Retirement Planning: How Much Do We Really Spend Now and How Much Will We Spend Then?

Recently I started getting curious about how close we are to having saved “enough” for retirement. I took a peek at various retirement calculators and realized with a sigh that finding out that answer depended on answering some other questions first. To make a decent attempt at planning our retirement, I would need to know how much we will spend per year once retired and that meant I needed to know how much we really spend now.

The whole issue is kind of like getting out the bicycles from the crawlspace for the spring. First the summer tires are in the way and rather than moving them

it makes more sense to get them back on the cars—which means booking an appointment and getting the car there, walking home, walking back and driving the car home, but NOT unloading the winter tires to put back in the crawlspace until after the bikes are out.

Of course, it’s not just the snow tires. It also means moving the snow blower to the quiet corner of the garage and getting out the lawnmower that’s currently sleeping there so there’s room for the bikes. But that means pumping the gasoline out of the blower (or putting stabilizer in it) and draining its oil. And what if it snows again? Spring snow is usually that wet heavy stuff that our neighbours appreciate a hand with.

And you wonder why I haven’t been posting much recently? (Ok, maybe the tundra-swan-and-snow-goose-migration watching also was a factor, but that was an essential health-related activity because it prevents our family from catching Nature Deficit Disorder.)

I Used to Know Exactly How I Spent Every Cent

When I was in university inflation was out of control and jobs were hard to find. Like many of my classmates, I enrolled in a program not based on my “passion” but based on the likelihood of getting a decent job when I graduated. I was hired while finishing fourth year and headed west upon graduation. (Yes, even then you had to move to where the jobs were. Twenty-five years before my Dad had had to move West, too, but to Ontario.)

I’d only been working for about two weeks when the layoffs began.

Through a variety of fortunate circumstances and by showing major initiative, I managed to hang on to my job in a modified format. I didn’t expect it to last, though, as the industry was collapsing all around me. So out came the notebook and down went every cent I spent, from a postage stamp (Get this: There was NO EMAIL!!!) to a new sofa bed.

Recent years have been kind to us financially. While we still half-expect a layoff at any time we no longer record every cent spent. We know we are saving steadily and we still spend carefully. We’ve kept close watch on all of our beyond-our-control costs but we didn’t really know exactly what our discretionary spending was.

Back-calculating our Total Annual Spending

Thus began a rather disorganized attempt to calculate our total annual spending. The first time I tried it, I started from our T4s and other sources of income. That became a huge mess because I never did figure out what to subtract from our gross income to get down to what gets deposited in our chequing account. And I’d have to keep shaking myself out of the train-wreck-shocked stupor I’d get into from comparing our gross to our net on those T4s. (Frankly I don’t think they should ever show you your gross.)

Why was the whole thing so messy? Because most of the money we take home goes into one form of savings or another: RRSPs, TFSAs, RESPs, non-registered investments. And we have weird sources of money, too: Anyone else have about 18 shares of Telus (real paper shares in the safe deposit box the government says I don’t need anymore) that date back to Alberta Government Telephones privatizing? So I had to remember them all and track down what they added or removed from our bank account/s.

The successful attempt took a more simplistic approach.

Identify all the sources and amounts of income coming into our lives during each calendar year, including the one off’s:

  • Pay deposits including performance bonuses, annual bonuses, SARs, RSUs, CAP and SP plan withdrawals etc.
  • Income tax refunds
  • Blog advertising deposits
    (big bucks here! E.g. it’s neck and neck in a race with what those 18 Telus shares generate)
  • ING Direct bank referral deposits
    (in the same race! but ahead of the ads)
  • Interest income from bank accounts, HISAs, GICs, Canada Savings Bonds (none of those left for us adults but we still had some for the first year I did this math)
  • Dividend payments made by direct deposit or by cheque
    (we still have paper shares for a few companies)

I didn’t have to include any income

  • earned in our RRSPs or LIRAs
  • earned in our TFSAs
  • earned in our defined contribution pension plans
  • earned in our CAP/SP provided we didn’t withdraw any money out to spend

because those earnings were not available to be spent on discretionary costs. That made this a bit easier.

