Managing Your Money

“How do I compare with others?” This is a question that I often get asked by clients who want to know how they compare financially to others their age. It’s a difficult question to answer because it depends on so many factors that are personal to them, and may be different for others, both today and in the future.  Factors such as:  When do they want to retire? What kind of lifestyle they want to live?  How much are they currently earning and able to save? Will there be any major purchases in their future? Rather, the better question to ask is, am I on track?

Determining whether or not you’re on track towards your personal financial goals can be a very enlightening exercise.  It will likely result in one of two outcomes.  Either you’ll confirm that you’re managing your finances and savings well, and if you keep it up, you’ll be on track for financial independence/retirement.  Or you’ll learn that you need to reconsider your financial management, maybe reevaluate your budget, and work harder towards getting your savings on track.  Either way, knowing will give you a sense of empowerment and control over your financial future.  Not everyone has the goal of retirement.  Many people plan to keep working but want the freedom of financial independence.  Financial independence being when you have enough assets or “passive income” to no longer need to work.  Either way, the earlier you find out there is a gap, the more time you have to close it.

Part one is to determine how much money you need to live on (i.e. what your lifestyle costs you), both now and at retirement.  There are various ways you can do this.  You can take your after-tax income, and subtract the expenses that you expect will disappear at retirement such as mortgage payments, child related expenses, retirement savings, etc.  So, let’s look at a simplified example:

After-tax household income:                                                             $150,000

Less Expenses not applicable after retirement:

Mortgage                            $24,000

Children                             $20,000

Retirement Savings         $26,000

Total                                                                                                      ($70,000)

After-tax Retirement Living Expenses                                          $80,000

A more accurate way of doing this is to base expenses on your current lifestyle and imagine life at a future point, where you’re not working.  List all your regular expenses (including future regular expenses).  Create two columns for amounts – expenses today and expenses that will be there in the future when you retire.  For example, you may have minimal vacation expenses today but plan to travel a lot when you have more time.  You may be paying for kid’s education today, which will be done when you retire.  You may be contributing regularly to your RRSP today, which you likely won’t be doing when you retire.  Some expenses will stay the same, and some will be added or removed.  Imagining what your lifestyle might be like if you didn’t have to work will help you think of what new expenses may arise in the future.  Consider that you will go from working 8 hours a day to having 8 hours of additional “free” time every day.  The closer you get to retirement, the more accurate this estimate will be.

There are rules of thumb for estimating retirement expenses that take a percentage of your pre-retirement income or expenses.  I have been doing retirement planning for 25 years, and I have gone through actual retirements with many clients.  I have rarely seen a situation where they needed less income in retirement.  In fact, often their retirement lifestyle costs them more than their working lifestyle, so I’m not a fan of this approach.  Once you’ve estimated what your “comfortable” income needs are, the next step is to figure out how to cover them.  One thing to keep in mind up to this point is that we’re talking about amounts in “today’s” dollars, not factoring in inflation.  Depending on when you want to retire or attain financial independence, you may need a lot more than you need now to cover the very same expenses.

Part two is determining what regular income will be available to you when you stop working. Depending on what age you retire, that might include a federal or provincial pension, or a pension from your employer.  It also could include other forms of passive income such as rental income, or income from a trust fund.  Some people, especially those who are very far from retirement, or those who plan to retire at an early age, choose not to include government pensions in their calculation and consider it a bonus if they get it.  If you choose to include it, subtract the amount from the expenses you have established in Part one.  This should give you the amount of income you need to generate from your savings and investments to meet your goal of retirement or financial independence.  We’ll call it the “shortfall”.  If we take the amount from our example in Part One of $80,000, and assume after-tax pension income of $30,000, that leaves us with a shortfall of $50,000.

Part three is to estimate how much you need to have saved to fund that shortfall.  And this is where most people want to know how their savings compare with others.  According to the Canadian Securities Institute, we break down the saving years (ages 20-70) in to “early-life”, “mid-life”, and “pre-retirement”.  Early-life occurs sometime between the ages of 20 and 40.  Mid-life generally occurs between ages 35 and 60.  Pre-retirement usually occurs between ages 55 and 70.  That being said, there are rules of thumb as to when a person progresses to the next stage of their financial life, which offers a comparison to others in the same stage.  The early-life stage is said to be complete when a person has saved twice their estimated annual post-retirement withdrawals, at which point they move on to the mid-life stage. So, in our example above, that amount would be $100,000 ($50,000 x 2). Progression from the mid-life stage to the pre-retirement stage happens when the portfolio value is 20 times the estimated annual post-retirement withdrawal (or shortfall amount). That would be $1,000,000 ($50,000 x 20) based on the example.  At pre-retirement there is generally sufficient money available to finance retirement, however, for those still working, it is an opportunity to continue to grow their portfolio above and beyond 20 times, providing a more conservative cushion, and potentially an opportunity to leave an estate.

There are various methods of estimating how much money you need to have for retirement or financial independence.  The more accurate ones require sophisticated financial calculations, or software, that factor in such things as investment returns, compounding, and inflation.  There are also charts available that provide a multiplier to use with your shortfall amount, depending how long your post-retirement time horizon is.  A conservative rule of thumb is to multiply your shortfall amount by 25 and 30 to give a conservative target range of how much money you need to save based on the retirement lifestyle you plan to live.

Your financial planner or wealth advisor will do these calculations as part of comprehensive retirement planning.  The financial software they have lends much more accuracy to the projection.  Most of those advisors also have tools to help you determine your lifestyle expenses as well.  Feel free to contact me to learn more about accessing these tools yourself.

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 24 years of experience working with retirees and pre-retirees. For a second opinion, private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected]. Or visit our website at

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

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