 – Non-Registered and TFSA Dividend Income
Investing in stocks that continually pay dividends is a good thing. Investing in stocks that continually increase their dividends year after year is a great thing. Not only does this provide investors with a steady passive income stream but also an increasing passive income stream. We’ve been on a journey to earn tax-efficient (non-registered) and tax-free (TFSA) dividend income for retirement, a goal of $30,000 per year I’ve been blogging about for almost five years now. We have a considerable distance to go to achieve that goal but things are coming along every month. If the pension income and RRSP savings can cover the bulk of our “needs” then this income source could cover everything else including the “wants”.
Source # 4 – Government Programs
Based on Service Canada information, the average Canada Pension Plan (CPP) payment is just over $600 per month for new beneficiaries at age 65. My wife and I will need to wait close to 30 years to collect Old Age Security (OAS) and that only provides a few hundred bucks per month – hardly enough to live from. I’ve left these programs for the end, purposely, since I’m not betting on anything from our government. Any income from government programs will be considered icing-on-the-retirement-cake. We figure very conservatively CPP will pay us about $10,000 per year (combined) at age 60 and OAS will pay us another $10,000 per year (combined) age 65.
When I add up our pensions starting around age 55 or 60 ($40,000 per year), RRSP income/drawdown ($12,000 per year), non-registered and tax-free dividend income ($30,000 per year), and government benefits (up to $20,000 per year), the sum of these parts should mean we’ll be in decent financial shape in another 15-20 years. We just need to keep doing what we are doing.
That said our retirement plan includes a host of assumptions, hopes and savings goals. Lots of things need to converge in the coming years to keep the plan intact. I figured we needed to start somewhere with our plan to end up remotely close to where we want to be.
“…Plans are worthless, but planning is everything…” – Dwight D. Eisenhower.
What planning have you done for retirement? If you’re in retirement, how did you determine your enough number?