Build If/Then Statements Into Your Financial Plan

Anyone familiar with Microsoft Excel knows how useful “if/then” statements can be to make comparisons under certain conditions. An IF statement can either be true or false.

An if/then statement can be extremely useful in financial planning. Here are three examples of how to build “if/then” statements into your financial plan.

When your income is variable

Many of my financial planning clients are conservative in their income projections because a good chunk of their compensation comes from a bonus or from working overtime.

I think it’s reasonable to be conservative with your future income projections (i.e. using cost of living adjustments), but you should strive to be as realistic as possible within the current year to help guide your financial decision making.

Adding an if/then statement helps determine how much you can save or spend for the year. For instance, if your income is $100,000 then you might aim to contribute $10,000 to your RRSP. If your income increases to $120,000 due to a bonus, then you might aim to contribute $20,000 to your RRSP.

In reality, you might be saving for more than one financial goal at a time. This is true for most of my financial planning clients.

In many cases, we aim to optimize RRSP contributions at the marginal tax rate, maximize TFSA contributions up to the annual limit, and then prioritize another goal such as extra mortgage payments, saving towards a short-term one-time expense, investing in a taxable account, or increase spending on a fun category like travel or hobbies.

So, here’s an “if/then” statement in action:

If my projected gross income equals $100,000, then I will contribute $10,000 to my RRSP and $6,500 to my TFSA.

Total taxes plus CPP/EI deductions comes to ~$25,000, leaving me with $58,500 for personal spending.

If my projected gross income equals $120,000, then I will contribute $20,000 to my RRSP and $6,500 to my TFSA, plus an extra $5,000 lump sum payment onto the mortgage and $5,000 to top-up our vacation budget.

Total taxes plus CPP/EI deductions still comes to ~$25,000, leaving me with $58,500 for personal spending plus an extra $10,000 to allocate towards other goals.

The if/then statement allows you to maintain a good savings rate at your base income level and allows you to accelerate those goals (or add others) as your income increases.

When variable income means variable spending

One mistake I see people making when it comes to variable income is they have the tendency to base their spending rate as if they’ll always earn a full bonus or high variable salary.

I get it. When you’ve made bonus for three years in a row it’s tough to envision a year in which you don’t reach your targets and earn a bigger cheque.

But anchoring your spending to an unrealistically high income can cause major cash flow problems if your Christmas bonus ends up being a one-year membership to the Jelly of the Month Club.

The trouble arises when you lock yourself into fixed payments like a bigger mortgage, bigger car loan, private school or expensive activities for the kids, etc.

That’s why an if/then statement should also apply to your spending.

The if/then statement in this case might be:

If I receive my full bonus this year, then 20% of it will go into a high interest savings account as a “just in case I don’t get my bonus next year” fund.

Doing this allows you to smooth out lifestyle consumption so you don’t get used to living on a full bonus every single year.

By the way, this also applies to saving.

Imagine planning to contribute $30,000 per year to your RRSP because you’re sure you always make around $200,000 after bonus. So, you automate a $2,500 per month contribution to your RRSP.

Then September comes around and you’re wondering why there’s no money in your chequing account to pay off your credit card bill. A quick calculation shows you’re only on pace to earn $160,000 this year and there’s no bonus chance of a year-end bonus. Meanwhile, you’ve already put $20,000 into your RRSP, severely impacting your cash-flow for daily living expenses.

The lesson is to set an if/then statement for your savings with a lower income base in mind:

If my income is $160,000, then I’ll contribute $18,000 to my RRSP.

Now you’re only committing to $1,500 per month.

If income increases, then increase RRSP contributions via lump sum later in the year (or before the deadline).

Retirement spending floor and ceiling

Most of my retired clients want to enjoy the same standard of living they had in their final working years, if not enhance it a bit with extra money for travel and hobbies, or to help out their adult children.

But one of the best ways for retirees to reduce sequence of returns risk (receiving poor investment returns early in retirement) is to have a variable spending strategy.

What that means in practice is determining a comfortable spending floor and a safe spending ceiling.

That comfortable spending floor might be exactly how you lived in your final working years.

Consider a year like 2022, with rising and persistently high inflation and rising interest rates crushing stock and bond returns. Those years will happen from time-to-time and when they do it might feel better to skip the extravagant vacation, the home renovations, or the new vehicle upgrade.

No need to withdraw more from your portfolio than necessary in a year like that.

In a normal year (is there ever a normal year?), you might boost spending by $5,000 to $10,000 to take that trip, or remodel the bathroom, or upgrade your appliances.

And in really good times, where perhaps you’re sure you won’t ever touch your TFSA for your own consumption needs, you might give your kids an early inheritance gift of $50,000 to $100,000 to use for a down payment or to start a business, or take a dream vacation yourself.

An if/then statement for retirement spending might look like this:

If last year’s investment returns were negative, then I’ll only make minimum RRIF withdrawals in addition to any pension or government benefits, and withdrawals from non-registered savings and investments – and I won’t contribute to my TFSA.

If last year’s investment returns were between 0% to 6%, then I’ll increase withdrawals from my RRIF and/or non-registered accounts to boost spending – and I will contribute the annual maximum to my TFSA.

If I’m comfortably meeting my retirement spending needs, and I’m confident I have more than enough resources to last a lifetime, then I’ll use the proceeds from my TFSA to give an early inheritance to my kids / take the family to Hawaii / fund my grandkids’ RESPs / renovate the house / buy a new car / travel more, etc.

Final Thoughts on if/then statements

Life is surprising and doesn’t always move in a straight, predictable line. We often have variable income (up or down), lumpy spending needs, years of poor investment returns, years of strong investment returns, or periods of higher interest rates and/or inflation.

Building if/then statements into your financial plan can give you a playbook for how to treat unpredictable times in your life.

If/then statements can help you accelerate your goals and ensure appropriate balance in your life when it comes to saving and spending.

If/then statements can help save you from setting your spending (or savings) bar too high and getting into trouble with your day-to-day cash flow.

Finally, if/then statements are crucial for your retirement plan to help plan your expected withdrawals from year-to-year. Setting a comfortable spending floor and a safe spending ceiling allows you to make the most of your available resources in a responsible way throughout your retirement.