Let’s Pretend
Posted by Gail | Filed under Retirement Planning, Take Control
Remember when you were a kid and you could dive deep into your imagination to become a princess, a knight, Batman or Catwoman or some other character that you so desperately wanted to be? Our ability to suspend our disbelief evaporates over time so that we are rooted in our reality. Well some of us. Some of us are still rooted in the delusion that everything will be okay, no matter how deeply in debt we are. Hmm.
One of the best ways to prepare for a significant change in your life – assuming you can see it coming – is to play Let’s Pretend. But instead of it all being in your head, you make it as real as you can so you can actually feel the experience you’re headed to.
You’ve seen me do this with couples on TDDUP. If they’re planning to have a baby, I make ‘em live on their mat leave income so they can see what it will feel like living on less. By practicing living in their new circumstances, people can develop a feel for what it will be like and be ready to make the adjustments necessary. I’ve done it with couples who have no retirement savings too. And I’ve recommended it in my blog for people who are thinking of buying their first home.
By simulating life in the new situation, not only will you see how you will feel, you’ll experience what you’ll have to do to make it work. Let’s take the example of people getting ready for retirement to show you how this is done.
First you’d have to figure out how much you’ll have as a monthly income during retirement. Once you come up with a figure, you’d actually have to live on that money, cutting back where necessary to make the money come out even. Impossible? Well, now you at least know how much extra you’ll need, which will lead to how much you must save to have the income you’ll need in retirement.
Living the retirement experience is important because people operate with a set of myths that may have no bearing on their reality. People often think their costs will immediately go down in retirement. Research shows that’s not true, at least for the first few years. Since people have a load of pent-up “I wanna’s”, they often spend time and money doing those things, throwing their spending plans out of whack. Whether it’s travel, home improvements, or a slew of new hobbies, the early days of retirement often prove to cost more than we anticipate.
By living the experience, you’ll also come up with some new info you may have overlooked. Most people never even think about income tax since it’s automatically deducted from their paycheques. But when you retire, you’re responsible for making sure your taxes get to the Tax Man on time. Will it be better for your cash flow to do it monthly or quarterly? How much will you have to remit? And what exactly do you have to pay tax on when you’re retired?
Ditto your insurance needs. With no mortgage (you did plan to retire without a mortgage, right?) and no dependent children, you may not need as much life insurance. But you may need long-term care insurance or to replace your health care benefits that used to be covered at work.
Playing Let’s Pretend will also give you an opportunity to think about what you want from your retirement. You get to visualize what retirement life will be like for you. Do you plan to travel? Will you spend time Volunteering? Will you work part time? And is it important to get to retirement by a specific date, or are you will to delay retirement so you can save more – and live more comfortably – later on?
Let’s Pretend helps you avoid the miscalculations and misrepresentions most people make when they make retirement plans, plans to have a family, or plans for home ownership. Living out the “what-if’s” is a concrete way of gaining a clear sense of what life will be like so you can make good decisions about how you’ll do it when the time comes to execute your plan.
January 29, 2010 at 8:23 am
I’ve given the retirement issue of how much I will have to live on a very good think for many years. I haven’t retired for a few good reasons: my mortgage is still very large; I have no idea what I want to do with my time other than fix up the house and work in the garden; and I’m a little afraid that the gap between my present pay and what I would get is going to force me to take out CPP early and to work a little after I retire (not that working isn’t good for your heath). I’d like to know that I don’t have to work in retirement.
I have looked into long term care and I would have to give up one insurance policy to cover those payments but because of changing some meds recently, the insurance company wants to wait until I’m stabilized before proceeding with this policy.
I’ve looked into an income plus plan for my RRSPs with Manulife and Sun Life and this plan will help – five years into retirement with a supplemental $4000. a year but that is not quite enough for me. I’ve started my second TFSA and I have some contingency money but not much.
So, my plan is to work another year and a half and hope that things have resolved themselves (my mother going into long term care in particular, my budgeting getting better and my husband not spending money he doesn’t have). All things considered, I have a budget which is paying down the mortgage more aggressively, and I’m managing. I need to put more money aside and that is the only thing which I have to address.
By the way, I had a Rogers marketer call me yesterday and I went ballistic. He wants me to have a digital package to lower my overall bill but failed to say until I pressed for it, that what is happening down the road, is that Canada will be cutting out the analog signal to TVs and all signals will be digital. As a reult, I will not buy into their digital service unless I can’t afford a new TV with digital reception or a conversion box (so I’m not beholding to Rogers for eons of time). I dislike having my bills change so often without notice. Have others been approached? In the States, there were deals to get everyone getting a conversion box for free or at very little cost in Erie, PA (Channel 8, PBS). Let’s hope that we will be given the same priviledge.
Thanks for listening!
