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On Track Retirement Doubts: What's a Spending Goal?

July 17th, 2018 by 
Guest

Today we're honored to host a guest post from the inimitable Nelson Smith from Canadian Dividend Investing on DQYDJ. Enjoy!

Each week, Canada's Globe and Mail (think of it as our country's own New York Times, complete with the paywall and 14 opinion writers who have the most inane thoughts on things) features a couple with doubts about their retirement.

Picture of Canadian coins

Retirement concerns – and humble bragging – are universal.

The people profiled tend to follow a certain pattern, because if editors know anything... it's what generates hate clicks. They're usually in their 50s or 60s, and they're almost always upper-middle class or outright wealthy. Net worth statements are included with every profile, which usually are at least mid-six if not seven figures.

I've taken to making fun of these stories on Twitter when they come out, dubbing them as "local couple swimming in money wants to know if they can possibly survive their golden years" or some other similar snark.

The answer is never in doubt. Of course they can afford to retire. All that's accomplished is an anonymous couple gets to brag about how much they have and some financial planner gets a few quotes and a plug in a national newspaper.

And then last week's profile happened. It is the purest form of comedy since Napoleon Dynamite (at least I think, I've never seen it), and it deserves nothing more than a sound mocking. I'll do my best.

Marvin and Melody have done well, earning professional degrees, paying off the mortgage on their Toronto home, and paying for their sons' university education. They've also managed to save a tidy sum.

We'll soon see the first part of this is a massive understatement. They've "done well" like my body odor is a "slight" problem. Look, I appreciate your concern, but if my wife can't convince me to go to a doctor what chance do you people have?

Lately, the stress of running his own consulting company has Marvin thinking about scaling back or even quitting – especially now that Melody is back working full time. Melody is sympathetic. If Marvin quits, he'll be leaving behind income of nearly $150,000 a year. Melody earns about $95,000 a year in high tech. He is age 54, she is 53.

How will this poor couple manage to make ends meet on a mere $95,000 a year if Marvin quits? Oh the sacrifice!

"I have recently returned to work full time after nine years of working part time, preceded by a decade of staying at home with our children," Melody writes in an e-mail. Marvin is suffering from "extreme stress," she adds.

Marvin is a consultant. Isn't that the laid-back job that certain kinds of professionals take as a retirement project? I don't know. Maybe he's just a bad consultant.

"I feel bad for all the stress Marvin is having." – An Iraqi veteran with PTSD, probably.

"I wonder if we could live in comfort for the rest of our lives if he stops working or greatly reduces his workload," she adds... Their aspirations are high: A retirement spending goal of $100,000 a year after tax, including an expensive vacation each year.

Ah yes, the ol' We'd-Like-To-Have-Our-Cake-And-Eat-It-Too retirement. This is totally reasonable. We can't expect Marvin to have to sacrifice anything if he just throws up his hands and quits. How dare we even suggest that.

In the meantime, they have to finish paying for the boys' tuition and living costs at an out-of-town university. One graduates next year; the other in 2020.

The total projected cost for these three years of university? $110,000.

American readers should keep in mind it costs substantially less to go to college in Canada versus the United States. The average student who lives away from home spends about $20,000 a year.

Which means the couple is spending more than $15,000 more than the average each year to send their freeloading sons to university. Or to put it in percentage terms, 75% extra. Those kids must be drinking a lot of beer.

We asked Stephanie Douglas, a partner and portfolio manager at Avenue Investment Management in Toronto, to look at Melody and Marvin's situation.

My second favorite part of these things is when the financial planner gives obvious advice. My favorite part is when I slam my face against the nearest wall hard enough to make my nose bleed.

If Marvin decides to retire this year, they would deplete their investable assets by 2050, when Melody would be 85 and Marvin 86. At that point they would either have to borrow against their house...

Oh no! Downsizing would be the worst kind of sacrifice!

Which would be worth an estimated $1.7-million with inflation, or sell it to help pay for their living expenses.

