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Retiring Early – Part 1 (The Expenses)





After reading "Why Swim with the Sharks?" I have been fairly curious about how much my wife and I would actually need to retire assuming a comfortable retirement lifestyle. So, lets work on a case study… me!

In the book, the author suggests that you calculate the expenses that will be eliminated on a monthly basis due to not working anymore.

Housing:

  • Mortgage Payments

Costs of Working:

  • Deductions off your paycheck
  • Work clothes
  • Lunches, Coffee, Social Fund, Gifts
  • Commuting Costs
  • Childcare Fees

Costs of Raising Children:

  • Extra-Curricular Activities
  • School Fees
  • Dental and other health costs
  • Clothes, haircuts, other personal items
  • Groceries: $200/month (on top of what we usually spend)

Debts:

  • Line of Credit Payments
  • Credit Card Bills
  • Car Payments
  • Other

Savings:

  • Retirement Savings
  • Children's Education Savings (RESP)

Total:

The summary above doesn't account for extra spending required during retirement. Since you have a lot more time, wouldn't you think that you're going to spend more money? I also PLAN to have kids, but don't have any currently so I really don't know how much they're going to cost. As a result, I've decided that instead of using the suggested table, I'm going to do a rough calculation of the expenses that I predict that I'm going to have, instead of calculating what I'm NOT going to have.

Assume that all debt is paid off, kids are moved out or in college with an established RESP. I've listed below some expected expenses:

  • Groceries: $500/month
  • Car Insurance (1 car): $100/month (liability only)
  • Gas: $200/month
  • Car Maintenance: $100/month
  • Heat/Light: $300/month
  • Phone/Cell/Internet/TV: $150/month
  • Home Insurance: $50/month
  • Property Tax: $200/month
  • Home Maintenance: $100/month
  • Travel/Vacation: $500/month (We hope to travel a bit)
  • Eating Out: $300/month (We like to eat)
  • Medical Insurance: $300/month (estimated)
  • Gym Membership: $80/month
  • Misc Spending: $500/month
  • Total Expected Expenses: $3,380/mo
  • Expected Expenses x 10% contingency: $3,718/mo or $44,616/year
  • Current Combined Income: $44,178 + $38,019 = $82,197/year (after tax, no CPP/EI/deductions )
  • Percent of current income @ retirement: $44,616/$82,197 = 54.3% (this % will decrease as we advance in our career)

Notice that when you're retired, you don't need to worry about CPP, RRSP, pension, EI or any other deductions from your paycheck! That's a big chunk of your money during your working years.

I'm actually surprised to see that we would only need 54% of our CURRENT income to retire comfortably. Try the calculations yourself and you may be surprised.

Stay tuned…tomorrow, I will post about the expected income during retirement and calculate the a feasible age where we can retire comfortably.

Continue with the series: 

Part 2: Early Retirement – The Income

Part 3: Early Retirement – Conclusions 

 





41 Comments, Comment or Ping

  1. When I went through this exercise, I decided to add 20% for contingencies and as coverage in case I have underprovided for inflation. I also incuded a sinking fund for things which will need to be replaced or fixed up every so often (like the tv, the stereo, the air conditioners, computers, the stove etc and repainting the house), lump sums for one off events (like future weddings for our children ) and a budget for vices (you may have included this in your miscellaneous expenses).

    I also assumed that tax rates will be higher than at present.

  2. FT,

    Actually most people would find they only need 40 to 60% of their current income in retirement. That entire 70 to 80% is a myth.

    I agree with Traineeinvestor that you need some kind of slush fund during retirment to provide a buffer for those items you didn’t plan like a new roof.

    I look forward to your numbers.

    CD

  3. 3. George

    I’m a big fan of “Why Swim with the Sharks” – it’s one of the few Canadian books on retirement that points out just how many expenses people won’t have in retirement.

    You mention that you don’t yet have kids, and that you’re not sure how much they’ll cost. While this is something that’s highly variable, here are some rough guides (after writing this, I realized that it’s a bit long for a comment – feel free to repost it as a guest entry):

    1) Diapers cost about $80/month for a newborn, and slowly the cost drops until potty training. Purchasing cloth diapers (we got ours from http://www.motherease.com) can cut the diaper costs dramatically, but increase the amount of laundry you need to do.