Then I had to identify all the ways that income left our hands

  • RRSP contributions that year
  • Charitable contributions that year
  • TFSA contributions that year
  • RESP contributions that year
  • Amount spent on a major vacation (we kept tight track of that one out of curiosity as we don’t do big vacations often)
  • Amount spent replacing the Camry after it was taken away from us
  • Amount paid for beyond-our-control costs including Natural gas Electricity Water Internet Telephones Car Insurance Home Insurance Property Taxes
  • Non-Registered Savings contributions that year

By subtracting those costs from that income, I could see what our discretionary spending was. (I already had a pretty good idea of it, of course, because my husband spends almost everything on his credit card and I spend almost everything on debit from an account which is only used to buy things. This exercise was to give some ‘science’ to my estimate, since my husband always way over estimates our spending based on the lunch room conversations of his more profligate friends. Note: this is while he is eating his home-cooked lunch and they are eating take out.)

Why I Nearly Had Two Heart Attacks

I did this exercise for the past three complete years. So I nearly had two heart attacks.
The first came when I thought our spending had increased $20 000 one year. I couldn’t believe it, though. Sure, we let our eldest get pizza lunch once a week at the new school, and we pay when the youth group goes to LaserHunt, but $1667 more per month?!

That one didn’t take too much detective work. I’d set up a new savings account that year at ING Direct for orthodontics so we didn’t invest that money when we needed it handy to pay the bills. I forgot to subtract the one time cost of funding that account from our income.

The second heart attack came from a different year having an $10 000 increase in spending. That one was a bit more heart palpitating because I have been feeling guilty about how often I’ve been suggesting we go out for dim sum. (Once we even went without the children, on a weekday!) The real cause of the extra spending was much harder to track down, which is a bit funny because I wrote about the cause several times on my website. What can I say? I’m not fond of adding numbers.

Anyway, it turns out that we had put $11 000 into a TFSA Kickstarter account at ING Direct in November but I had only subtracted $11 000 for our January contribution to our TFSAs from our income. Because we transferred the TFSA from ING to InvestorLine before I started this work, there was no obvious sign of it when I was poking around online adding up numbers. So when I corrected for this, our spending actually went down a few hundred dollars that year, not up. Phew. I would have missed those spiced squid tentacles if we’d had to cut back on lunches.

And the Actual Retail Value is…!

So now I suppose you think I’m going to tell you how much we spend on junk a year, huh? Nope. You’ll have to go read someone else’s blog if that’s what interests you.

In percentage terms, we’re saving way more than we’re spending. Which is good because we are not going to have much of a pension in retirement so we’d better not get used to having money to spend.

After adding back in the not-under-our-control costs, I had an annual spending number to start figuring out our retirement plans. I doubt we’ll spend less in retirement because we don’t spend a lot now.

I actually have two numbers: a ‘regular annual spending’ number and a “r.a.s. plus a vacation or a new car or a major home reno’ number. Those sort of give us the two ends of the retirement spectrum we’d like to land between, at a minimum.

Ideally, we’d like to have more. We’d like to be able to

  • help our children (with a loan! Not a gift!) with the costs of their first home and,
  • if they’re interested, pay for a wedding for them (limit one per customer: choose your partner as carefully as possible!)
  • It would be nice to be able to fully fund their ‘higher’ learning, too, although there are limits to that. No perpetual students need apply.

So we’ll keep saving like the dickens regardless of what this experiment unveils. Because at any time, the money could dry up. Layoffs and “early retirement” are almost as common today as they were when we entered the workforce.

Related Reading
Budgeting for Retirement:

Planning for Retirement:

 

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Have you got a good grip on how much you spend per year? Can you use it to extrapolate what you’ll spend in retirement? Please share your misery (or miser-y) with a comment.

Budgeting for Retirement: Reduce How Much You Must Pay on a Fixed Schedule

Like many Canadians, we won’t have much steady income in retirement. We don’t have any defined benefit pension plans. Yes, CPP and possibly OAS will pay us a certain amount per month. But most of our income will come from dividend and interest payments from our investments and those are not all paying monthly. (We do have some money invested in stocks that pay a monthly dividend though.) So one of my goals has been to reduce the number of bills we must pay on a fixed schedule.

Reduction One: Getting Rid of our Rental Water Heater

In a recent gas bill from Enbridge, I received a flyer called “Information for Direct Energy’s Customers about Residential Water Heaters.” Although I’m not a Direct Energy customer, I read it anyway.