January 29, 2010 at 8:34 am
I agree with using the let’s pretend to plan out retirement and to test the waters but this can also be used as a financial fire drill to test the waters if a bad set of things could happen, like a job loss. trying out a job loss will let you see where you need to cut and how long you can go without that income.
regards,
Jason
January 29, 2010 at 9:47 am
Right now, my DH is laid off of work and is in retraining until early next year.
We have become all too aware of what we can live off of. As long as we do not have a car payment, my salary can cover our needs if we need that to happen.
Dh’s loss of income was a BIG change. Thankfully he gets a good EI benefit for now. We are being realistic about this next year and the possibility that he may not have a job right away, after he finishes his schooling. We have consolidated to free up more cash flow and I think that was the best decision we could have made. It will allow us to avoid going into debt any further and to save a bit more for emergencies. Once DH is back to work and we know what our income will be, we can then re-adjust the mortgage and add more to savings to help pay down the mortgage faster. In the next year our son will go to school which will reduce childcare expenses, and DH will be back to work.
Keeping up with Gail’s blog has been very helpful to keep me on track and to deal with these life changes.
January 29, 2010 at 9:54 am
Just wanted to send compliments to Gail and her web design team…the photographs that now appear on the site are absolutely lovely, especially yesterday’s kitten and the today’s fairy princess.
January 29, 2010 at 10:08 am
@ Jason- I like your idea of playing pretend to test out any financial scenario. This is a great way to get us to actually sit down and do the math we need to do. I find it gives me peace of mind when I can actually see the numbers spelled out. Otherwise, there are too many “what ifs” floating around in my head and I can easily lose focus.
In this economic climate, I think it’s important for each of us to run a few scenarios, no matter how unlikely we think they might be. That way, if something happens, we’ll look a little less like deer in the headlights.
January 29, 2010 at 11:10 am
About a year ago my husband and I decided to try to live off of his income and use my income for RSP’s, RESP’s and to pay off our line of credit (which we did last summer) and since then to put aside money into TFSA’s for ‘planned spending’. Unexpectedly I received notice that I will be laid off in 2 months. Now I am so relieved that we paid off our LOC and now can dip into our TFSA’s if necessary rather than accumulate debt. But the nicest part is that we shouldn’t need to dip into the TFSA because we are getting by living off of my husband’s income anyway. And I feel that I have some control over looking for a job that I’ll enjoy and works around our family needs rather than feeling pressured to find the first job available. The ‘pretending’ to get by on one income has served us well and now we have peace of mind that my job loss will not cause us to go into debt. And the bonus is that we’ve saved $6000 in our TFSA’s for unexpected needs/emergencies.
Thanks Gail for all your great advice.
January 29, 2010 at 11:16 am
Thanks to Gail, we ran our “let’s pretend” scenario a few years back. We could not believe that we had not realized the importance of having an emergency fund. WHAT HAD WE BEEN THINKING??? Yes, we had maximized our RRSP’s and had even taken a small leverage loan with which to purchase investments (tax efficient) but would have been in dire straights had an emergency arisen.
We are now ten years from retirement and are in the process of running scenarious again. Great approach, Gail, and so relevant.
January 29, 2010 at 11:42 am
Again perfect timing with this blog.
My husband was just complaining that my second job (thought saved my financial stress level) is just not worth the aggravation of having to work around my 2nd job when there are a lot of things going on in one day.
I am going to take all the money from what I make for the next month and put it away and see how we do. I think it will be awake up call to him that we still need this 2nd job atleast for a little while longer.
Are financial situation is better but we are not in the clear yet. 2 more credit cards to go and a HUGE Line of Credit.
Thanks for a new way to discuss this issue without getting into an arguement.
January 29, 2010 at 11:59 am
Anne:
I can’t find the kitten photos and “Internet Explorer cannot display Til Debt Do Us Part Slice”
January 29, 2010 at 12:18 pm
We didn’t do the “let’s pretend”, we did “let’s make sure” at my insistance. When came time to buy a house, hubby got excited because we could get a really nice one with both our incomes. I said no, it has to be a house we can afford on one income. He agreed and soon after there was surprise baby #1 (and the Dr said I couldn’t work during the pregnancy) and layoffs at his company. While he was not laid off, he got less work but more sleep because we can still afford the house without breaking a sweat while we regroup.
As for pretending for retirement, I’m afraid I will have to use standard excuse #3; it’s so far away and I have other things to worry about for now. This doesn’t mean I’m not saving for retirement, I put as much away as possible actually. I’ve just never run the numbers.
