FinancialToons

How much should you spend during Retirement to be comfortable for the rest of your Retirement?

I’m a worry wart. I never know how much I’m supposed to be saving. Also, the concept of retirement is really out of reality for me. I’m still in my 30s, and also my father will never likely to retire (he’s an artist). So he never even thought about financial indepenence or retirement, so was never a saving type of guy.
I have a feeling I have the same mentality. I’m (kind of) an artist so a part of me is thinking – “I’m going to be working for the rest of my life so I don’t need to save!”

cartoon of retirement portfolio

That said, I think it’s still important to save for “retirement” or “financial independence”. Life throws you lots of curve balls. It’s always nice to have a nest egg to fund your living expenses, comfortably.

So, how much should you be saving and how much you should spend so your nest egg would last? Being by deciding on hte lifestyle you would like. Write down all the money that will be needed on a piece of paer, including monthly payments of rent/mortgage, drug and dental expense, entertainment, etc. This site may help you find out how much money you need per month. This figure will be your cash outflow.

Now it’s time to examine your cash inflow. How much can you expect to come in after you stop retiring?

From the Government
For most people, CPP and OAS (that’s the gravy retirement expense you can expect from the government, if you’ve been working most of your adult life in Canada) replace less than 40% of your job income. You can ask for an estimate of how much you’ll be getting by requesting this from the Canadian government from here.

Pension from your Employer (if you’re lucky)
If you are employed check to see if you are enrolled in a company pension plan.  If you are lucky, you are in the defined benefit pension plan – which means a set amount is guaranteed even the company’s pension plan’s investment doesn’t go well. These days most companies have a defined contribution plan – your employer will contribute a % and you contribute a %. Payment amount is not guaranteed so it depends how well the investments do well in the plan.  Check your pension plan statement – it should tell you how much approximately you should be getting per year if you stay employed in your company.

Your own Investments
Since CPP & OAS replace only up to 40% of your average income during your career, and also many companies participate in the defined contribution plan where the unknown factor is quite big, it’s highly likely you’ll be relying on your own investments for a major part of your retirement cash.  The big question is then, how much can you withdraw from your portfolio without reducing its value?  According to Moneysense magazine’s “Guide to Retiring Wealthy”, most studies show you shouldn’t withdraw more than 4% of assets each year if you don’t want to run out of retirement savings.  Performance of your investment is also very important – the magazine also mentions that if there’s a market downturn and it’s leaving you short, you may want to start withdrawing funds only from your fixed-income investmets so your equity portfolio gets a chance to rebound.  Annual review of your portfolio is therefore more important than ever during retirement.

Ryan & Reese at the Oscar

At the 2003 Academy Awards, while on stage with his then-wife, Reese Witherspoon, Ryan Phillippe made a joke about their income difference. When it was time to open the envelope to reveal the Oscar winner, Ryan said, “You open it – you make more money than me.” I think I saw one of Reese’s vein pop out from her forehead.
Putting that aside, there are simple techniques you can use if one spouse has a higher income than the other.

Technique #1 Higher-Income Spouse Pays the Daily Living Expense

Make sure that daily living expenses (such as groceries, mortgage or rent payments, and credit card bills) are paid by the higher-income spouse. This way, the lower income spouse can maintain a larger investment base for earning future income that is taxed at a lower rate.

Problem: For those Ryan-Reese couple where the woman earns a higher income, it may result in some marital issues. According to this article, it appears that psychological issues arise when women make more than their male partners.

Technique #2 Higher Income Spouse contributes to the Lower Income Spouse’s Tax Free Savings Account

Attribution rules do not apply to amounts transferred to a TFSA, so this will increase the lower income earning spouse’s investment base.

What is an attribution rule?  Here is a description from the KPMG Tax Planning Guide 2011 (pg 79):

The attribution rules with respect to spouses provide that where property (including money) is tranferred or loaned, directly or indirectly by you or your spouse (or a person who has since become your spouse), then all income or loss from the property, and any capital gain or loss on the disposition of the property will be attributed back to you.

These techniques only work if the couple has a happy marriage.  But since this is a blog on personal finance I won’t get into that.

My favourite all time personal development book is the secret.

“Thoughts are things”. That is the main teaching of the secret. It’s very true. All thoughts I had “blind faith” in always materialized. Even in forms you didn’t think it would take place in.

The hardest part of achieving what you want is to know what YOU really want.

I think this explains why humble people around me are also the happiest people around me. Famous example: Warren Buffett. He’s a very humble guy.

Why are humble people are the happiest? They don’t feel compelled to impress people, so they don’t want what other people want. So they know what they want – really clear in their mind – so with the power of the secret they naturally attract it.

Here’s the first 20 minutes of THE SECRET. It will change your universe.