Income Needs and Wants in Retirement
Some time ago on this site I wrote one of the biggest retirement questions is: how much is enough?
What might be our income sources, needs and wants in retirement?
The answer to such questions are 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 for future income needs and wants:
|Key expenses||Monthly||Annually||Semi-retirement comments ~ end of 2024???|
|Mortgage||$2,240||$26,880||We anticipate the mortgage “dead” before the end of 2024.|
|Groceries/food||$800||$9,600||Although can vary month-to-month!|
|Home maintenance/expenses||$700||$8,400||Represents 1% home value per year, increasing by inflation.|
|Home property taxes||$500||$6,000||Ottawa is not cheap, increasing by inflation or more.|
|Home utilities + internet/TV/cell phones, subscriptions, etc.||$400||$4,800|
|Transportation – x1 car (gas, maintenance, licensing)||$150||$1,800||May or may not own a car long-term!|
|Insurance, including term life||$250||$3,000||Term life ends in 2030, will self-insure after that without life insurance.|
|Totals with Mortgage||$5,140||$61,680|
|Totals without Mortgage||$2,900||$34,800||As you can see, once the debt is gone, we’ll be in a much better place for financial independence!|
Add in other spending/miscellaneous spending to the tune of $1,000 per month and that’s our budget.
Back in this older post, I estimated our basic expenses in retirement might around $4,000 – $4,500 per month excluding any major discretionary spending and excluding any international travel (after taxes).
Wants – Travel and Major Entertainment = $X factor
I’m sure we can retire on less but this is just an estimate.
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?
Income sources in retirement
Source # 1 – Pensions
At the time of this post, when I started my job with my current employer well over a decade 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.
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 with. I figure that should allow us to withdraw a solid $20,000 per year for a few decades.
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”.
So, our goal is to earn about $30,000 in dividend income from these accounts by around age 50-55.
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.
OAS should pay us another $10,000 per year (combined) age 65.
Income Sources, Needs and Wants in Retirement Summary
When I add up our future pensions (starting no earlier than age 55), along with our RRSP income/drawdown plans, non-registered and tax-free dividend income should we want to use the latter, AND government benefits in our 60s, 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.
If you’re in retirement, how did you determine your enough number?