Monday, March 25, 2019

Padding Retirement Savings

In the nearly two years since I retired, I’ve been asked a few times why I didn’t work longer to build a bigger nest egg so that my wife and I could live a better lifestyle in retirement. After all, I did walk away from a good salary and generous variable pay. The truth is that we’re not very interested in living lavishly, but I decided to take a look at what I passed up.

It’s not hard to see how much more money we could have had in our accounts, but this doesn’t tell us directly what kind of lifestyle we could afford. What matters is how working longer would have translated into extra spending per month during retirement.

Fortunately, I have a spreadsheet that takes all our account balances and computes the amount we can safely spend per month (after taxes), rising with inflation, until we’re 100 years old. This spreadsheet makes a number of fairly conservative assumptions about investment returns and takes into account CPP, OAS, interest, dividends, capital gains, and income taxes.

The question I decided to answer is how much more income did I need to earn during the rest of 2017 (the year I retired) for our safe spending level throughout retirement to rise by $50 per month. The answer was higher than I initially guessed: $47,100. That’s a lot of income to make a modest increase in lifestyle.

Why did it take so much income for only $50 more per month? To start with, living in Ontario, that income would have been taxed at 53.53%. So, $25,200 of it would have been consumed in taxes right away. Then our incomes would have been slightly higher throughout retirement. So, we’d have paid more taxes each year of retirement, and the OAS clawback would have been higher.

In the end, continuing to work just didn’t translate into much increase in retirement spending. That said, let me make a couple of things clear. I’m not asking anyone to feel sorry for us; we’re very happy. And I’m not calling for reductions in income taxes. I’m not sure what tax rates are best for our society, and I’m not inclined to support government policy changes just because they’re good for me.

But you have to expect individuals to make decisions in their own interests. I didn’t retire to protest high taxes. I retired because working more didn’t benefit us enough to be worthwhile. A side effect of retiring is that the government isn’t collecting anywhere close to as much income tax from me. One person doesn’t make much difference, though. Government revenues will only suffer if enough others do the same. I don’t know how many others retired young for similar reasons.

So, to answer those who asked about why I didn’t keep working, it’s because it just didn’t make enough of a difference to our retirement to compensate for the time lost. As time has passed, I’ve become more comfortable with my decision to retire. I have far too many projects on the go to worry about working 9-to-5 for someone else.


  1. I believe I've seen stats showing that something like 50% of americans will have an income in the top 10% at some point in their life.

    If it's consistently high (as it seems to be for you) that's one thing, but when people face declining income later in life it may be especially hard to plan and prepare in the face of higher tax rates.

    1. @Richard: I assume you're talking about dealing with higher tax rates during the high-income part of the working years before a later drop in income. An RRSPs help to spread income out a little, but it doesn't help much if you have a very good year where you get taxed very heavily.

  2. The way I see it, you just traded marginally more income for irreplaceable more time to spend as you wish, unbeholden to anyone else. You can always make more money. You can't make more time if you spend it on someone else's priorities.

    1. @EM: Well said. You've captured how I feel about my retirement.

  3. Hi Michael,
    Any chance you'd share the spreadsheet with us, scrubbed of personal information, of course? I'm trying to figure out if the time is right for me to retire, or at least move to part time work. I've used this financial calculator ( but since I can't modify their assumptions or see the math exactly, I'm hesitant to accept their results.

    1. @Larry C.: I've tried to make a spreadsheet generic enough to be useful to others without much success. However, the following post has a link to a spreadsheet I created that does some of the work.

    2. Thanks Michael. Much appreciated. Enjoy the spring weather in Ottawa.

  4. The following exchange is reproduced to remove broken links.

    ----- BHCh March 25, 2019 at 9:36 AM

    "I don’t know how many others retired young for similar reasons."

    Count me in. I haven't yet but will certainly do so in the next 6 years - before I hit 55. And I have already taken measures which effectively transfer my income into the future. The >50% tax rate was a wake-up call.

    ----- Michael James March 25, 2019 at 9:49 AM

    @BHCh: I'm starting to understand Malcolm Hamilton better when he says “investing outside tax shelters is futile.”

  5. The following exchange is reproduced to remove broken links.

    ----- BHCh March 25, 2019 at 3:00 PM

    That's another issue. I've been looking at UK... Their version of TFSA (ISA) has a £20,000/year limit. That's almost 7 times larger than what we get. And their version of RRSP has a £40,000 limit. Again, much larger than in Canada. And then they have annual capital gains threshold of £11,700 - below that no tax is due.

    I am guessing these stingy investment thresholds lower Canadian-bound investments and productivity.

    ----- Michael James March 25, 2019 at 3:10 PM

    @BHCh: You may be right, but I don't know if there are other differences between Canada and the U.K. that work in the other direction. When people compare Canadian and U.S. taxes, they usually leave out health care, which is a very large expense for typical Americans.

    ----- BHCh March 25, 2019 at 3:38 PM

    Of course it is but "taxes" = $s which the government spends on your behalf. In the US a portion of healthcare is funded from taxes and another portion isn't. We don't get any choice. It's correct to leave the non-tax portion of healthcare out when talking about taxes.

    ----- BHCh March 25, 2019 at 3:42 PM

    Back to the UK - they have a MUCH higher consumption tax than us. Consumption taxes actually incentivize investment and are generally more efficient.

    Their income taxes are far "cleaner"; with few pre-election handouts to target groups of electorate and the top rate of 45%. Used to be even less under Thatcher; she was the one who simplified the system.

    ----- Michael James March 25, 2019 at 4:54 PM

    @BHCh: Whether it's right to leave out health care in a comparison of Canada and the U.S. depends on the discussion. Conclusions that it's easier for Americans to get by than Canadians because of lower taxes are misleading if other important differences, like health care, are left out of the discussion.