My (detailed) financial goals

[George]

As noted in the "target retirement (http://canadianmoneyforum.com/showthread.php?p=1639&posted=1#post1639)" thread, my goal is to reach financial independence by age 50. I'm 32 now, so 18 years to go...

I have a public sector pension so I'm fairly limited in the amounts I can contribute to RRSPs. That said, after age 50 I'll be eligible for a generous pension (it'll be reduced if I retire before 55, though).

Here are my intermediate goals to help me get to "findependence 50":

By age 30: Pay off all debt except the mortgage (complete)

DONE MAY 25, 2009 (YAY!)By age 32: Establish an emergency fund of 6mos of expenses

Update as of September 2010: Mortgage balance now below 75k, on track to pay it off even earlier than planned (by age 34 or so!).
Update as of May 2011: Mortgage balance is now below 50k! Should be paid off by summer 2012!

DONE MAY 2012 (age 34) By age 37: Pay off the mortgage in full.

By age 40: Have 2x annual gross income in retirement savings (TFSA/RRSP)

By age 44: Have contributed enough to children's RESPs to have received the full Canada Education Savings Grant.

By age 45: Have 3x annual gross income in retirement savings (TFSA/RRSP)

By age 50: Have 5x annual gross income in retirement savings (TFSA/RRSP)

I would welcome any comments anybody has on these goals. Any suggestions for additions would be greatly appreciated.

[ethos1]

By age 50: Have 5x annual gross income in retirement savings (TFSA/RRSP)

I would welcome any comments anybody has on these goals. Any suggestions for additions would be greatly appreciated.

George, on the assumption 55 is your retirement age, why do you feel or think that you will need 5x annual gross in retirement savings, just how did you decide or come up with that number?

interested to see comments from a 30-year old on this

[George]

The thought behind having 5x annual income saved is that it'll be enough cash to replace about 25% of my gross salary income. Combined with a reduced pension at age 50, it'll be enough for a replacement ratio of 65-70%.

It's actually a fair bit higher than what I think will be needed, but I like the idea of shooting high... :D

[moneymusing]

And don't forget that juicy severance pay at retirement as well

[George]

Woohoo! The emergency fund of 6mos of expenses has been established. Time to move toward an early payoff of the mortgage...

I'm using a spreadsheet from Vertex42.com to do the mortgage math: (http://www.vertex42.com/Calculators/Canadian-mortgage.html

I highly recommend it - it's the most flexible tool I've found to calculate the effect of prepayments, especially if the prepayments are irregular.

[Ben]

I'm using a spreadsheet from Vertex42.com to do the mortgage math: (http://www.vertex42.com/Calculators/Canadian-mortgage.html

I highly recommend it - it's the most flexible tool I've found to calculate the effect of prepayments, especially if the prepayments are irregular.

That's a good spreadsheet - I use it as well, for some functionalities. As a point of interest, it doesn't seem quite to match up to the penny with the amount I pay on my mortgage. Have you found this to be true?

I've not had to motivation to figure out why it does not quite line up. The difference is trivial, but seems to be present.

I have another simpler spreadsheet that I use most often, and it does match my mortgage payments.

[George]

That's a good spreadsheet - I use it as well, for some functionalities. As a point of interest, it doesn't seem quite to match up to the penny with the amount I pay on my mortgage. Have you found this to be true?

I've not had to motivation to figure out why it does not quite line up. The difference is trivial, but seems to be present.

I have another simpler spreadsheet that I use most often, and it does match my mortgage payments.

I've noticed the same thing - the variance is typically less than 80 cents per payment, though, so I'm not worried. I don't really care whether the calculations match those of the mortgage lender 100% - as long as they are close (which they are), they're good enough for my use.

[steve41]

By age 50: Have 5x annual gross income in retirement savings (TFSA/RRSP)

I would welcome any comments anybody has on these goals. Any suggestions for additions would be greatly appreciated.


For someone grossing $65K say, just starting to save at 37 and planning to retire at 50, 6 times earnings by 60 is about right. I ran the numbers assuming a 2% DB pension (integrated) and projecting a constant ATI, die-broke at 95, 6%/2% earnings/cpi, and living in BC.

