Weekend Reading – What you need to save to spend $75,000 in retirement income
Hey Readers!
I hope you had a great week…welcome to a new Weekend Reading edition: focusing on what you might need to save to spend $75,000 per year in retirement.
First up, a few recent reads just in case you missed them:
I updated this post about my own Locked-In Retirement Account (LIRA) and highlighted some options about how to invest in it, including sharing what I own right now.
Thanks to various reader questions, comments and emails over the last few months, I shared a bit more about my/our own portfolio in this post – related to how to build a moaty DIY portfolio.
The results of this portfolio as an example are in that post!
Weekend Reading – What you need to save to spend $75,000 in retirement income
Headlines including my own are interesting because while such provocations seem simple to answer, there’s always IMO a BIG “it depends” attached to it.
- What rates of return are involved? How realistic are those?
- What about inflation or changes to inflation rates?
- Does this account for any variable spending at all? (Life is not a straightline).
- Does this imply a spending to zero balance? How desirable is that?
And my list goes on…
But for a bit of the back-of-the-napkin math, not so bad based on my own analysis and reporting work for clients.
Here is what I am talking about, from The Globe and Mail this week (subscription):
Source: https://www.theglobeandmail.com/investing/personal-finance/retirement/article-saving-for-75k-retirement-income/
This math confirms some of my work, give or take, with more detailed analysis in my selected posts:
1. If you’re single, and you won’t have this much saved at age 55, it’s still possible to retire:
2. How much do you need to retire on $6,000 per month with 3% sustained inflation?
Certainly, a few things jump out in such detailed analysis that I do or even some G&M headliner articles might touch on:
- As you age, as you work longer, you won’t need as much personal savings thanks to our generous government benefits by way of CPP and/or OAS – although I wouldn’t want to rely on our government programs exclusively, that’s for sure…
- Inflation is a wildcard. Plan for it to be higher in the coming decades and therefore be pleasantly surprised if that doesn’t happen.
- I don’t know anyone that spends consistently, as in every month. Sure, rolling year-over-year spending averages are good to forecast but like I mentioned above – life is not a straightline. Spending in asset accumulation and asset decumulation years is likely to be variable and your cashflow and portfolio income planning work must account for that accordingly.
- Like a few commenters (to this G&M article referenced), early retirement is probably out of reach for many due to competing financial priorities like raising a family and/or due to the higher recent costs of home ownership – if that’s what folks want – than incurred in previous decades. Those are just the facts.
- Due to competing priorities and/or life choices, many Canadians might be in for a reality check when it comes to their retirement planning altogether.
What say you?
What factors would you like to see considered (more) in such case studies or analysis?
What retirement income planning factors are overlooked or conservely, are you taking to heart?
Let me know your thoughts in a comment on the site or reply via email if you wish to keep it personal. I read all of them!
More Weekend Reading…beyond what you need to save to spend $75,000 in retirement income
Well, lots of noise about TC Energy (TRP) stock of late. Insider buying (from the CEO no less) is usually a very good bullish sign…
TC Energy's CEO Francois Poirier bought 11,500 shares today, for an investment of over $500k. Not a bad show of confidence.$TRP.TO
— TSX Dividends (@TSXDivStock) July 31, 2023
An interesting debate over whether it’s more financially advantageous to use extra cash to pay down your mortgage sooner or invest.
I shared my personal definitive answer on this debate here.
As a homeowner, I know this debate very, very well but some folks do need reminders in any renting vs. homeownership debate; you could also add utilities in the list depending on the rental property:
It's true, you will not recover the cost of renting.
But you also won't recover these costs with homeownership:
– Property tax
– Maintenance
– Buying/closing costs
– Opportunity cost
– Insurance
– InterestIf you're not including these numbers, you're doing it wrong.
— Rachael Camp, CFP® (@camp_wealth) August 3, 2023
Here are some timeless tips to better understand how your personal time horizons matter to successfully separate today’s spending from tomorrow’s future wealth.
