Revisiting our financial freedom assumptions
Every now and then I get a few emails from readers wondering how much is enough and how to fund retirement? Today’s article will revisit some older perspectives I have on this and share my latest assumptions to these questions.
Financial freedom assumptions – how much is enough?
Only you can answer that question for yourself and your family.
We figure “enough” money covers our basic necessities with some extras – like travel and entertainment.
Here is a quick rundown of what we might need in our financial future. I will update this chart or something like it over time…
|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-$800||$8,400-$9,600||Represents 1% home value per year, increasing by inflation, closer to $800* in 2023/2024?|
|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||$5,240||$62,880||*Using high-end values above.|
|Totals without Mortgage||$3,000||$36,000||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/buffer and we’re targeting upwards of $4,500 after tax spending per month**
Financial freedom assumptions
**These are estimates only. We don’t track our personal expenses very closely after we pay ourselves first every month. We pay ourselves first (via TFSAs, then RRSPs, then non-registered after that if there is any money leftover).
Could we be saving more?
Do we really want to?
No, otherwise we’d be doing this already.
We need to live our lives today.
Your mileage may vary.
This brings me to this: personal finance is very personal.
Funding your retirement will be different than mine.
How to fund and achieve retirement?
To fund our needs and desires in our financial future I’ve done some math on this and we’ll rely on the following to achieve our plan:
- A paid off home. We wish to avoid entering retirement or semi-retirement with any debt. Servicing debt reduces your financial flexibility because you are forced to pay other people first. We plan to start semi-retirement/part-time work only when all debt is done.
- A $1 million dollar investment portfolio. This includes all registered and non-registered investments between us, it includes LIRAs, taxable accounts, TFSAs, etc. We hope to achieve this milestone by investing in some dividend paying stocks for passive income and indexed Exchange Traded Funds (ETFs) for long-term growth within the portfolio.
- Modest workplace pensions. We hope to keep our jobs with our current employer for the coming 5-10 years as our debt is killed off. Nothing is a given though. We’re optimistic if we continue working with our current employer, at least into 2024, we’ll both have some small workplace pensions to draw from over time.
- 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. We’ll also have Old Age Security (OAS) income as well. We are however not relying on CPP or OAS for an early retirement. These payments will be considered icing on the cake per se as we get older to fund extra wants.
- Part-time income. I can’t sit still for long so I expect to have some form of work for the rest of my life. What that is I don’t know. It could be this blog long-term if it grows. It could be running my own financial planning business or other. It could be part-time, seasonal work. It could be all of these things or different things. Time will tell. I’ll figure it out. 🙂
These are our high-level assumptions for the financial future. We have work to do to meet our goals and desires but we’ve made great progress to date. No doubt our plans and needs will continue to evolve over time but this is our updated perspective. I’ll keep you posted.
What reality check have you done on your financial plan? Are you in retirement? How did your plan match reality?
Thanks for sharing your numbers with us. I like the pay yourself first mindset which is what we do as well however we do budget very carefully as you already know. Once you have that mortgage paid so much more will open up for you as we’ve experienced the past 2 years. We still don’t regret our decision to pay the mortgage one bit especially with the rising prices of hydro and other housing costs not to mention the real estate market increases. I’d be interested to learn more about your $700 grocery budget. Does that include eating out as well? Do you make a list or just shop and buy as you need?
Thanks Mr. CBB. No doubt once we’re debt free I suspect a whole new set of doors could open up. We’ll see!
The $700 grocery budget does include some take-out and dining out. We’re closer to spending about $100-$125 per week for two people. We eat a lot of meat, mostly white, lots of fresh fish; veggies; fruit and we love great cheese. We only buy what we need and will use in any given week.
You’ve inspired me to write a similar post. I think these numbers look pretty good . 🙂
Things are coming along. Happy to read your take.
Mark, excellent job on setting your goals and sticking to your plan. I believe it is a very solid plan including the reasoning on debt, various income streams and ideas on staying engaged employment wise in semi retirement as you choose. I have no doubt you’ll get to where you want to be and more.
