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Cash Flow Forecasting: How Much Do You Need?

So how much do you need to retire anyway?  Have you done a calculation to figure out exactly where you stand?  Today’s article will give you some things to think about for yourself, and ideally provide a catalyst to figuring out your ‘number’.

First of all, it doesn’t have to be that complicated.  Let’s start with a couple of statistics: 

According to a Bank of Montreal study done in 2015, the average Canadian retired household spends $2400 per month[1].  This figure includes housing costs, living expenses, food, travel, entertainment, and medical expenses.  Of note, the average retired Albertan spends $2,648 per month.

Now let’s consider how much Canada Pension Plan (CPP) and Old Age Security (OAS) you’ll receive at age 65.

In 2019, the maximum CPP for a 65 year old is $1154.58 per month and the average amount for new recipients (as of January 2019) was $723.89.[2] 

The current Old Age Security pension is $601.45[3].  Note: If you’re income is higher than $77,580, then the amount you receive in OAS begins to be clawed back by 15 cents on every dollar you receive above that amount until your income reaches $125,696 when all of it will be clawed back by the government.

Now that we’ve reviewed some statistics, let’s consider three different couples.

The Messiers are 50 years old, spending the Albertan average of $2,648 per month, plan to retire at age 65 and will apply for CPP and OAS at that time.  They will receive the average amount of CPP for new beneficiaries of $723.89.  They have no savings at this time because what savings they had went towards the education of their fully grown children.

The Kurris are also 50 years old and plan to retire at 65 years old.  They have $500,000 in savings, and monthly spending requirements of $5,000 per month.  They plan to apply for CPP and OAS when they retire, but they expect to receive the maximum CPP amount of $1154.58 per month.

The McDavids are 30 years old, and just like our first two couples, plan to retire at 65.  They have $100,000 in savings and monthly spending requirements of $5,000 per month.   They plan to apply for CPP and OAS when they retire, and they too expect to receive the maximum CPP amount of $1154.58 per month.

Now look at the following table.


The Messiers

The Kurris

The McDavids

Age today

50

50

30

Age you’d like to retire

65

65

65

Approximate age at death

85

85

85

How much in savings

$0

$500,000

$100,000

Monthly spending requirements

$2,648

$5,000

$5,000


How much will you need in savings when you retire?

$177,272

$692,116

$1,059,313

How much will you need to save per month to get to retirement?

$931

$686

$1,925


Note:   All three couples are invested in a balanced portfolio which produces a real rate of return after adjusting for inflation (2.1%) and taxes (22%) of 0.77%.[4]

By looking at all three couples, their current savings plus their government pension plans will be inadequate to cover their monthly cash flow needs in retirement.

The Messiers are going to need a total of $177,272 in savings and investments when they reach retirement to finance their desired lifestyle.  To reach that goal, they will need to save $931 per month, every month, over the next fifteen years.

The Kurris will require $692,116 to fund their retirement nest egg.  Fortunately they have already saved $500,000 so are well on their way.  To accumulate the difference of $192,116, they will need to save an additional $686 per month over their remaining working years.  

Finally, the McDavids will require $1,059,313 when they retire to achieve their lifestyle goal of $5,000 per month.  So far they only have $100,000 in savings so have quite a ways to go, which is why it will require them to save an additional $1,925 per month over the next 35 years.  Is this bad news?  Absolutely not!  By gaining an understanding of how much they’ll need to save, the McDavids have plenty of time to make adjustments to their monthly savings strategy, their spending habits, or both.

You may be asking why the McDavids require so much more in savings when they have the exact same spending requirements as the Kurris.  The answer has to do with cost of living (i.e. inflation).  Every year, what you buy gets more expensive.  So if the Kurris and the McDavids spend the same $5,000 a month today, they will spend more next year, and the year after that, and the year after that, and so on.  The McDavids aren’t retiring for another 35 years, whereas the Kurris retire in 15.  Those extra 20 years will have a big impact on the McDavids cost of living and as a result, the amount of money they’ll need to store away as a nest egg.

The main goal of this analysis has been to demonstrate the importance of getting a handle on what you have, what you spend, and what you will need in the future.   It was also to demonstrate that everyone is different and there’s no ‘one size fits all’ approach when it comes understanding your current and future cash flow needs.

You have the ability to control how much you save and spend, and the sooner you get a handle on it, the sooner you can make adjustments to either achieve your goals or get comfortable with more realistic ones.

Should you have any questions about this article, or if you’d like to do an analysis on yourself to see where you stand, we urge you to call us at (780) 426-2400, or e-mail us at administration@lgkwealth.ca

Call 1-780-426-2400