Timeless Financial Tips #6: Aligning your Investments with your Time Horizon
Dale Roberts touted the benefits of his U.S. portfolio powered by Apple and a few other tech stocks. Very well done! Dale has no intention to live off dividends in perpetuity (which is smart IMO). Dale is creating his own dividends over time:
“Given that I am semi-retired and my wife is in the retirement risk zone, we will take the opportunity to sell into the rally to create retirement income. If someone wants to pay us more for less current earnings per share, step right up. It’s an easy game in retirement.”
Reader Question of the Week (adapted slightly for the site):
Hey Mark,
It is becoming increasingly hard to ‘keep the faith’ with respect to dividend growth stocks given their overall returns over the last year or so. In particular, Enbridge has been a huge disappointment in terms of overall return, along with VDY and XEI due to poor performance of bank and energy stocks.
Any suggestions ? this would be for a buy and hold cash account.
Great question.
Timely, too, right? Given all our major Canadian pipelines are down in price (TRP, ENB, PPL) this year.
I have a couple of thoughts…
One, higher-yielding stocks (like Canadian pipelines) are going to suffer from lack of price growth IMO. That’s because I believe you cannot have two sides of the same investing coin: lots of dividends/dividend growth and higher prices at the same time. The math just doesn’t work. So, you need to consider that when investing in any individual stocks.
Two, when it comes to any ETFs holding Canadian stocks, be mindful of sector weights or sector ETFs themselves. While some of my favourite Canadian dividend ETFs (like VDY) offer good yields, too much of a seemingly good thing could hurt portfolios too. Meaning, too much ownership/weighting to ENB or other Canadian stocks could be a short-term drag on any ETF returns based on their design/construction.
Energy in particular is cyclical.
While energy ETFs can be an excellent addition to an investment portfolio thanks to:
- Diversification: The energy sector is counter-cyclical and can provide diversification benefits to broader indexes.
- Hedging: Historically, energy has outperformed during times of increasing inflation due to soaring commodity prices.
- Liquidity: Energy sector ETFs can offer liquidity, easy to buy and sell.
- Dividends: Energy ETFs can deliver higher yields thanks to the dividend-paying nature of their underlying holdings.
…such sector ETFs are likely to underperform the broader market index at times and might underperform over time.
Just for kicks, I’ve compared Vanguard VDY ETF (a Canadian dividend ETF), to BMO’s ZEO ETF (an equal weight oil & gas ETF), to low-cost diversified fav. of mine XIU ETF from iShares:
Source: Portfolio Visualizer
Finally, three, while VDY vs. XIU has done very well for sure, be mindful Canadian banks have bolstered VDY returns for a decade now. That may or may not continue. VDY is constructed with >50% financials. So, as Canadian financials go so goes VDY.
For the record, I don’t intend to sell my ENB or TRP or PPL shares. I happen to own all three.
I also pretty much own the top-20 stocks in VDY directly, just different weights than VDY holds, to reduce my risk to the financial sector.
Thanks for your question and readership. Always great to engage…
Summer Deals – Playing portfolio offence with Qtrade
Building on my playing portfolio offence with some defence post, thanks to my DIY investing approach, I’m very fortunate to have partnerships and deals shared my way from many companies…offering low-cost solutions and promotions quite frequently.
I enjoy passing on those saving, investing and earning opportunities to you…
Well, one such new offer is with Qtrade.
Right now, get up to $150 cashback when you invest with one of Canada’s low-cost online brokerages: Qtrade. Their cashback promotion starts now and ends later this year.
You can also access my link below to take advantage of the offer and learn more:
Need help with any retirement income drawdown order or projections for your retirement like those case studies above?
Contact me here over the summer!
