Investors often look to rules of thumb or mental shortcuts to help guide their decision making. Unfortunately, there aren’t many good rules of thumb that can help determine how much you will spend in retirement.
The 4% safe withdrawal rule, while a decent starting point, is not particularly useful. For one, investors don’t just have one pot of money labeled ‘retirement income’ that they draw from. We have RRSPs and RRIFs, LIRAs and LIFs, TFSAs, and non-registered savings and investments, each with different withdrawal rules and taxation. We may also have pension income, along with CPP and OAS benefits, to consider.
On top of that, life doesn’t just move in a straight line. We often have lumpy one-time expenses such as buying a new vehicle, renovating our home, gifting money to children, and spending on bucket list experiences throughout retirement.
It’s also the sequence of withdrawals that matters – how all of those puzzle pieces fit together over the years to create a tax efficient retirement income for your lifetime. That means a strategy of targeting a specific number, say $1M, in savings and investments and expecting that will pay you exactly $40,000 per year (rising with inflation annually) might fail to meet your spending needs in retirement.
Then there’s the percentage of income rule for retirement income – commonly cited as 70% of your final average pay. This rule assumes you’re no longer saving for retirement, kids have moved out of the house, and the mortgage is paid off. But what about single Canadians? Couples with no children? Lifelong renters?
Retirees who had a high savings rate throughout their careers may only spend 40-50% of their final average pay in retirement to maintain their standard of living. That’s because they may have saved 20% or more of their income, paid a high average tax rate, and don’t carry any debt. Assume they’re no longer saving, paying off their mortgage, spending on their children, and can benefit from income splitting and overall lower tax rates in retirement.
On the other hand, lower income earners who are lifelong renters may not have been able to save as much throughout their careers, but could easily spend 80% or more of their final average salary simply to maintain their current standard of living. Their tax rate may not change that much, so aside from no longer paying into CPP/EI their expenses would largely be the same.
Finally, you’ll need to consider your human capital and how long you plan to earn an income from employment (either full-time or part-time as you ease into retirement).
All of these nuances mean it’s essential to have a retirement plan – one that looks at your unique circumstances and doesn’t blindly follow rules of thumb.
I can say after working with hundreds of retirees it’s clear that the best predictor of your future spending is what you’re currently spending. Indeed, most of my retired clients want to maintain their existing standard of living, if not enhance it slightly for extra spending on travel and hobbies. An added bonus is if they can have a pot of money left untouched for unplanned spending shocks, one-time expenses, and healthcare challenges (often the TFSA, but mostly it’s their untapped home equity).
Another useful tidbit I’ve noticed is that for most retirees who have the ability to significantly increase their lifestyle, many just cannot bring themselves to do it. Call it a scarcity mindset, or just decades of practiced frugality, but it’s almost impossible to turn the spending taps on full blast after a lifetime of saving.
That’s useful because for those in their savings years now, thinking they’ll live on less today in order to live large tomorrow, it’s unlikely they’ll actually be able to bring themselves to do it. Better to allow yourself some lifestyle creep now and throughout your career so you can enjoy the journey.
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On the topic of saving for retirement, Fred Vettese shows how hard it is for regular Canadians to save enough to retire at age 60.
A Wealth of Common Sense blogger Ben Carlson explains why you probably need less money than you think for retirement.
PWL Capital’s Ben Felix explains why cash, even at 5%, is extremely risky for long-term investors:
If you’ve been using (or thinking about using) one of the Horizons’ all-in-one ETFs in a taxable account to avoid annual investment income, note these important changes to their funds. They’ll now look more like the Vanguard, BMO, and iShares’ versions and pay taxable income.
What are the world’s best performing stock market indexes right now? Andrew Hallam shares why you don’t want to chase the latest winners.
The always brilliant Morgan Housel compares the difference between intelligent and smart.
Fee-only financial planner Anita Bruinsma has a thoughtful post on managing our weaknesses.
If the media covered elevators like they cover the stock market, they’d re-name the up and down buttons as “soar” and “plunge”. Here’s Preet Banerjee on why we, and the media, have a fascination with market bears and their predictions:
You might be surprised by these reporting requirements – and tax breaks – on your interest-bearing investments like bonds and GICs.
Why do these investors want their portfolios to drop?
“Steve owns a globally diversified portfolio of index funds. For him, market drops are like low ocean tides. They are temporary. But they allow him to scoop additional ownership in thousands of companies with a lot less effort. It’s like plucking salmon or tuna from low tidal pools.”
Why everything and everyone underperforms, eventually.
Looking for travel deals? If you’re flexible on when or where you go, these tools can help.
Why couples should consider co-mingling their finances. Research shows that couples who merge their money are more likely to be happy and successful.
A good summary by Cullen Roche on the future of inflation and interest rates.
Finally, is this the most unaffordable time ever to buy a house? Not according to one metric (subs).
Have a great weekend, everyone!