Retirement Planning - Part 3: Oh, shit! Things just got real.

 

This Was Not a Part of My Plan!

Just when you think you have everything figured out, the Universe pulls your pants down and you fall down.

At the end of March my company announced a change in structure and a large percentage of us in Canada were going to be laid off. My last day of work was Friday. Most of my coworkers who were also laid off were done on April 10th. 

For the first few weeks after receiving the notice I was in a near-constant state of low-level anxiety. It would've been much, much worse but Kim now makes a decent salary and we paid off our mortgage last March. Still... anxious.

I cancelled Netflix. I cancelled our TV cable. Those were costing me about $80 a month. Nobody really watches TV in the house and we have other streaming options. Saving that $80 reduced some of my stress.

Less Anxiety For Me, Some For Her.

Between the day I was informed I'd lose my job and today, my love of spreadsheets has reduced the anxiety a bit more as I looked at my financial situation. The question I had was, how soon would I need to get a job? I will be receiving a severance package, but the sooner I get employed, the more of that money could be put into savings or investments.

Every time I'd come up with a plan, Kim would reiterate that I should find a job. But the more I looked at the numbers, the more it looked like I could actually retire. That set off some warning bells with my Beloved. I kept looking at ways to make it work.

In this day and age, in the industry I've worked in for the past almost-thirty years, there's not much call for somebody with my set of skills. (I've tried to learn JAVA, so I could create test automation, but my brain just doesn't code.) If I had more technical abilities, I wouldn't be nearly as concerned. As it is, there aren't a lot of jobs out there for me.

Kim really wants me to find a job. Each plan I came up with was "we could get by for a few years," but that doesn't allow for emergencies. We can't just "get by". What if our strata had a special assessment and we had to come up with $20,000? What if one of us got really sick? What if our Kia rolled over and died? The Universe... She's a fickle being.

Each of my plans had me being retired, but only just paying the bills and not saving. At least not for several years.

Cracking the Code!

Today I figured it all out! Despite not having much in the way of an RRSP -- relative to how much I was planning on having at retirement -- and my TFSA not being quite where I need to to be, I figured out how I'll never have to work again!

It all comes down to my RRSP. More specifically, where it is. My RRSP is being managed by a company that apparently charges a relatively high management fee (2%) and they also charge for withdrawals ($50). 

As an aside, my parents are retired and they withdraw the minimum amount from their RRIF as mandated by law. I asked my mother when/how they do this, and she informed me that they do a lump-sum once a year.

This is interesting because when I found out my RRSP company would charge $50 per withdrawal, I immediately thought the fewer the transactions the better. Gotta be frugal here, right? But then I thought, if I do one big transaction at the beginning of the year, then I'm also removing a large chunk of investment opportunity.

Two things came to mind. First, find out how much Questrade charges. Second, figure out how much of a difference the withdrawal frequency impacts the growth of the account.

Questrade has two options for RRSP accounts. They offer a self-directed account, which is like my TFSA; the investments are handled by me. They also offer to manage an account for a 0.20% - 0.25% fee. When the difference between a good year and a bad year in RRSP growth can be 2%, then keeping that money is huge. I'd go self-directed, of course.

Then I started in with the spreadsheets. And that's when it all clicked.

Oh, For the Love of Spreadsheets!

I'll be turning 55 in June. I have to be able to get to 70 without drawing on my CPP and OAS. My RRSP cannot get me through 15 years. If I stick to my RRSP Meltdown Strategy, how far can I get until my TFSA can be utilized as tax free income? Apparently, I need five years. I just need to get to my 60th birthday. 

From this birthday until that birthday, my RRSP has to not only be of a certain size, but it also has to grow as I withdraw from it over time. (My parents' RRSPs have grown at the same rate as they have withdrawn from it; it's the same amount today as when they retired.) I won't be withdrawing the minimum, though. 

How can I do this if my RRSP isn't currently big enough? Through trial and error and some light bulb moments, the data I was seeing in my spreadsheet made things clear.

I need to use the same DRIP strategy in a self-directed RRSP account as what I have been doing in my TFSA. 

Okay, I just said I only need five years from my RRSP account to get me to 60, but that's not true. From my 55th to 56th birthday, I need to use the DRIP strategy to grow my RRSP to a particular size. I figured that even in a Bear market, I can get it to where I need it to be. (Bull market? It'll be even better.)

From that "final" number I want, I then started plugging data into my spreadsheet to see what impact the withdrawal frequency would have on things. The news just kept getting better. As Questrade doesn't have withdrawal fees, I could easily compare withdrawal strategies. From one, big annual withdrawal all the way through to making withdrawals twice a month (which is the pay cycle I'm used to). 

What I found was, if I took out less money more often, the money still in the account had a better chance of growing more. So much better, in fact, that I was able to up my "annual salary" because otherwise I was blowing past the target of my 60th birthday with funds still in the RRSP due to growth. (The goal is to drain it to zero.)

Where is the Anxiety Now?

What absolutely shocked me was I was able to show that an annual withdrawal that would be less than 80% of what my work salary was, equated to the same amount of money in my bank account every "pay day". There are lots of deductions from a work paycheque as well as the income taxes from being in a particular tax bracket. Without all of those deductions, and being in a lower tax bracket, I can take less from my RRSP, but still get the same number, almost exactly, as my recent paycheques were.

Since the number are almost identical, I can save for vacations just like I was. I can save for a car, like I was. I can pay the bills. Better still, since my TFSA is maxed, I wouldn't be contributing to it like I was, which means, I actually have more disposable income. (Yes, they up the contributions limit each year, but that increase is about half what I was depositing into it.) I can actually put more towards savings than before. For emergencies.

How does Kim feel about this? She'd still be more comfortable if I had a job. But now it's because of the other issue with me not working; sitting around and doing nothing all day. I told her that I'd have to have a schedule. Do the dishes. Laundry. Clean. Shop. Cook. Walk dog. House husband. I'll make it work.

But we'll still keep Netflix and our TV cable cancelled.