It’s a great idea to periodically re-examine these like you are in this post in order to update or adjust due to the many factors that can influence this.
It will take some effort and calculations to decumulate your RRSP as per your described situation but I believe you will be able to do it and maintain a favorable tax rate, as long as you do not have significant semi retirement employment income. On the other hand that income is fine too as it could lessen the need/desire to tap the RRSP or the unregistered investment income, and raise your standard of retirement lifestyle. Although you may have to pay a little more tax…a nice problem to have.
Thanks RBull. I think the plan is coming along. Of course, so many things need to happen in the next 5-7 years to make this plan work out, but at least with a plan, you know where you’re going and you can adjust how you get there.
I’ll probably revisit this assumptions once per year on the site, seems like a decent thing to do. Many bloggers write about net worth but I really couldn’t care less about that. It’s all about meeting our needs from an income perspective and working towards that.
I fully expect some math in my future to figure out how to decumulate the RRSP. Ideally, we’ll kill all RRSP assets prior to pensions, CPP, OAS and any other “bond-like” income. I know for almost certain the last account to collapse will be the TFSA.
I truly hope I have a tax problem in retirement. 🙂
Agree on the plan and making adjustments, although I would add where you’re going (and end up) may change and you’ll likely still be fine. In our case we didn’t really have a specific number, but we did “settle” for roughly 2/3 of originally “planned”. We just got to well past the “cross over point” where bills could be paid, leaving a good amount available for desired discretionary spending, and with big unexpected career interruptions for both of us had less interest in working anymore, so the decision to fully retire was easy.
My RRSP decumulation is working out to be relatively straight forward, incorporating enough to top up TFSA’s, and keep taxes low while maintaining a satisfying lifestyle. When government benefits start we’ll just have to tinker a bit to lower that draw accordingly to fund lifestyle and minimize tax. TFSA last to go- no brainer- at least under existing tax rules!
I see the perspective growing the income and net worth (liquid assets) as mostly going hand in hand, when speaking from an investment point. You can’t really reach a reasonable retirement lifestyle level having one without the other. Your method of looking at both the estimated capital required to reach a target income is much better than using just a net worth goal since it has you looking at retirement expenses and projecting/measuring this desired income. Good job.
Lol on the tax problem. I had to gently remind my dad the other day his was a nice issue to have, although he truly knows this already.
If you’re “settling” now for 2/3 of what you had planned, I can’t imagine what the earlier objective might have been for you. That’s great….
I do focus however on the growing income (investment assets; dividends and distributions from capital) vs. the overall net worth, although they are related for sure. I figure I have to live somewhere so I try and take house out of the equation as much as possible and that skews any net worth summary – so I really don’t focus on that.
I admire those that have a plan, when I was younger, I never really had a plan with a specific goal in mind. I maxed out our RRSPs, used the RESP and RDSP (daughter) to take advantage of government contributions as well as paid down any debt as fast as reasonably possible. With the advent of the TFSA I added that to my “to be done” list and maxed them out for all three of us. I have now started to pull funds from my RRSP to the extent I remain in the 15% federal tax bracket. This will fluctuate with the farm income year to year but should be in the range of 15K. I think I will invest these funds in a non-reg account. We don’t travel or spend a lot of money on “entertainment”. I don’t spend a lot of time considering CPP as our pensions were integrated so basically what we gain in CPP we lose off our pensions. I will likely take CPP early. If we get OAS, great. If not, shouldn’t be an issue.
One thing I have to keep in perspective is that the income generated within the RRSPs will be eventually subjected to taxes whilst the income generated within the TFSA will not. To simply say that all investment income generated is 60K without breaking down taxable v. non-taxable is a mistake.
The final issue is the longevity of any of these government policies. We have certainly seen how any government can change the policy of the previous government and pull the rug out from under the best laid plan.
Lloyd, you and other readers, have your act together.
“I have now started to pull funds from my RRSP to the extent I remain in the 15% federal tax bracket.”
