The Retirement Puzzle

Someone asked me how I felt when I handed in my retirement notice.

Well, it felt a lot like I was quitting.

I suppose putting in a retirement notice is similar to quitting. Except that there is no next job on the horizon. And, because I presently serve as a senior executive in an Insurance company, I can’t just give a couple of weeks notice. In my case, I have provided 9 months notice to allow the CEO time for an orderly transition.

So, although my intentions are clear, I still have a few months left before I am officially retired.

We have been planning for retirement for years now, and yet there are a few questions that continue to worry me:

  • Will we have enough money?
  • Will we be happy?
  • Will we stay healthy?

Being a numbers guy, I have been preoccupied with the first question. This is probably the most common question that people have when they think about retirement: how much money will I need to retire well?

Keep in mind that I am offering a Canadian perspective. The U.S. is a very different country in terms of asset and income variance. To enter the top 1 percent of income in Canada is roughly $225,000 a year. In the U.S. the entry point is almost $600,000 Canadian a year. And in Canada, there are only about 300,000 tax filers in this category.

A recent poll issued by BMO Harris Private Banking, claims that people with at least $1 million of investable assets think they need $2.3 million to retire well. Canadians with at least $1 million of investable assets reflect only 1 percent of the population. Most Canadians will never be able to accumulate that much money for retirement.

Ask most Canadians the same question, and they might say $1 million. Or less. Or more. Very few have a clear idea of what is needed.

My approach was very straightforward. I tracked all of my expenses and I categorized them. I had two columns: one for my expenses while working and one for expenses that we would carry on into retirement. I then looked at contributions from pensions and identified the gap. That gap represented the target retirement savings that I thought I should have before I could call a retirement date. And, of course, there could be no outstanding debt carried into retirement.

Let’s take an example.

We will assume a household with only one income earner and let’s assume that single income earner is doing okay. Much better than the average.

In my province of Ontario, income at the 50th percentile — the median where half make less and half make more — is just under $40,000. Yes, you read that correctly, $40,000. Income at the 75th percentile is $72,000 and at the 90th percentile it is $110,000.

Let’s use that number.

Our single income earner, roughly 10 years from retirement, will pay about $30,000 in taxes on $110,000 of income. That leaves him with $80,000 to spend.

He holds a mortgage which costs him $18,000 a year. This assumes that he put 20% down on an average house and he carries the balance as a mortgage that is paid down over 25 years. The house would be worth about $400,000.

So, he is now left with $62,000 to spend after taxes and mortgage. Out of that amount, he has a number of expenses to cover: cars, food, entertainment, raising kids, saving for retirement. Which, if we look at the average household expenditure after tax, means he has very little, if anything, left over.

But, what might his expenses look like after retirement?

His mortgage would be gone. Saving for retirement would be done. Money spent on raising the kids would be done (hopefully).

In all likelihood, he would be able to live to the same standard in retirement at roughly 60% of his pre-retirement income. Indeed, Sun Life completed a report where they found that the average retired Canadian was living quite well on 62% of what they earned before leaving work. That ratio goes down as income goes up. One of the few benefits of a highly progressive taxation system in Canada is that high income earners can likely live quite well on much less, say 35 to 50% of their pre-retirement income.

So let’s see where our single income earner might stand.

This is what he can count on in retirement. Assuming that he intends to maintain his standard of living, he would need to achieve about $68,200 per year. Based on averages, he might see the following:

CPP: $8,000
OAS: $14,000 (for both himself and his spouse)
Pension: $45,000

Well, lucky fellow! He is almost there at $67,000. His gap is really only a few thousand. Let’s say he needs $10,000 more per year, a total of $77,000 to fill the gap and provide some buffer. A simple way to calculate his target retirement savings is to multiply $10,000 by 25: $250,000. If invested appropriately, he should be able to take out 4% in the first year and then increase his withdrawal by the inflation rate in subsequent years.

If our single income earner did not have a great pension, let’s say only $25,000 then his gap would be $30,000 which would mean a target retirement savings of $750,000. That amount of savings is a pretty big number for most Canadians. Let’s hope he understood the need to put money aside during his working career! Although, as some financial planners would say, you will have whatever you have when retirement comes along. If you are within a few years, there is not much you can do except try to work longer and accept a lower standard of living whenever retirement happens.

The most recent data from Statistics Canada shows families whose highest income earner was 65 or older, had a median after-tax income of $57,500 in 2015. Our single income earner in our example will be taking in more than that in retirement and he will likely enjoy more discretionary spending now that the kids have gone and the house has been paid off.

Every person will have a unique situation in terms of how much is enough money for retirement. From all of the reading and research I have done in this area, I have reached a few basic conclusions:

We will live on much less in retirement because our income taxes will be substantially lower. We can easily live to the same standard on an after-tax basis with an income replacement ratio of 45%.

Thank heavens I set money aside when I was younger. That is the only reason why I can retire earlier at 61 as opposed to 65. Fortunately I have always worked for companies with defined benefit pension plans. Although not indexed for inflation, they are worth a lot of money to me in retirement. To get a rough idea, I took the annual income stream from my pensions, multiplied it by 25 years — I hope to live that much longer! — and gained a deep appreciation for 35 years of pension contributions. I also set a lot of money aside in my 40s which gave time for my investments to grow over the following two decades. That combination of company pension plans and personal investments provides the foundation for financial independence.

Having enough is a very personal matter and in the long run doesn’t mean very much. Having enough to not worry about money is probably the best perspective. As I have done my own research, most people in retirement do not consume like they did in their younger years. They value time and relationships. They find purpose differently from when they were working.