January 29, 2010 at 12:26 pm
At the current time my bf and I are on separate $$ agenda’s him pay off his cc debt and me pay off as much as my car loan as I can as well as some other things im saving up for. Next january we plan to up our rent as we only pay 650 right now for our house and make extra payments to start saving for a down payment on a house. He is currently learning how to make a budget work and cut out extras that he thinks he needs now so I’m giving us a little room before we start especially bc his work schedual has been on and off and sometimes working full time Im hoping that as he will be a journeyman next january after schooling this september work will be on better grounds. But playing pretend is definatly on my agenda!! thanks everyone for a great friday post and comments!
January 29, 2010 at 1:01 pm
dlm: The photo Anne was referring to was yesterday’s picture that was used for the ‘Pets are People Too’ blog. Unfortunately, the photo doesn’t stay when the blog is moved into the archive section when a new blog is put up by Gail.
January 29, 2010 at 1:50 pm
What a timely post!! This past week, I’ve been sitting around with a calculator, pencil, and a tonne of research, trying to figure out how we would afford to buy a place, have a baby, while one of us attends grad school. And although the numbers can be worked out, I wasn’t sure how to test how realistic this budget would be. Could we actually do it?? Pretending like we are living on that budget now sounds like the perfect solution!!!
January 29, 2010 at 1:52 pm
I certainly get (and appreciate) the idea of “let’s pretend”, and I really wish we had tried that when I was still working fulltime back 10 years ago when I was expecting our first baby. Ditto on when we were still renting and planning to buy a house. Had we done that, we might have learned to live on a real budget a decade ago…
As for “pretending” to live off of a projected retirement income, I’m not sure how to manage that when we are still paying a big mortgage, and raising a young family, toting ourselves to and from work spending hundreds of dollars in gas money and public transit, etc… I expect that we could easily manage on half our current income if we poofed into retirement today and had no mortgage, no dependents, no work expenses… but it’s really hard to say for sure. That’s the scary part about planning for retirement… you never really know what you’ll need to live a comfortable retirement until you are so close to retirement that there isn’t a whole lot of time left to actually prepare more fully… All we can do today is live wisely and frugally and not waste money on senseless purchases, while socking away at least 10% for the golden years.
January 29, 2010 at 3:02 pm
Ahhh, the shoulda, coulda, woulda’s take over when learn all the things now we wish we did earlier. I’m with you Mrs. T, I wish we were smarter, planned more, looked to the future. But we still stayed above water, everyone’s fed and clothed, and now that daycare is non-existent as a budget robber and we both make double the salaries we had 15 years ago, we can finally, FINALLY focus on the debt repayments, the emergency fund payments, the future plan payments, etc.
Do I wish we learned to live on one salary, didn’t have a case of “But I want it nows”, and all the things I know now? Sometimes, but I also am happy with where we are, what we’ve learned, and where we’re headed…no more shoulda, coulda, woulda regrets.
Debt’s getting paid and lives are still getting lived…balance is being achieved one pay cheque at a time, and that’s the best most of us can do. I don’t want to learn to cut my own hair, grow all my own food, make my own cleaning supplies, make my own clothes, and learn how to repair a clunker while learning to live on one salary…but I also don’t need LV bags (or is it shoes??), Hermes something-or-others, and all the other money pitfalls in life that take both our salaries and then some any more either. It’s a learning process, and I think most of Gail’s followers are learning as we go, stumbling sometimes (okay, oftentimes some months), but getting back up again and on the path to debt-free forever. We’re getting there one pay cheque at a time, the same way we ended up in the holes we dug in our past lives.
January 29, 2010 at 4:16 pm
Sage advice.
Of course the let’s pretend scenario is only going to work for the things you want in the short term (10 years or less), if a baby or a house or a new career or retirement are in the forecast, those are the best times to do this excercise.
We did that before we bought a house… figured out what the difference between home ownership and our rental costs and lived that wat for a while. The savings helped make our transition easier (closing fees are expensive!) and it was educational — we had to give up on cable TV, phone frills and other “luxuries” for the first few YEARS of home ownership to make that dream happen.
While expecting the first baby we tried socking the amount of my wage (over what my expected mat leave) away to get used to living on the reduced pay. Then I got laid off early…. and then hubby got his hours cut way back too. Talk about rotten timing! But we had the best of intentions and the strategy was sound.
Thankfully having no consumer debt before these setbacks happened prevented it from being a genuine tragedy.
January 30, 2010 at 9:46 pm
@ Michelle I totally agree with your post.
We are anticipating the end of daycare costs so that we are able to put so much more a month on debt repayment however as a family who has had to work extremely hard for everything we have I do not totally regret the debt we have right now. We have learned a lot and reached a number of milestones on our own.
The biggest thing we did right (of just a few to choose from) was to base our mortgage/house purchase on our terms and not bank’s terms. Just because commissions were huge a few years ago didn’t mean we could expect them forever. So glad we made choices to fit our comfort zone. Making a few adjustments to the extras on the housing list and staying true to the important things like Single family house with a yard vs. new/updated/dream location made all the difference and we love our little neighborhood (we never would have considered it – in a perfect world).