    2) If you need it, daycare is the single largest child-related expense you’ll have. A good daycare can easily cost over $800/month. Dayhomes can be a cheaper option, but they have their own pitfalls. Having “free” daycare from grandparents, if possible, is the cheapest solution.

    3) The initial “set-up” cost for a nursery is around $500, less if you can get things used.

    4) If you end up bottle feeding, baby formula costs up to $25/can for powder, and a can lasts about ten days – that’s $75/month for formula alone. Obviously breast feeding is cheaper, but it isn’t always possible.

    5) Baby clothing adds up very quickly. We got a large amount of our baby clothes from friends and from Freecycle, which helped out immensely.

  4. Hi George,

    Thanks for the informative comment. I will use your comment as a post next week!

    FT

  5. 5. Jeff Mackey

    Good post today, I’ve played with the numbers for myself a few times, but maybe I’ll get around to formalizing it a little as well.

    I wonder why people who do this exercise never budget for car costs, yet they account for insurance and fuel. Even if you only bought a new/used car every five years or more, there is still a monthly amortized cost over the long-term, even if you pay cash. At the best, a $12,000 used car that will last you four years is still costing $250 month, the money has to come from somewhere. Of course maybe I’m a little high in the sense that when you sell it won’t be worth nothing, but it should still be counted nonetheless.

    I’ll revisit this post and the series of posts at Canadian Dream when I get around to doing my own list.

  6. Hey Jeff,

    You are absolutely right, I should have accounted for car purchasing costs. Perhaps we’ll have to put aside some of misc spending and travel expenses. :)

    FT

  7. 8. Recently Retired

    A few comments in no particular order.

    Kids are a big question mark. How much you support them after they are 20 years old can be a big cost unless you are very cold blooded about it. Even now I budget 2000 per year savings for auto depreciation. The younger you are when you retire, the more money you may want to support a more active life style. Don’t guess…keep track of your cashflow so you how much you spend in every category.

  8. Good points Recently Retired. Did you retire early? From your name, I assume that you are already retired, what unexpected expenses have you found?

    FT

  9. 10. Cannon_fodder

    If you check out this site http://fireseeker.com/real-cost-of-living.php(although it US based) it provides a list of the typical expenses.
    The one ‘glaring’ ommission IMO is vacation/travel.

    It shows the oft-quoted 70% of current income may be high. Now, if you were a single person living alone, a couple with only one income or a low income earner, I think 70% would be quite reasonable.

  10. 14. Sara

    The estimated cost of your health insurance premium seems impossibly low for a whole family. I would expect it to be closer to $800 – $1000 per month if you don’t get it through an employer. At my job, my health insurance is $400 per month (paid for by my employer, but just as an example) – and I am a single, healthy 25 year old! Unless you know something I don’t… I can’t see how $300 per month would be adequate for a family unless your coverage was totally bare bones.

  11. Hey Sara, here in Canada, our health insurance premiums are much lower than the US. Basically, our health insurance that we purchase covers the medication where the govt pays for the hospital/doctor visit.

  12. 16. Sara

    Oh, that makes sense. Sorry. I am a new visitor – came here from Get Rich Slowly. Thanks for the interesting set of posts.

  13. 17. JD

    What about the fun?? The reason people preach the numbers of 50% or 70% of your current income for retirement is they are just focusing on the amount you will need to SURVIVE. But the whole point of retirement is to enjoy life without the hassles of a full-time job. I currently save around 50% of my net income but for retirement I would actually want MORE than my current income because I plan to travel much more, buy some toys, give some large gifts to children and/or grandchildren, and basically not have to spend my “golden” years pinching pennies. You say you want to travel quite a bit in retirement but you are only budgeting $500/month for it. That is $6k per year which is virtually nothing if you plan to do any considerable amount of travel. Even if you don’t plan to travel internationally and enjoy the finer things it is not much at all. Even if your travel is bare-bones throughout the US/Canada (mostly driving) and staying in cheap motels it is not much. Even a bare-bones vacation with no luxuries for 2 people would cost at least $200 per day, so you’re talking about a whopping 30 days a year of travel at an extremely tight budget during what are supposed to be the most relaxing years of your life??? I don’t get it. It must be a Canadian thing, hehe.

