Weekend Reading: Retirement Spending Edition
You might not have a hot clue how much you plan to spend in retirement, especially if those days are still a decade or further away. Even those nearing retirement may not have a good sense of their desired retirement spending amount.
A good rule of thumb is that you’ll likely want to enjoy the same standard of living you enjoyed in your final working years, if not enhance it with extra money for travel, hobbies, helping your kids, and spoiling your grandkids (if possible).
When preparing retirement plans for clients I’ll look closely at their current spending, and then stress-test the heck out of their plan to determine their maximum annual spending (the most they can sustainably spend without running out of money by age 95).
This offers clients a spending range between a comfortable floor (what they’re spending today), and a safe ceiling (their maximum sustainable spending limit). For example, let’s assume you spend $84,000 after-taxes in your final working years. A thorough stress-test of your plan suggests you can spend up to $96,000 per year without running out of money by age 95.
Knowing this, clients have the option to dial up spending in good times or to dial it back in bad times. Reality probably means settling into the sweet spot of spending $90,000 per year.
Retirement spending of $84,000 likely gives you the ability to continue making TFSA contributions into retirement – socking away money for large known one-time expenses, unplanned future spending shocks, or to build up tax free savings for your estate. The trade-off is sacrificing some standard of living and not spending up to capacity.
Spending up to the $96,000 ceiling offers the ability to maximize life enjoyment, particularly in the “go-go” years of early retirement. The trade-off is no room for extra savings contributions to the TFSA for a rainy day, and potentially less margin of safety for unplanned spending, poor market returns, or longer than normal life expectancy.
One area of spending not talked about enough is your one-time cost categories like buying new vehicles, renovating or repairing your home, gifting money to your children, or taking a bucket list trip. These expenses are often large, are not factored into your annual spending needs, and tend to occur in the early years of retirement, squarely in what I call the retirement risk zone (the period of time between retirement and when pensions and government benefits kick-in).
Throw a bad stock market outcome into the mix, and this could be a recipe for disaster if not planned for appropriately.
All the more reason why retirement planning should be done 5-10 years before your retirement date. This gives you a chance to understand your retirement spending needs, list and prioritize your one-time expense categories, and hopefully knock some of those items off while you’re still working and earning income.
This also gives you a chance to consider working part-time as a way to combat the retirement risk zone and ease yourself into full-stop retirement living.
This Week’s Recap:
No posts from me in a while as much of our free time has been sucked up by kids’ activities (dance season) and birthdays.
From the archives: Forget about asset location – why you should hold the same asset mix across all accounts
One final note on our mortgage renewal with Pine Mortgage. Everything is in place now and we’ve received the $3,000 cash back promotion along with a reimbursement for the home appraisal that they ordered. The dashboard is nice and user friendly, and they allow payments from our regular TD chequing account.
Speaking of TD, they reimbursed us for the mortgage payment that automatically came out of our chequing account on May 1st.
Finally, it looks like Pine Mortgage will get more attention now that they’re been chosen as Wealthsimple’s mortgage partner. That’s right, Wealthsimple is now offering mortgages (through Pine) and has some great deals for Wealthsimple customers (existing and new).
Promo of the Week:
Want to earn some serious credit card rewards? Start with the Amex Cobalt card – the best card for everyday spending in Canada with 5x points for food & drink. Sign up and spend $750 per month on this card to get an extra 15,000 Membership Rewards points (plus the 45,000 points you’d earn if you spend $750 per month on a 5x spending category).
Then use your own referral link to refer your spouse or partner (called: activating Player 2), and have them do the same thing. This could be worth a total of 120,000 Membership Rewards points in a year, plus another 10,000 for the referral bonus.
Next, use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you spend $5,000 within three months. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).
If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a Marriott hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.
Weekend Reading:
A question I’m hearing more and more from clients and readers alike: Is it wise to begin investing when stocks are at an all-time high?
A Wealth of Common Sense blogger Ben Carlson on the gambler’s fallacy in the stock market.
David Aston explains why, when it comes to Canadian government pensions (CPP and OAS), timing is everything.
Jason Heath shares why your retirement may be different than you expected:
“Retirement math, whether based on rules of thumb or professional planning, can overlook some of the real-life implications of being a retiree. Running out of money is a risk, but so is running out of time.”
You want to retire early. Should you start your RRIF withdrawals sooner or later?
Trading meme stocks is gambling, not investing. But, have you ever gambled with meme stocks? Preet Banerjee walks us through the latest drama with GameStop stock:
Work can maintain engagement, keep us all sharp, as well as continue social connections and even a sense of purpose. Here’s why we should douse the FIRE movement and adopt CHILL instead.
A good piece by Dana Ferris on how to determine the appropriate retirement date. I recently wrote something similar about the best time of year to retire.