First it had the usual fear factors listed under the heading of “Typical Water Heater Repairs:”

  • Ventor motor $827
  • Gas valve $526
  • Flame sensor $342

I call this fear mongering. A brand new GE 40 gallon natural gas water heater with a 12 year warranty (the longest available) is $688.50 from Home Depot in Toronto. I know you’d have to pay installation on top of that, but even so a brand new tank would be cheaper than the repair for the ventor motor!

Anyway, it says that
a CV40 is $15.59 a month,
a PV40 is $24.49 a month,
a DV40/50 is $25.49 a month,
and a PDV 40/50 is $29.99 a month.

I believe a PDV is a power direct vent, a DV is a direct vent, a PV is a power vent, and a CV may be a conventional (or convection?) vent. Direct Energy doesn’t provide any explanation for these tank descriptions on the flyer.HST is applied on top of those prices.

Another asterisk points out that “unlisted tanks will be subject to an average 2.5% increase over the 2013 rates.

2.5% in one year! For a tank that’s one year older and in many cases has long since paid out the capital and installation costs. Robbery!

I believe that means that we would be paying $25.49*1.13 or $28.80 for our tank if we were renting it.

Fortunately, we bought and installed our own water heater tank with the help of Home Depot and a local contractor several years ago. That removed another fixed monthly bill of over $28.80 a month from our budget.

Yes, we have to save to replace the tank and/or to fix it if it breaks down.

When we paid to have everything done the last time, from delivery to installation to removal of the old tank, it cost $910.90. Based on the price we were paying to rent a tank that was almost 20 years old, it would have taken 5 years to pay that out. The payout compared to a new rental tank was 3 years.

Which means it paid out 3 months ago. Cool!

It’s been working fine and the maintenance is the same as for a rental heater (just draining it once a month to help reduce the buildup of scale.)

So by replacing our rental water heater with one we purchased, we have removed the need to pay a fixed monthly bill of about $28.80 a month.

Reduction Two: Eliminating our Cable TV Bill

So far our experiment with switching to an Over the Air indoor antenna has been working well. We no longer have to pay a monthly cable TV bill. Since we are not huge sports fans this has not been a problem for us.

Cutting our ties to Rogers has removed a fixed monthly bill of over $40.50 from our budget. (And it was steadily increasing. It grew from 26.44 a month to 40.50 a month in 10 years with no change in the channels we received or the quality of our signal. In fact, I just checked online and basic cable would be $43.37 not including a digital or HDTV box, plus an asterisk says that rates will increase on March 24 2014.)

What Other Fixed Monthly Bills Can We Eliminate or Reduce?

Some of our bills can’t be eliminated easily. We’ll have to pay for water, electricity, and natural gas.

I plan to check the details of our property taxes, car and house insurance, though. We pay those monthly. I have a bad feeling that we may be paying more than if we just paid them with a lump sum annual payment. If so, we’ll switch to annual. That wouldn’t really fit into this category of eliminating a monthly bill, but it might be a good idea just to save money.

Other Fixed Monthly Bills We’ve Avoided or Minimized

  • Monthly condo fees: We don’t live in a condo.
  • Security and alarm fees: Our police officer friends say that alarms don’t stop break ins. (We leave our drapes open so thieves who are shopping can see we don’t own anything of value.)
  • Voice mail fees: We have a machine that cost $20 over 20 years ago. It’s still working beautifully.
  • Other telephone fees: We don’t pay anything for “features.”
  • Internet fees: We just use our neighbour’s Wifi. (Oops. I hope he doesn’t read this blog.)
  • Gym fees: We have some weights and an exercise bike for the off season and regular bikes and sports equipment for the rest of the year.
  • Golf/Tennis/Racquet/Yacht Club fees: We’re more “pay as you go” people than club joiners.
  • Gasoline costs: Have feet will travel.

Right now, we tend to focus more on increasing our earnings than on decreasing our costs. As we shift into retirement in a decade or so, though, I expect that will change. These steps are gradually taking us to where we want to be.

Related Reading

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Have you eliminated any monthly bills to simplify your retirement spending? Which bills could you banish? Please share your experiences with a comment.