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 

 

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

Posted in

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
Subscribe
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

29 Comments
Newest
Oldest
Inline Feedbacks
View all comments
Bob Lin
3 years ago

I calculate how much we need annually in retirement by looking at what went into our bank accounts over the past 12 months, minus amounts transferred to savings, car loan payments, and the costs associated with going to work (we have already paid off our mortgage).

In the 12 months to October 31, 2017 we have lived on $57,088 Canadian. This includes two vacations: 14 nights in Maui, Hawaii and 10 nights in St. John’s, Newfoundland.

We could bring this number down with a bit more effort, but are choosing not to at this time. We are two adults and a dog, our kids having [mostly] left home.

Ed
8 years ago

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.

Ready for some serious fund
10 years ago

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.

A Primer on Real Return Bonds | Million Dollar Journey
10 years ago

[…] Variation. If the bond investor is planning to use income from RRBs for his monthly expenses, then he would be better off with a sufficient emergency cushion to ride out the fluctuations in […]

George
10 years ago

@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.

Dave Stewart
10 years ago

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.

Dave Stewart
10 years ago

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.

Brian Poncelet, CFP
11 years ago

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.

Ed Rempel
11 years ago

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

Brian Poncelet,CFP
11 years ago

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