  14. 18. George

    JD: Malcolm Hamilton, an actuary and frequent commentator in this field, has looked at the spending habits of actual retirees. One of the things he’s found is that a 50% “replacement ratio” is probably pretty close to the norm for people once they retire.

    More interestingly, he also found that those same people were spending 10-20% of their gross income on gifts and charitable donations. If you can earn 50% of your pre-retirement income and still afford to give that much of it away, you’re hardly just “surviving”.

    If your goals are to blow large amounts of money in retirement, then it’s probably a good thing that you’re saving half of your net income. Like the vast majority of people in Canada and the USA, I plan on living a retirement lifestyle that’s pretty similar to the one I’m living while working, just with more time available for hobbies, volunteering, and being with family.

    Perhaps it is a Canadian thing, but I don’t see how spending gobs of money would make me happier once I retire.

  15. JD, it really depends on what you want your lifestyle to be like during retirement. If your pre-retirement lifestyle is extravagant (like you claim), then most likely you’ll want your retirement lifestyle to be the same. Thus, you’ll need to save for it. Really, to each their own, if materials and extravagant spending make you happy, then more power to you.

  16. 23. Cannon_fodder

    FT,

    I’ve gone through this a few times, and here is what I came up with for our situation in retirement. (Of course, I went through what we no longer would have to direct money to just like you did – the remainder is to follow.)

    In 2008 dollars on an annual basis….

    Property Tax – $4,500 (what we currently pay – perhaps we will move to a smaller home or in a less expensive community)

    Auto (down to 1 vehicle):
    Gas – $2,400
    Insurance – $1,200
    Maintenance – $1,200
    New car fund – $6,000

    Home
    Insurance – $500
    Upkeep/Big Fix Fund – $1,800

    Utilities

    Internet / Cable – $1,800
    Cell phone – $600 (never owned my cell -always got it through work!)
    Water Tank – $250
    Gas/Water/Elec – $2,800

    Vacation – $6,000
    Gifts – $2,000
    Food – $3,500
    Entertainment – $1,800
    Clothes – $1,500
    Charity – $500

    Now, you put down gym membership. That made me think of golfing – something I’d love to do when I retire since I only get out 1 or 2 times per year now.

    I’d say there are some big differences between our two lists – food (both groceries and eating out) and miscellaneous spending. (The new car fund was discussed earlier in the follow up comments. If we retire when I’d like, we would be halfway through the life of our car at that point giving us another 5 years to save up for the next one.)

    I hope I’m being realistic with my numbers – it will be easier once the kids have grown up and we can see what it is like with just the two of us.

  17. 24. AL

    It takes a lot of money to be capable of spending and retiring early.

  18. 30. NIL

    Interestingly, I did a calculation before I discovered this, and came up with almost the same result (I got $44,700. per year). Nice to see it confirmed.

  19. FT,

    A great book to read is LEAP by Robert Castiglione. If you or your readers want a copy I will try to get one.

    One of the topics is (yes, it was written in the US) is 401K’s & RRSPs. all they are doing is deferring taxes into the future. So CRA, IRS wants your money plus interest! In Canada, if you do a good job you your OAS clawed back and the age amount (age 65 see line 303 of your tax return).

    What has been taught is markets always go up. Like real esate or the stock market.

    Currently there seems to be a trend to go with TFSA vs RRSPs, if you buy into in this, then looking at permanent life insurance (structured right) is a better step!

    With permanent life insurance their is almost not limit (allowed by CRA) to have all the same features of the TFSA. In fact if you borrow from your policy to say buy a car and pay yourself back you get all your money plus interest…try that with a TFSA!

  20. 32. Ed Rempel

    Hi Brian,

    Permanent life insurance is not competitive, except for people that already have a permanent insurance need. That means they need to know now that they will need life insurance for their entire life.

    For nearly everybody, life insurance is only necessary for income replacement, so you can make sure those financially dependent on you will be okay if something should happen to you.

    Very few people actually have a permanent life insurance need, so why pay the full cost of it, just so you can get tax deferral on investment income? There are other ways to get a tax deferral, such as corporate class mutual funds.