Like you I hope like you, we don’t spend really any time worrying about CPP. I don’t today. I figure if we can “retire” without CPP or OAS, we’re in a very good place financially. That will allow us to fight any longevity risk and maybe more important, government policy risk!
Your solid plans have been paying out and they always will.
We just achieved $200K of milestone since we started financial independence journey 2 years ago. It wasn’t easy but I can see the growth getting faster and faster. I am very glad that we are doing it together.
Very well done. That’s an outstanding milestone.
Not being one, but I think those who retire early will probably continue some type of work or have some other source of income (as with Derek Foster who probably made more from his books than work). Can’t see you sitting around doing nothing for long. 50 is not old and most at that age are still in their prime, many will probably still feel great at 60.
Your breakdown is great and a good reminder to those who have not taken the time to look at where their money is going or what they might need. I still contend that one should concentrate on the Income their savings will generate, not a “how much”.
I absolutely can’t see myself lying around our home all day. 50 isn’t old (I hope) and that would be a great age to leave the workforce on my own terms.
Thanks for your contributions cannew.
“tracking” has a Karma and exponential positive effect to your net worth. I promise.
I have friends who did so after inquiring, requesting and accepting my tutelage on the software “hows”. And a good %age of them are still at to-day it and rave about doing so.
I won’t sell you anymore on this (promise #2) but I don’t think you’re totally cognizant of the benefits. I understand.
Neither were we until we began ..
Thanks for the encouragement. We do track expenses, just not to the penny, but you are making your case clear!
Excellent post Mark – I enjoy reading your posts, Thank you.
BUT your comment ” We don’t track our personal expenses very closely after we pay ourselves first every month. ” really, really very much surprised me.
4 years ago, my wife and myself DID exactly what you folks intend to do. We retired young. How? Because we tracked all of our revenues and all of our expenses. I have the quarterly and year-end reports from 20 years ago to prove it.
We always believed that what happens to the right of the decimal point, counts most. Like what the book ‘Moneyball’ (and movie) did for baseball, our money-management philosophy involved a firm belief that you have to have an evidence-based awareness of whats coming in and whats going out. To the penny.
We utilized the Microsoft Money98 software (it was free), and we still do. As my wife says, “it has made the difference in our lives’.
And Tracking DOES NOT have to dominate your time – its just a matter of keeping all of your receipts and posting them. If you don’t know what is spent, then assuredly, more is spent than needs to be. Or, on the wrong things. But even if by the remotest of chances this isn’t true for you, then just simply knowing what is spent can never be a bad thing, true?
Keep up all the good work you’re doing Mark..!! You’re gonna do fine regardless..!!
But please, you seem like a deserving guy, do it more effectively and efficiently, better and quicker. TRACK.
My kindest regards and best wishes.
Ha, well, maybe I could be more diligent Darrell!
Really though, we have monthly contributions to our RRSP. Those increase in value every year to max out my wife’s account at least. My RRSP is already maxed out. Our TFSAs are maxed out. I have a non-reg. account that I’m taxed on already, the more I add, the more taxes I pay. The mortgage is being paid down. We’re doing what we can.
Could we save more? For sure, lots, but we gotta live and I love my craft beers on weekends. Hell, I might have one now 🙂
I will see what I can do to track things more but I can’t make any promises!
I have never felt the need to track expenses.
However, in 2014 I decided to keep track for one year, just to see exactly where money was being spent, because I didn’t really have a complete idea of what our food and other costs were. After that year I had a clear idea of how much money we would need for “necessities” when retired.
One thing to come out of that exercise is that I cut our television package down to the minimum; bundled with internet and home telephone it just seemed like way too much money. Okay my husband has added his soccer channel back for an extra $10 a month. The other thing is that I thought we should spend more on entertainment and eating out. After 3 kids and no extra money and no time, we just weren’t in the habit of doing that. I still prefer casual eateries with good food that are not expensive, as long as you watch the liquor consumption.