Enjoy your August long weekend and stay well.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Re Retiring on 75 K brutto / year
Hi Marc,
How do you calculate the CPP and OAS portion of the 75 K ? Are you taking into consideration the full payments, applicable to those who have lived in Canada for 40 years and contributed 40 years to CPP . ? But lots of Canadians are immigrants , whose CPP and OAS are proportionally adjusted to reflect the fact they reached these shores in their 40’s or even 50’s Would you be kind to provide an interactive tool allowing one to simulate the personal savings needed, besides CPP and OAS , for variable amounts of CPP and OAS ? E.g. someone retiring at 65 but accruing only 22 years of presence in Canada ( so OAS would calculate as Max / 40 * 22 ) and contributing to CPP only 21 years ?
I think therere lots of New Canadians around who would appreciate this approach !
Tks in advance
Nadia Solomon
Great question, Nadia.
In my case studies I almost never use full CPP. Maybe 75% max? That’s for singles or couples. It depends.
I do include lower CPP values for some folks too.
https://www.myownadvisor.ca/can-you-retire-early-on-a-lower-income/
As for OAS, that depends too but in most case studies I do assume they have lived and worked in Canada for decades. That may or may not be the case of course for some folks, fully appreciate that, and OAS is pro-rated for residency.
I also did a case study for newcomers as well:
https://www.myownadvisor.ca/financial-independence-for-newcomers-to-canada/
🙂
All my best!
Mark
Reference OAS:
You will receive a partial OAS pension. So will your wife. A *partial monthly pension is earned at the rate of 1/40th of the full monthly pension for each year of residence in Canada after the age of 18. For example, if you have lived in Canada for 15 years after the age of 18, you will receive 15/40ths of the full monthly pension amount. Once a partial pension has been approved, it cannot be increased due to additional years of residency in Canada. You take OAS at age 65. *You can find more details about partial OAS here.
Great timing on the article for both the retirement income and paying mortgage off as I have been thinking of both of those this week. We have come up with our new pay off mortgage plan that will take 2.5 years using max annual lump sum payments and then the final principle when our current term comes up for renewal. At a current variable of 6.6% it now clearly makes sense to pay off vs invest and I will actually use my TFSA to top what I can’t save this year and next to make that 15% lump sum payment my bank allows. The idea of a paid off mortgage is a goal I can’t resist right now as it makes so much sense. Then after the 2.5 years are up we can go back to building the TFSA accounts again until we are both done with FIWOOT which probably won’t happen for awhile as we enjoy this phase of work/life balance.
I recall paying about 6% or so 20 years ago on my first home. Not fun but just part of the budgeting process. I suspect the same for you.
https://www.mortgagearchitects.ca/media/15915/rates_historicalcomparison.pdf
We should be done our mortgage in 9 months give or take. We could pay it off now but at 1.69% I would rather invest this year and early next year instead. We almost have our funds saved for x2 TFSAs – a few more months of saving for 2024.
Keep up the great pics on Twitter/X, Chris 🙂
Mark
Hi Mark,
Congrats on nearing the finish line with the mortgage! That last payment is in sight and will be the most enjoyable one to make. And a good move to keep going with the “cheap” money rather than paying it off. I’m wondering if the banks have been sending you the very well-written letters about the “pride of ownership” to get you to pay things off early, or perhaps even offering to excuse the last couple of payments in order to retire the mortgage and get it off their books?
I recall my parents receiving some of those lovely letters to try and get them to pay off their 5.75% mortgage in the 70’s when CSB’s were starting their astronomical climb. Fortunately they didn’t fall for it and continued to add to their CSB holdings which served them wonderfully through retirement.
Happy Simcoe Day!
Doug
Thanks very much, Doug!
Almost there!
Yes, I recall one of my early mortgages being in the range of 6-7% in fact. Not fun.
Paying 1.69% is much better for the next few months – fixed-term that ends in 2024.
No nicely written letters yet, I’m sure they are going to send me one. I might frame it. Ha.
All the best back,
Mark
The title of retiring on $75K caught my eye but as I read on that is gross income. Once you reach the $80K threshold, or there abouts, you get in to the OAS recovery area – also know as a clawback.