What a terrible problem, trying to unlock cash from an asset worth $1.7 million. Orphans with no feet will feel bad for Marvin and Melody. "Take my last dollar, Marvin," they'll say. "You need it more than I ever will."

The couple face some substantial demands on their income, the planner notes. They want to continue to support their children through university at an estimated cost of $110,000 over the next two years. They value their annual family vacations at a cost of $15,000 a year. And they have a $38,400 loan to pay off.

We'll get back to the loan in a minute. It's probably the best part.

Also, and I'm sorry for even suggesting this, but maybe they could cut back on the $15,000 a year in travel?

"How dare you ask them to do without!" – Tribesmen in Sri Lanka

A better option would be for Marvin to work part time, she says. This would help them meet their retirement goal by preserving their capital and allowing them to save more.

No kidding. Thanks, Stephanie.

"More money is better than less money." – Stephanie Douglas, the smartest person in the world.

"For example, they could achieve their spending goal if Marvin works until age 61 at a reduced salary of $70,000 a year and continues to save $3,408 monthly [$2,491 to registered retirement savings plans and $917 to their tax-free savings accounts] until retirement."

Financial planners need to grow up and tell people to spend less. They "could achieve their spending goal?" What the hell is a spending goal? That's the dumbest thing I've ever heard.

I have a better spending goal. Why don't you spend less? There, I'm a genius financial planner now.

Alternatively, they could save more aggressively while Marvin is still working at his current salary, which would allow him to retire earlier, Ms. Douglas says.

More money is better than less money, part 8,000.

Once Melody retires, they will get $6,000 a year from her defined-benefit pension plan.

This is the worst pension of all time, but they keep mentioning it.

Finally, Marvin and Melody should eliminate their $38,400 in debt before Marvin retires. With their current debt payments of $400 a month, it would take nine years to pay off. "They should focus on paying this down as soon as possible."

Paying down debt is a no-brainer, and the couple should aggressively save to do just that.

Except, wait. From the next section, which outlines their assets and liabilities:

  • joint cash $32,660
  • her cash $5,540

You read that right. They can literally cut a damn check and pay off this debt. Tomorrow. How this wasn't first on the list of things to do is beyond me.

Speaking of the couple's assets, what else do they have going on?

  • House $900,000

In San Francisco that gets you a 14x22 foot vacant lot with eight homeless guys squatting on it.

  • his RRSP $540,977

Barely six figures

  • her RRSP $89,564

I lose more money under my couch cushions every week.

  • joint non-registered portfolio $245,000

That's not even enough to bribe a jury.

  • his TFSA $63,894
  • her TFSA $72,171

This will quickly be squandered on glitter and temporary Paw Patrol tattoos.

  • Total: $2.1-million

Only $2.1 million. How will they ever survive?

Next comes their monthly expenses, and there are some doozies. Including:

  • phones, TV and Internet $482

If I spent $500 a month on my phone, TV, and internet, I would smash them all to bits out of frustration.

They pay their kids' cell phone bills, don't they? Nothing drives me crazier. You know they're just using those iPhones to strike out on Tinder, right?

Hey baby, do you want to come back to the apartment my parents pay for? Where are you going?

  • vitamins & supplements $8

Eight bucks a month is nothing, but I still have questions.

  • life insurance $10

Repeat after me: if you're worth $2.1 million, you don't need life insurance.

  • clothing $90

Marvin insists on a new furry costume every quarter. He's a bunny.

Want a free financial facelift? E-mail finfacelift@gmail.com.

My new goal in life is to make up a scenario and get my own fake financial facelift.

Anyhoo, that about wraps it up. Stay tuned for the next edition of the Globe's financial facelift series, titled I Have Even More Money Than The Last Guy, Please Don't Mock Me Nelson. Or something like that.

If you guys need me, I'll be weeping in a corner.

Nelson Smith formerly wrote for Financial Uproar, the worst personal finance blog in the history of the world. You can find him today at Canadian Dividend Investing, which might be slightly better but probably not. He likes nothing better than when you refer to him as a cat parent.

Don't Quit Your Day Job...

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