Without the pension, you might want a bit more... 7.3 times salary. Also... by retiring at 50, recognize you wont be able to make it on RRSPs alone. You will need to be saving outside your rrsp (nonreg & or tfsa)

[George]

Without the pension, you might want a bit more... 7.3 times salary. Also... by retiring at 50, recognize you wont be able to make it on RRSPs alone. You will need to be saving outside your rrsp (nonreg & or tfsa)

You're forgetting the DB pension, which can be taken as early as age 50. Given that the thread is about MY goals, then MY pension has to be taken into account, no?

[steve41]

I indicated that six times earnings was about right for someone with a 2% DB pension, and that withoutout the pension, the higher 7.3 number would be required.

[George]

I indicated that six times earnings was about right for someone with a 2% DB pension, and that withoutout the pension, the higher 7.3 number would be required.

I think I misread your post, then - my apologies. It looks like you were comparing retiring at 60 with the pension and retiring at 50 without.

Are both of the above numbers assuming full retirement at 50 and living in BC? Would the numbers significantly change in Alberta?

[steve41]

It is hard to make assumptions to fit your example... ideally you need to crunch all the numbers... your salary/pension, loan, etc, so I had to assume the following:-

In Alberta,
31 yrs old
no saving until 37
salary now- 65K indexed at 2%
retire at 50
rate 4%/cpi 2%
full cpp/oas
die broke at 95

results in a 644K nest egg at 51 and a 23.2K ATI level
Ratio savings to salary at retirement.... 6.15

with a 1.5% db pension (not integrated with CPP), the nest egg is 412K and ATI level is 34.1K
Ratio savings to salary.... 3.93

23K vs 34K.... This points out just how much the pension adds to the outcome.

I am not convinced this ratio (salary/savings) is a particularly useful number, BTW. The ATI has much more relevance.

[George]

Can you elaborate on what ATI is? I'm not familiar with the term...

[steve41]

ATI is 'planner speak' for after tax income... the amount you get to spend on beer/groceries etc. In the above context it is common to adjust for inflation... expressing it in current dollars.

[tom_ford]

I'd say this is pretty impressive, George.

[George]

I'd say this is pretty impressive, George.
Thanks Tom! It'll be even more impressive when I reach some of the goals, but the journey is where most of the fun is. From my amortization calculator, only 3.31 years left until the mortgage is gone!

[Saniokca]

Thanks Tom! It'll be even more impressive when I reach some of the goals, but the journey is where most of the fun is. From my amortization calculator, only 3.31 years left until the mortgage is gone!

I must disagree here. I love it much more when I reach a goal :)

I love your goals. My long term goal is almost the same - I want to retire at 50. Ironically, I don't want to reach this goal for a while - I quite like being 25.

[steve41]

I am uncertain what you mean by annual gross income at those future ages. Do you mean your current gross income or your gross income at those future points in time? It makes a difference.

Your salary will grow (sometimes significantly) at a greater rate than inflation. These rules of thumb drive me nuts, BTW.... but that's just me.

[George]

I am uncertain what you mean by annual gross income at those future ages. Do you mean your current gross income or your gross income at those future points in time? It makes a difference.

Your salary will grow (sometimes significantly) at a greater rate than inflation. These rules of thumb drive me nuts, BTW.... but that's just me.

My plan is to have enough saved to hit the income multiples based on my gross income at those future ages (whatever that may be). As a public servant, my income is actually likely to grow at a LOWER rate than inflation, if the past decade is any indication.

[the-royal-mail]

Hi George, I'm quite impressed with what you've accomplished in your short life. Well done and to use a cliche, keep up the good work. :D

I'm curious about something though. You made a comment in your initial post about your pension vs ability to save in an RRSP. While I don't know a thing about retirement and ratios as explained by steve41, I would like to better understand what you meant by the comment. I've heard a similar thing before and didn't know what they meant. Shouldn't having money in an RRSP be a good thing? What does that have to do with your pension?