Your $75K will probably be in the order of $50K net, close to $1K per week, so quite doable. You probably won’t spend $1K every week but things like trips, cruises, house repairs will more than most likely ensure that you do not have a big wad left over at the end of the year. Want a new car? There goes that $1K per week.
So make sure you know what your needs are versus your “wants”! WANTS can add up quite quickly.
As to the OAS clawback, all is not lost with it as 1) you get a monthly voluntary income tax deduction right from the get go and then if you start to cross the clawback threshold then you get an OAS recovery tax for higher income seniors. At least you get to apply this recovery tax against taxes owed. So at least (very least) you do recoup the recovery tax.
My “voluntary” tax and combined clawback are just over $116 taken off my OAS every month.
Each year is a little bit of a juggling act to figure out how much tax to withhold to pay the Fed and Prov (QC) revenue depts. You don’t have to withhold anything if you withdraw the minimums from your RIF/LIF but then you would probably be hit with quarterly payments the following year as you would have to make up the tax owed when you file your income tax for the end of April. I prefer to pay the withholding taxes when i withdraw from my RIF at the end (November) of the year That way I can “play” with my money right up to the end of the year and hopefully receive more dividends. Paying quarterly would mean you would have to have the cash available every there months to pay the Rev depts. Pain in the rear IMO. So pay up and keep things simple.
EICARDO
Ya, I’m assuming that’s after-tax income = since that’s what spending is.
This is per couple though, so well under any OAS clawback.
Most retirees I know are spending at on or more $1k per week per couple on food, utilities, car, home maintenance, etc. Singles are about the same. So, that’s $48k per year. Assuming no debt, pretty easy to do assuming you’ve saved well during your asset accumulation years.
Then “wants” on top of that of course. That’s where the fun begins!
“So make sure you know what your needs are versus your “wants”! WANTS can add up quite quickly.”
100%.
How are things with you?
Mark
Way over my projected budget for this year but that is from buying a yard tractor, used, as well as an upcoming cruise (wants). Also planning a road trip in Sept so more cash burn.
Still have my RIF withdrawal coming up later this year so that gets my taxes paid for 2023, or close to it, and I have the funds for the TFSA in January.
I suppose it is not all that bad a situation to be in.
Unfortunately up to Ottawa for a funeral visitation tomorrow. One of the missus’ classmates.
Just an up and down though. No layover time.
RICARDO
You’ve been busy 🙂
Ha – hardly a bad position – my goodness.
Sorry to hear about the funeral. Take good care and maybe next time to say hello…
Stay well!
Mark
We paid off our mortgage two days ago and home ownership continues to be a part of our financial plan. I just wrote a post about this process today but the TL;DR of it is this: if you have money and are able-bodied, sure, renting can make you money. Considering that 22% people will suffer a disability in their lifetimes which will adversely affect where they can live and what access they need, it seems foolish to only thing of housing in terms of ONLY numbers. There are so many factors involved and most of them are emotional or needs-based.
Congrats on killing the mortgage!!
(Ours should be dead in another 9 months.)
There are SO many behavioural and emotional factors involved, when it comes to money, fully agree. Most just consider the math.
Thanks for your comment and have a great weekend.
Mark
I was wiped out by the dot-com crash in 2001 but recovered to the point where I could build a duplex during the housing crash when land, mateials, labor and interest rates were rock bottom. The mortgage was paid off earlier this year (with help from my tenants!). I figure the property is worth about $50,000 a year in rental income combined with not having to pay rent myself. Property taxes, insurance, utilities, maintenance and repairs are also partly deductable from rental income. Since the house was built as home and income with combined water & sewer, it still qualifies as my principal residence and was eligible for a reverse mortgage. I’ve been following several retirement sites as I count down to my own retirement at the end of this year and this is an option I’ve never seen mentioned. In my tax bracket – $1 saved is worth at least $1.50 earned – probably more if I factor in OAS clawback. The reverse mortgage is equivalent to the laddering strategy often recommended – you’re pulling that equity into income tax free while you’re young enough to enjoy it rather than leaving it for your estate. Obviously not for everyone – but should at least be part of the conversation.