Practice is a great idea and I think we’ll be doing everything possible to grow a retirement nest as soon as daycare is done next year. Not having done so for mat leave did leave a deficit that turned into additional debt.
January 31, 2010 at 9:40 am
As I wait for the axe to fall at work, I regularly test the what if of losing my income. We have a spending plan for 2010 mapped out through to year end, so I’ve just deleted my salary amounts from here to December to see how long we have before there’s a problem. Even without EI we don’t run into trouble until late August. That’s the upside of having cut our expenses down to a level where we live on essentially one income and use the rest for savings and travel. Worst case scenario we temporarily suspend the savings contributions and of course we don’t travel. Living on way less than you make takes the stress out of a job loss for sure. It lets me find another job I want and not take something else out of desperation.
For retirement planning, I’ve run various numbers to try to figure out what we’d need in today’s dollars. I’ve given up trying to use those online calculators as they are usually based on a single person and require you to make all kinds of guesses about inflation, investment returns, life expectancy etc, none of which can be accurately predicted. I also don’t subscribe to the estimate of needing 70 or 80% of your current income. We currently live off 55% and the rest is for savings and occasional travel. Even with a mortgage, two cars, kids at home etc I don’t need 70-80% now.
Instead I made a list of the basic expenses we would have (just the bare essentials, no travel or fun stuff included in this number). Then I calculated the amount we’d receive in CPP, pension etc and deducted the tax to see what we can count on for income. Now I have a number showing how much annual expense won’t be covered by the known income and that’s what needs to be covered by our savings.
I found a simple calculation to use to figure out an amount required to fund $x assuming a 4% return on investment. (It’s being recommended on several sites, but check this with your own financial advisor.) If you’re investments need to generate $10k (pretax) of income annually, the two calculations you need to test are:
10,000×25=$250,000 (at 4% withdrawal rate, principal will last for 30yrs)
10,000×35=$350,000 (at 4% withdrawal rate, principal will last indefinitely)
If the difference between your anticipated costs and anticipated CPP/pension is more than 10k, just increase to whatever you’ll need – or test lots of what ifs. The other tidbit you get from this calculation is that for every $1k of annual expenses you plan to have, you’ll need $25-35k of savings to generate that income. $1k annually is only $83/month. Kind of makes you rethink your expenses. Is it worth saving all that extra money or just better to cut out something?
For my own “what ifs” I’ve calculated a barebones number to cover our most basic living expenses and worked out what we need to save to cover that. That’s the absulute minimum we need to do so we have food, clothes, shelter etc assuming no mortgage, one car and no teenaged eating machine in the house. Then I play with a number that represents breathing room, the nice to haves, travel etc. and see how much more we need to save to cover that additional annual amount. Now we’re getting closer to how we’d like to retire.
At this point we’ve saved enough to cover the bare minimum number. We plan to retire in 10years so everything we save from here onward is going to cover the nice to haves that make retirement enjoyable. Since we also plan to retire several years before we can collect on CPP/pension we need to save that extra as well so we don’t start dipping into our savings too early.
We’re also planning that for the final 1-2yrs we’re working, instead of adding to savings we’re going to do one last round of major repairs and replacements so we won’t have any big ticket items to cover for many years if at all. This includes, new windows & roof, major appliances, car etc.
Try running your own numbers. According to several online calculators and testing a wide range of assumptions/guesses, I’m told I need at least $1.5million saved. Doing the calculations this way I figure I need a small fraction of that. Even if I double my savings from what I calculate is necessary, it’s still way less depressing than what any online calculator has predicted.
January 31, 2010 at 2:52 pm
Hind sight is a wonderful thing. Wish you were accessible to me 30 years ago Gail.
‘Let’s Pretend’? How about ‘Quit Pretending, You’re Here Already’?
Had an informative meeting with our financial adviser last week. Meeting with our insurance agent Wednesday. After much figuring, discussion, back and forth, we have decided we don’t want to be insurance poor. We want enough insurance to take care of our demise only. More importantly, we are interested in Long Term Care. Do you know how many boomers there are? How many of us that arrived when Canadian men came back from WWII? So, when we are old and creaky, I worry about what will be available to us. So, Long Term Care is a big priority.
February 1, 2010 at 8:27 pm
very good post!
We were thinking of maybe moving and I did the numbers in a realistic way and I didn’t have to play pretend because I didn’t like the numbers so we decided to abort the idea of moving for now.
I have to say I thought the tittle of this post was to make us play pretend and remember as kids what we used to enjoy and really like to stay focus in our adult’s spending.