Retirement Ready?

May 13, 2012 by

Retirement Ready?

In the Financial Post, there’s an article I read every week, and disagree with every. single. week. It’s called Family Finance, and it looks at the financial situation of a Canadian family and makes recommendations on whether they’re ‘retirement ready’.

The problem I have with this series is that they make assumptions about lifestyle and consumerism that I find are, frankly, ridiculous and unsustainable.

Case in point. This week, Victor and Edna are profiled. You can read their full financial profile here, but I’ll summarize.

This couple is in their 50s and thinking about retirement. They currently make $144,000 a year. They have a home and rental property worth $1,090,000 and mortgages of $600,000 on these properties.

Victor has no pension. If they wait until Edna is 65 before retiring, they’ll receive  a total retirement income of $77,687 (including OAS and CPP).

The article’s author says their future is bleak. Me? I think they’re set!

Sell the properties. They’ll have about $450,000 cash after taxes. Buy a $200,000 house. Depending on what city they decide to live in, this might be a tiny condo or a gorgeous home on an acreage with a lake. Buy a small, reliable car for under $10,000 cash. Take the extra $240,000 and invest it in reliable, income producing investments.

Now, for their spending. Here’s what they currently spend, and where their expenses would be cut following my suggestions:

Now Then
Mortgages $3,600 $0
Gifts &   charity $1,200 $250
TFSAs $833 $833
Food &   restaurants $800 $500
Car loans $800 $0
Education for   grown children $584 $0
Utilities/phone $353 $353
Travel $273 $273
Clothing &   grooming $150 $150
Car & home   insurance $117 $117
Fuel $0 $150
Total $8,710 $2,626

 

The article’s author suggest they’ll only be able to trim 7% off their expenses. By my calculations, they should easily be able to trim their expenses by 70%. Big difference, no? With a $77k retirement income, they’ll have no problems living off the $31k they’ll be spending. They can choose to splurge on travel, contribute to their grown children’s education, give more to charity, or invest even more.

This is why I believe so many Canadians have no idea what they need to save for their retirement. Because of financial advisers who perpetuate the myth that you need millions in the bank and will need 75% of your pre-retirement spending to survive in retirement. I think more advisers should be telling Canadians to cut their pre-retirement spending and learn to live on a lot less now.

The idea that this couple, despite having $600k in assets and a projected $77k in retirement income, are in dire straits is ridiculous. I think they’re perfectly poised to retire, as long as they make some significant changes to their lifestyle now.

What do you think?

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3 Comments

  1. Great post! You are totally right, and I was wondering how were they spending $0 on fuel? You should do more posts like this it was very eye opening

  2. I agree with you this is a bit far fetched. Come on it’s not rocket science, downsize. If we were getting 77k a year bloody heck we’d be laughing all the way to the airport. How much money do you really need is the question? Do you really need a large home? Articles like this are the ones that scare the pants off of people who are in a perfectly healthy financial situation. People who aren’t simply think there is no hope and that’s not true. Budget and start budgeting now…and live below your means and set realistic goals. Great Post. Mr.CBB

  3. Mary

    I agree…great post! My husband & I have a $500,000 home that’s fully paid but I consider that completely irrelevant to the calculation of the amount necessary for retirement income. It only factors in when and if I sell… since we have to live somewhere and the utilities and taxes on the house are less than we would pay for rent on a one bedroom apartment. We may at some point choose to leave the Vancouver area for a more reasonably priced housing market, but I am not factoring that into our financial day-to-day plans. It’s an emergency contingency plan that could be activated if something unforeseen arose. We have a timeshare participation that’s fully paid & therefore we are poised for a month of lovely annual vacations for the balance of our lifetime! The cost of our timeshare villa fees & taxes each year are far less than we’d have to spend were we wanting to cover the cost of accommodation at a 5 star property. If my husband retires at 65, I estimate we’ll have a retirement income of $57,600 for his age 65-71 (100% of our current family income since I retired this year) and then $63,600 once my husband turns 71. We’ve got maxed out TFSA’s plus some cash in the bank that we plan to tax shelter $10,000 per year until our entire cash savings are growing tax-free. That should generate sufficient income that our emergency funds at least keep pace with inflation. We don’t plan to live the “lifestyle of the rich & famous” in retirement but then we don’t live that lifestyle now! We live well, dine out on occasion, continue to max out our RRSP contributions every year all the while having some lovely vacations. How much does a body really NEED?

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