Our 3 kids are still in university, but the costs to us are not very much, middle son needs financial help (kinda unfair to the other two, but…). Since the mortgage is gone, and the music lessons, dance classes, sports etc. costs are gone, there is suddenly a lot more money to save for retirement. I am very happy with our position now, but it is still scary to think of the day when there isn’t that monthly salary coming in. I am now getting $329 a month in CPP.
Thanks for sharing Barbara. I assume now your kids are grown and getting their educations, you’re on the tail end of major expenses.
Now that your mortgage is retired, I suspect that’s a huge relief 🙂
Nice starting point Mark. As you say, everyones financial needs will be different but you have given a much better starting point than that old bank approach that recommended 70% of final salary (or whatever it was).
We have found that some expenses did go up when we retired, golf and curling are significant expenses. Especially when you include the obligatory post game libations.
We have more in the RSPs than in other accounts and our issue now us how to get that money out without incurring hefty tax bills. Not that we are too upset at having the savings, it beats struggling financially.
Thanks Richard. The asset accumulation part seems easier than the asset decumulation part, the one you’re in – how to effectively draw down RRSP assets without incurring hefty taxes.
I’m optimistic/hopeful we can start drawing down our RRSP assets before accepting any pension income. This way, we’ll be in our lowest possible tax bracket with no other income provided.
If only TFSAs had been around twenty years ago. Our financial advisor has been taking out from the rsps and reinvesting the money back in our tfsa accounts.
@Richard: Why would one take funds from rrsp to tfsa? Are you drawing down rrsp early? Not investing any money now? Have any Non-reg investments?
The TFSA has been a HUGE gift to all Canadians. I intend to max it out every single year I possibly can.
Without trying to sound overly brusk, you’ll have to explain to me your logic behind inclusion of the private pension but exclusion of the public pension.
It would be great to read some financial plans etc. from those who have children.
“It could be running my own financial planning business (after I obtain some professional designations).”
In Canada (and I’m pretty sure throughout North America) you don’t require any professional designation to be a “financial planner”. Take Ed Rempel, for instance, who got stripped of his license by the powers that be, yet still operates a financial planning website/business. (A great insight as to just how shifty the financial sector truly is.)
The most impressive thing is that you have stuck to your plan (most people can’t). Well done!
Well, the way I see it, to retire young I can’t rely on CPP or OAS. I will need money to live from beforehand; before those programs kick in. I do expect to live from CPP and OAS eventually, but I hope to have my income cover my expenses by age 50 or age 55 at the latest. Also, if I don’t work full time, it’s not likely I’ll get very much money from CPP; certainly nowhere near the maximum. Maybe that wasn’t clear when I discussed financial freedom.
You can be the judge.
I would prefer to have my CFP is I start my own business but you’re right, you don’t need to have many/any designations to call yourself a financial planner – which is wrong I think 🙂
Thanks for the comments.
Thank you for outlining your expenses Mark. And thank you for outlining your sources of income in retirement. It helps to put everything in perspective.
As a side question, is the $1 million in dividend stocks separate from the $500,000 figure in the same paragraph? I apologize if I am asking too much information.
I am also curious, would it be cheaper to simply rent your current house? For whatever reason, it looks like your cost to maintain the house is as much as what I would think the mortgage payment would be (or a rent payment would be). And then you can sell that house, and use the proceeds to invest in individual stocks or etf’s. As a renter, and as someone who does not live in the overpriced Canadian real estate market, perhaps I do not know that much.
Good to know.
Not too many questions – it was my post after all. The $1M in stocks and ETFs is a portfolio value we’re on pace for/striving for. I figure $500,000 in a taxable account with 30-40 stocks is great for income, as will, $500,000 in registered accounts that is both tax-free and tax-deferred.
I’m not sure it would be cheaper to rent our current house with our existing mortgage rate of 2%. Our house likely isn’t overpriced as far as I can tell. We have a decent house on a 0.5 acre lot so I feel, maybe wrongly, it’s priced rather well and provides good value for money – but I’m biased – I live here!