Lorraine keeps telling me not to worry about the numbers.

We have enough.

So. Will we be happy? Will we be healthy?

More on those two questions later.

Done Working (Almost)

I have a shirt that I purchased from this store, dunworkin, in 2016.

I’ve never worn the shirt as my family told me that I can only wear this shirt once I am done working and retired.

That time will be soon.

A few days ago, I told my CEO that I would be retiring within nine months. In my current role as a senior executive, I need to provide sufficient time to help the company with my leadership transition.

And so it is done.

We have been busily planning this part of our lives for over two years now. The usual concerns creep into play. Have we saved enough? Will we have enough money to last our retirement? Will I get through the next nine months?

There is a bit of fear. And a bit of excitement as well.

Someone told me that when they retired, they had mixed emotions: joy and happiness.

Right now, I have fear and excitement!

Crunch time as we get ourselves ready for our first extended sojourn in our coach in October of 2018. We will take the coach out a few times before then and I am glad that we have had a couple of years under our belt with the motorhome. I think we have a much better idea as to how we will enjoy that part of our retirement.

9 months and change.

285 days.

But then, who’s counting?

Retirement Card

We don’t have one. A retirement card that is. At least not yet.

When we left Hearthside Grove, we wanted to stay in touch with our new friends. Email is a way of keeping in touch. Our blog is another way of keeping in touch.

Most of our friends had retirement cards. Looks like we will need to make some up as well for the future.

Homeward Bound

Our last day at Hearthside Grove. The weather for the past two weeks has been incredible. Lots of sunshine and very warm temperatures.

The sense of community here has been far different than I imagined. Friendships formed quickly. Dinners, day trips, get togethers, and connecting with people as we walked around the resort.

Ken and Carol, Lou and Pam, Dave and Daphne, Moe and Cindy, Barry and Iris, Gary and Suzan, Rita. These were a few of the many people we connected with during our time here.

Most of the people we have met are retired. Not surprising given that we are vacationing in mid-September. And all have been very successful in their careers. Such amazing life stories.

It has given us a glimpse into what our retirement will look like and we are very excited about beginning that part of our journey.

When we said good-bye to one of our new friends, she described Hearthside Grove as a paradise. And she is right. This has been such an amazing experience for us. We would certainly buy a lot but for the location. As Canadians, we need to winter south.

That said, many of our friends here at Hearthside also have lots in California at Desert Shores and at Motorcoach Country Club. That is where they winter.

We are planning to spend a few months down there at one, or perhaps both, of those resorts in the early part of 2019. I hope we will see many of our new friends again.

Residency Calculator

If you are a U.S. Citizen, well, the U.S. Residency Calculator won’t be of any use to you. Lorraine and I, on the other hand, will have to be very careful about the number of days we spend in the United States.

When we first started planning out our retirement, we assumed we could be Canadian Snowbirds by just crossing the border to the U.S. in November and coming back to Canada in April. Enjoy moderate weather for twelve months of the year. Striking off one of my bucket list objectives for retirement: to never be cold again.

Perfect, eh? (Sorry about the Canadian stereotype.)

It turns out to be far more complicated than staying less than six months in the U.S. in any given year.

The substantial presence test, to avoid being considered a U.S. resident for tax purposes and goodness knows we already pay a ton of taxes in Canada, includes two very important points:

  • Physically present in the U.S. for 31 days in the current year
  • A three-year total of 183 days which includes all the days spent in the current year, one-third of the days spent in the preceding year and one-sixth of the days spent in the year prior.

That means only 120 days south a year to avoid being considered a U.S. resident for tax purposes. That means leaving in November and returning to Canada at the end of February. That means missing out on my bucket list objective to never be cold again.

February is cold in Canada. Very, very cold.

The U.S. Residency Calculator is helpful to determine whether you have to be a bit more formal in terms of staying in the U.S.

A Canadian can get an exemption by filing a Form 8840 with the IRS. This allows a Canadian snowbird to stay in the U.S. for up to 182 days every year without being considered a U.S. resident for tax purposes. To qualify, you have to be in the U.S. for less than 183 days in the current year, demonstrate a home in Canada in the current year (owner or renter) and establish a closer connection to Canada than the U.S. The latter can be demonstrated in terms of where you bank, pay taxes, keep your belongings, where your drivers license was issued amongst other things.

The 8840 form can be found on the IRS website here. The form should be filed before June 15 in the year after your 182 day stay in the U.S. although the Canadian Snowbird Association recommends proactively completing and filing a new 8840 each year and maintaining copies to indicate that you are entering the U.S. as a temporary visitor from Canada.

If a snowbird loses track of time and exceeds 183 days or more, then it is possible to file an exemption under the Canada – U.S. Tax Treaty. Sounds like a really complex process though which would require lawyers and fees. Best to keep it within 182 days. At least for now.

The Canadian Retiree Visa bill, H.R. 979: Promoting Tourism to Enhance our Economy Act of 2017, could see Canadian retirees being able to spend 8 months in the U.S. (owning real estate will not be required to obtain the visa). The bill has yet to pass but if it does, we will be applying for that visa. That said, every province in Canada has residency requirements to maintain health care coverage. In Ontario, we have to be physically present in the province for at least 153 days in any 12-month period. Not sure who is counting those days but I was somewhat surprised to learn that regardless of where you pay your taxes, you are a bit of a prisoner in your own province within Canada.

Who knew travelling in retirement could be so complicated?