    Ed

  21. Hi Ed,

    You need to read “How Annuities work” and “Using Universal life insurance with Corporations”. Life insurance gives more options. If cash flow is very tight then permanent insurance may not work, just like buying RRSPs. Corporate class mutual funds (which I own) are not guaranteed and is like having only one tool… which is not only the answer.

    If you are in Oakville, I will see if I can get the book for for you.

    cheers,

    Brian

  22. 34. Ed Rempel

    Hi Brian,

    The main issue with universal life insurance is that you have to pay for the cost of permanent insurance. The benefit for ULs can be larger for GIC/bond investors in order to avoid tax every year, but again you can get almost all the benefits without the large insurance cost.

    Ed

  23. I try to look financial risks. Here are the four “obvious” ones:

    1. living too long (longevity)
    2. dying too soon (mortality)
    3. getting sick (morbidity)
    4. getting disabled (disability)

    A fifth risk often gets overlooked: overpaying taxes through ignorance. Few realize how effective life insurance can be when properly structured.

    Do you anyone who falls in the 4 risks listed above?

    Right now you are focusing on mutual funds. If you get disabled or get sick how does the mutual fund help? What about poor returns when you need the money the most? If you get sick will some one continue to put money in your mutual fund account? What about fees? Are they guaranteed? Or returns are they guaranteed?

    This is not to say mutual funds are bad, just limited. I am talking about risk management.

  24. 36. Dave Stewart

    I am 63 years old and plan to retire this year. I’ve never understood all the mystery attached to financial planning. If you have some dexterity with Excel it is simply a matter of extrapolating your current expenses and identifying where the money is going to come from. With excel you can plug in various percentages for inflation and pretax investment return…the results are typically what one would expect..inflation is the big risk. In my case if I can have pretax investment returns of 1% over inflation and inflation remains below 12% (not unforeseeable for those of us who lived through the early 80′s), and I don’t live past 90 I’m OK. The one thing that really bugs me is the idea of a average percentage of pre-retirement income required to retire comfortably. Every situation is somewhat unique and the use of an average is a for neophyte financial planners with no real understanding of common sense financial planning. In my case my expenses, and hence my income requirements, will increase after I require because I will lose my company health insurance and my wife and I plan to travel a bit.

  25. 37. Dave Stewart

    I am 63 years old and plan to retire this year. I’ve never understood all the mystery attached to financial planning. If you have some dexterity with Excel it is simply a matter of extrapolating your current expenses and identifying where the money is going to come from. With excel you can plug in various percentages for inflation and pretax investment return…the results are typically what one would expect..inflation is the big risk. In my case if I can have pretax investment returns of 1% over inflation and inflation remains below 12% (not unforeseeable for those of us who lived through the early 80′s), and I don’t live past 90 I’m OK. The one thing that really bugs me is the idea of a average percentage of pre-retirement income required to retire comfortably. Every situation is somewhat unique and the use of an average is a for neophyte financial planners with no real understanding of common sense financial planning. In my case my expenses, and hence my income requirements, will increase after I require because I will lose my company health insurance and my wife and I plan to travel a bit.

  26. 38. George

    @DaveStewart: You’re doing retirement planning exactly as somebody should do it, particularly if you’re very close to retirement – figure out your current expenses, extrapolate for inflation, and match it up to your anticipated income.

    Problem is, it simply isn’t possible for somebody in their 30s or 40s to get a good estimate of their day-to-day expenses when they’re in their late 50s or 60s and preparing to retire. For younger people, a percentage of pre-retirement income is as good as a guess as any.

  27. 40. Ready for some serious fund

    I came up with a $60,000 need in today dollars for a couple to retire ($45,000 for a single person). That assumes no mortgage and US health care costs, taxes and a generous $1,000 a month for vacation/fun. I’m 45, have been working since I could calculate the value of it (about age 6), and figure I still have 5 working years left. I’d ‘retire’ today if I could.

  28. 41. Ed

    I know I am late to the party, but this is definitely the way you want to do it, start and zero and build up to what you want/expect to spend.
    I am planning on my expenses, plus annual fund for home repairs, auto repairs/new cars, etc. 10% fudge factor.

    I feel with these expense being covered by a dividend portfolio, the dividend increases will cover inflation.

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