Long-time renter and blogger at Of Dollars and Data Nick Maggiulli writes about the rise of the forever renter class:
“This is where many in the unwilling Forever Renter class find themselves. They have good jobs. They make good money. But interest rates are also the highest they have been in two decades. As a result, if they want to borrow money to buy a house, they will pay for it dearly.”
PWL Capital’s Ben Felix explains why there’s room for good financial planning – and for error – before the June 25 capital-gains tax change (G&M subscribers).
Ben and his Money Scope podcast co-host Mark Soth teamed up to explain what the proposed capital gains changes mean for business owners.
Jamie Golombek says be careful moving your TFSA — or the CRA might come knocking. That’s because you need to let the financial institutions handle the transfer rather than withdrawing money from one TFSA and depositing it into another.
A really important article by Anita Bruinsma on what kind of money messages you’re sending your kids.
Used cars versus new cars: which market is offering better deals, and how has the landscape changed after the pandemic-era disruptions to supply?
Travel and credit card expert Barry Choi says there’s a loyalty arms race on, but not being loyal might be a consumer’s best move.
Finally, speaking of credit cards and loyalty programs, here’s a deep dive into the anatomy of a credit card rewards program. Interesting stuff!
Have a great weekend, everyone!
Great read, thanks Robb! Curious if you have suggestions to account for variable returns in retirement when stress testing a floor and ceiling of spending?
Hi Cory, I think the floor and ceiling spending range helps with sequence of returns – especially if the range is really wide. That, and the discipline to stock with the investment strategy.
Besides working within the spending range each year, it’s important to know that spending cuts during poor market returns can be quite subtle – like don’t give yourself an inflation adjusted increase. It doesn’t have to be a 10% spending cut or anything drastic.
Also being flexible with your spending means being aware of economic conditions and not building a garage addition or a new deck when lumber prices have doubled, or not buying a car when prices are high and inventory low. Be flexible enough to move your big expenses around as needed.
Thanks Robb!
LOVED the credit card rewards article! Highly informative and funny, too.
What about HMAX ETF? A 13% yield?
Hi Walter, HMAX is a good ETF for generating solid income, however, its growth potential will be limited due to it’s use of at-the-money (ATM) covered calls. If you want similar high-yield income with better potential for upside growth, you would be better to look for covered call ETFs that use OTM, or out-of-the-money calls. There are plenty of good choices offered by Global X, formerly Horizons.
The link to Barry Choi’s article takes me to a Globe and Mail subscription page. Am I able to access the article without subscribing to the Globe and Mail?
Enjoyed reading this one! However, finding it tough to read your blog on the phone without accidentally opening ads I’m not interested in. It’s affecting my ability to follow your writing. Wondering if there are other less annoying ways of presenting your ideas that might ultimately be more beneficial
Hi Janet, pro tip – if you read it on the “home” page rather than the individual post page there won’t be any in-post ads.
That, or I could drop the ads and charge a $3/month subscription instead?
Hi Robb, excellent article. How do you determine a maximum versus a reduced spending in a particular year? Do you look at a probability of success and adjust spending accordingly?
Hi Kevin, thanks! That’s a great question and I think it boils down to how anxious you are about markets and outliving your savings. I’d say most of my retired clients don’t spend anywhere close to their capacity so they needn’t worry about year-to-year market fluctuations.
If you’re the type of retiree who pushes the upper limits of their spending capacity then I think it’s smart to review your plan regularly make sure your spending range hasn’t dramatically changed.
It’s tricky to adjust spending based on market conditions. Look at 2020 (not that we could have spent money on travel & entertainment if we wanted to, but hear me out). Market returns were still strong at the end of 2019 and you may have had planned to spend at the high end of your range.
Then markets plummeted 34% from Feb-to-March, which would have forced you to revisit your plan and reduce spending. Then markets came roaring back in April and finished the year up double-digits.
In a year like 2022 you might have planned to spend closer to the bottom of your spending range thanks to down markets, but inflation had other ideas and likely drove up your regular spending regardless.
Another thing to note is that spending cuts should be modest. If markets are down 20% you don’t cut spending by 20%. It’s more subtle, like not giving yourself an inflation-adjusted increase until markets recover. That small change has a big impact when compounded over time.
Finally, you may have other levers to pull. For instance, if you prefer to spend at the lower end of your range and you’re feeling anxious about a down market, you could just not contribute to your TFSA that year instead of cutting spending even further. The contribution room carries forward, so you can catch-up in the future.
Dare I say you could even dip into your TFSAs to allow you to maintain spending instead of saving it for a rainy day. If markets are down and you’re not living your best retirement lifestyle, I’d say that’s a pretty rainy day!