Hi, Jim,
Interested in the concept of reverse mortgage. I have read that the equity you can take out is based on the age, say for those over 85 years old can take out 55% equity, the younger you are, the less equity you can take out. Why do you consider reverse mortgage versus HELOC, which is 65% LTV, certainly, one has to pay the interest expenses if it is HELOC. What is you plan for the reverse mortgage, investing, spending, monthly instalment payment or lum sum?
Thanks,
Angela
Angela: I took out the reverse mortgage at age 70 and qualified for about 28% of the appraised value of the property – which was more than enough for my needs. I took a lump sum and invested in some renovations to protect against climate change (metal roof and heat pumps). The rest went to top up my registered accounts. I have no intention of making any payments on the reverse mortgage until declining health forces me to sell. Assuming 3% appreciation, the residual value in 15 years will be roughly what it is today (nominal dollars assuming average 6% interest in the mortgage). As you pointed out, a HELOC requires payments – which defeats the purpose. After losing my business in the dotcom crash, I took a job with the federal government so I will have pension income and health coverage for life – if I’m able to continue living in the house into my 90’s and the equity reduces to zero – that’s not a bad problem to have!
Hi, Jim,
Thanks for the reply. You actually win the game if you live very very long, into 90 or 100. Another question is what you do with the 72% equity in the house after the reverse mortgage, if you do live to 90 or above, there will be lots of equities there, are you planning to take more out of it? Even if you don’t need it for personal spending, maybe investment, gifts, donations etc.
Asset management is really a combination of science and art, while one is still alive, hopefully, one can optimize its performance and plan.
Angela: Interest on the reverse mortgage grows and erodes the remaining equity. At the end of year 1, I’ll have 72% minus the interest on the 28% plus any growth in the value of the home. Likewise for subsequent years. The loans are stuctured so the there will be residual equity for the homeowner unless we beat the actuarial odds by a fair margin. After 15 years, I’ll owe the reverse mortgage company $500,000 but, if the house appreciates 3% per year, it will be worth $1,000,000 – not a bad tradeoff. In the unlikely event housing prices fall and the house sells for less than the amount owing on the mortgage, the mortgage company takes the loss – not the homeowner. I have no intention of borrowing for any reason in retirement unless interest rates are well below expected investment returns and I have the cash to pay off the loan in reserve regardless of what happens in the market. If my assets continue to grow in retirement – that’s an estate planning issue – again, a good problem to have!
Sorry to hear, Jim, but it sounds like you have recovered well!
Yes, reverse mortgages can work for some. What’s the long-term plan as your equity is reduced over time?
Cheers.
Mark
Mark: The residual equity in the home isn’t a concern for me. I’m living here rent free and I’m collecting rent. Expenses like property tax, insurance, maintenance and repairs are partially deductable from rental income. Turning part of my equity into cash today is far more valuable (to me) than leaving it locked up in the house – the old bird in the hand is worth 2 in the bush analogy. Since there are no payments required, my living expenses are low, easily covered by my pension and rental income and I’m covered by the public service health care plan for medical expenses. I have investments but they’ll be used for major expenses – planned or unplanned – not for day to day living expenses. Barring significant unplanned expenses, my investments will continue to grow during retirement, the RRIF will be transferred in kind to TFSA and non-registered accounts as quickly and tax efficiently as possible. If things go according to plan (they rarely do) there will always be enough in the investment accounts to pay off the mortgage – if there is a good reason to do so.
Gotcha. Rather unconventional planning but again, personal finance is personal – when it comes to any reverse mortgage use.
Very wise to move RRIF $$ you don’t need to TFSA every year. I work with a lot of clients that do that.
Mark