CAN I AFFORD TO RETIRE?

First Published Fall 1990

Almost every day I get asked, "Can I afford to retire?" Although we have very sophisticated computer programmes to answer these questions, we must first ask the client "How much do you need coming in every month, in today's dollars when you retire"? This gets everyone squirming at the thought of having to do some budgeting, to determine the answer to that question. I guess budgeting conjures up thoughts of the early years, when pennies had to be pinched and planning was a necessity. I do not feel budgeting is necessary at retirement, but an analysis of your cash requirements will be necessary in order to determine when you can retire. This is rather a hypothetical cash flow estimate.

To further complicate the problem, most people think in after tax terms as they are used to a take home pay cheque. At retirement, you usually have to remit your own income tax payments directly, whereas previously they were deducted at source. There will be a lot less deductions at retirement. You no longer have to pay Canada Pension or Unemployment Insurance, Union dues or most group insurance costs. But, you need to base your calculations on gross income.

How much you will need at retirement depends totally on your lifestyle. A good financial planner will tell you if your figure is realistic, but the standard of living is yours to decide. Henry David Thoreau, the famous American philosopher in his book "On Walden Pond", speculated that one could subsist by living in a pine box in a forest near the pond. Although the example is extreme, it makes the point about lifestyle. It will be different for each person. What is suitable for me may be unacceptable to you or vice versa. Many of our clients have down sized their housing in recent years to take advantage of high real estate values. They have moved to townhouses or further away to some of the outlying suburban areas. As a result, they have come to us with the difference, to invest it in an income producing portfolio. Although this may appear as an ideal solution to some, it is not for everyone. Some want to stay in their present neighbourhood, because of friends, family or health facilities. They see the others as moving to wither away in the wilderness. There is no doubt that you can buy two, three or more houses in smaller centers for the price of one city house. If that fits your plans, it is a great way to be able to retire early. So, once you have decided how much gross, pre tax income you need to live on in today's dollars, we then need to know if you intend to use your investment portfolio for your retirement income or do you wish to leave the capital intact for your beneficiaries. Many parents decide that the children will inherit the home and all of their personal effects, but they regard their investments as their pension plan and want to retire as soon as they can and will use the capital as well, to supplement their income and to protect against inflation. With those two pieces of information and the amount of the existing investment portfolio, it becomes just a mathematical calculation to tell you how soon you can retire. With a little bit of advance planning it is often easy to achieve early retirement. It doesn't happen on its own, but nothing is impossible if you want it badly enough.

Copyright 2004 – www.money-software.com

About the Author

Peter F. Baigent CFP, CLU, CHFC, RFP. is a Past President of the Canadian Association of Financial Planners for British Columbia, a former Director of the Canadian Association of Financial Planners. He has spoken across Canada on financial planning matters and has taught courses for the Chartered Financial Consultants & Certified Financial Planners degrees. He is the founder of Money Minders Software which produces financial planning software.