Cat Food and Retirement

Life expectancy in Canada hit 81 last year.

For the vast majority of us who are not on the indexed-government-pension-gravy-train (the filthy bastards), and who also hope to avoid the dignity-crushing-part-time-Wal-Mart-Greeter-package, a principal amount high enough to support 26 years of work free income will be necessary to start relaxing at age 55.

In other words, if you are an average, private-sector Canadian with grandiose plans of Freedom 55, you better start redefining your definition of relaxation (as someone I used to work with put it, a pension of $20,000 a year is a lot of cases of beer to drink while sitting in a folding chair on the garage floor with the door open).

Ignoring all effects of inflation – which is actually quite stupid, as these will probably be massive – I’m fairly confident that in today’s dollars, a couple heading into retirement who owns their house free and clear and has no other debt (apparently a rarity these days, even among the dermatologically withered) can probably get by reasonably well on $2,000 a month. Annual trips to the ski chalet in Europe and the ocean-front Caribbean cottage aside, of course.

To generate $24,000 per year for 26 years in AFTER-TAX income from a non-registered portfolio is going to require somewhere in the region of $500,000 (remember, everything is in today’s dollars, no inflation, etc.). And that completely depletes the principal to zero at the end. To survive strictly off the interest would require at least $750,000. Of course, this is all assuming you are able to generate a rate of return that beats inflation by 4% consistently over the 26 years, which is probably a realistic number to use (ignoring the hordes of pension fund managers who inflate this number massively to shrink the appearance of unfunded liabilities).

If you step back and actually use your brain for a minute, working for just 30-35 years until age 55 and then retiring for almost the same length of time (26 years) should seem rather difficult. It is.

Using the same 4% rate of return (I’m not going to run more than one case, as I spend enough time in Excel at work and at home as is), it is possible to come up with the $500,000 necessary to fund my above example by saving about $8,000 a year, every year, from age 25 to age 55. This is around $675 a month. Put that way, it doesn’t seem too far out of reach, but remember we are still depleting principal and leaving no money to our children/pets/stalkers, etc.

To get to $750,000, you need to be saving about $1,000 a month for 30 years.

Recall before when I said non-registered accounts. This would likely apply to RRSPs as well, as the government forces you to make minimum withdrawals (the amount of which they can change at will) above a certain age, and you are taxed at the prevailing rate when you start to withdraw. The demographic issues of the present dictate that it is impossible for this rate to be lower than it is now.

Therefore, while older Canadians are essentially screwed, us young folk (the most stupid, financially) now have the advantage of the TFSA at our disposal.

I am a fan of paying tax now over tax later. I don’t like RRSPs because they assume you will make less in retirement than you do right now (possible, but unlikely for those who plan to retire well) and they also assume that taxes in the future will, at best, be the same, and not rapingly higher. The government can also claw back your old-person rewards (OAS/CPP) as well, but not to worry, as those won’t exist by the time anyone presently under 40 reaches retirement anyway.

With a TFSA, you are investing after-tax dollars that will never be taxed again (at least for a few elections). This knocks a staggering $100,000 off the principal amount required to generate our chosen amount of $24,000 a year for 26 years to $400,000. Leaving the principal intact raises this to $600,000, which is $150,000 less than the previous, non-registered example.

The monthly amounts to come up with these principal amounts, calculated the same as before, are $540 and $810. Both of these are presently possible within the $5,000 per person TFSA annual limit (provided there are two of you; if you don’t have a spouse, you will only be able to come up with $308,000, and will have to supplement your cases of beer with cat food).

What all this boils down to is that the average Canadian needs to be saving between 20% and 30% of their net, after tax income each and every year just to reach the “reasonable” standard we’ve established above.

In other words, if you have eager hopes of building a yacht and sailing around the world with your freshly injected botox glistening in the sun, I suggest you set enough money aside for a bullet when your last tin of cat food runs out.

The median contribution was $2,680 and the average contributor was 45 years old with a median income of $51,570.

The RRSP deadline looms this Tuesday; if you are near the age of 25, fill up the TFSA first, and consider carefully with someone who knows something (not the person at the bank, who is only qualified enough to sell you terrible products) if you want to waste your time with RRSPs.

Have a happy week of employment, and consider selling one of your Escalades!

Insert obligatory statement here of taking no responsibility for any of the math here or your ill-formed investment decisions. Etc, etc. Anything performed above can be done in about 3 minutes with any version of Microsoft Excel and the Goal Seek tool.