[high octane]

If you contribute to a pension then a pension adjustment is subtracted off your RRSP contribution limit (http://www.milliondollarjourney.com/rrsp-deadline-march-1.htm)

Maxing out an RRSP isn't automatically the best choice for someone with a pension. RRSP withdrawals are taxed the year of withdrawal based on annual income

[the-royal-mail]

Holy crap. You're right! I never understood this until now. After reading your post I viewed my recent notices of assessment and can see where they calculate an annual contribution limit based upon 18% of income, then deduct from this allowance whatever was placed into your pension. Wow. I guess the days of my ballooning RRSP deduction limit are over.

The good news is that I have built up a heck of a lot of contribution room from my pre-pension years so I can chisel away at that amount when the funds allow, I guess.

Anyway, sorry to hijack your thread, I just wanted to clear up this point. Thanks!

[George]

Holy crap. You're right! I never understood this until now. After reading your post I viewed my recent notices of assessment and can see where they calculate an annual contribution limit based upon 18% of income, then deduct from this allowance whatever was placed into your pension. Wow. I guess the days of my ballooning RRSP deduction limit are over.

The good news is that I have built up a heck of a lot of contribution room from my pre-pension years so I can chisel away at that amount when the funds allow, I guess.

Anyway, sorry to hijack your thread, I just wanted to clear up this point. Thanks!

No worries - one clarification, though - the pension adjustment (PA) amount isn't the same as the amount that was contributed to your pension in all cases. If you have a defined-benefit pension, it's a calculated amount based on the "value" of your pension if it were equated to an RRSP contribution.

The idea behind the pension adjustment scheme is to ensure that all Canadians, whether members of an employer pension plan or not, have the same opportunity for tax-deferred retirement savings.

I'm happy to say that for 2009 I've maximized my TFSA and RRSP contributions, and will likely do the same for 2010. We're also on track to have the mortgage paid off in a little over three years (at age 35!).

[gwcanuck]

RE ratios of retirement savings to salary.

The book The Millionaire Next Door has a formula where your net worth should be your age x your salary / 10. If you're at this number or higher you are a wealth accumulator. If you're 50, the formula works out to 5x your salary as your net worth. So if you have 5x your salary just in retirement savings you are in great shape because that would neglect other assets, and your net worth is actually higher. It's up to you to decide if you have enough to retire though.

[George]

Just updated the original post in this thread with numbers from fall 2010. We're ahead of schedule based on the original plan. As it stands the mortgage should be paid off in full within two years or so (before my wife and I turn 34!).

We've scaled back a bit on the RRSP/TFSA contributions, but will likely max them out once the mortgage is paid off.

[Cal]

RE ratios of retirement savings to salary.

The book The Millionaire Next Door has a formula where your net worth should be your age x your salary / 10. If you're at this number or higher you are a wealth accumulator. If you're 50, the formula works out to 5x your salary as your net worth. So if you have 5x your salary just in retirement savings you are in great shape because that would neglect other assets, and your net worth is actually higher. It's up to you to decide if you have enough to retire though.

Interesting post. Thanks. I had read the book years ago, good refresher.

[George]

Updated the original post to reflect another 25k or so paid off on the mortgage!

[canuck1]

Great going, George!

[George]

Great going, George!

Thanks!

[Financial Cents]

Updated the original post to reflect another 25k or so paid off on the mortgage!

Wow, great stuff George!!!!!!!

[George]

DONE MAY 2012 (age 34) By age 37: Pay off the mortgage in full.


The original goal was to pay off the house by age 37, but we did it three years early. We poured any extra cash that came in, plus increases in our income from raises and promotions, into the mortgage, and now it's gone! Now on to increasing our savings!

[mind_business]

The original goal was to pay off the house by age 37, but we did it three years early. We poured any extra cash that came in, plus increases in our income from raises and promotions, into the mortgage, and now it's gone! Now on to increasing our savings!

We're at the same point without debt, but we did it 12 years later than you. Well done! You're going to enjoy watching your savings grow. It's addictive. Soon you'll be going over your household budget looking for more ways to squeeze savings ... if you haven't already.

[Plugging Along]

Congrats. That's quite the feat!