Almost every post everywhere that talks about retirement starts with finances. Some assume that is all retirement is about. And, admittedly, it is after all one of the defining characteristics of retirement. You are moving from wages as a source of income to pensions as a source of income. If, indeed, you mean true retirement, of course.

I was surprised by the number of people online who said, “I retired at age 45,” but neglected to mention that they did so to run their own private business or double down on a side hustle. What they really meant was that they retired from working for someone else. That’s not what I’m talking about. I’m talking about traditional retirement. Quitting working, period. Moving to the life of the officially unemployed but pensioned.

Regarding my knowledge about finances and investments, I’m about the middle of the pack. I understand more than the basics; I can do the math out the wazoo, I understand the theory behind most of the various types of financial investment instruments. Okay, well, maybe not derivatives or cryptocurrency or NFTs. But I’m okay with the standard stuff. I am not a wizard, though, nor do I have any great insights that will make me millions. My financial picture is pretty cautious, vanilla white and bland.

Going into retirement, I have aspects of all three main sources of retirement financing and potentially some from the fourth.

1. Personal assets, savings, RRSPs, etc.
2. Employer pension
3. Government pension
4. Passive income

Category 1: Personal assets

We have a primary house that has increased in value by about 80% since we bought it. That occasionally sounds great, except as with all things real estate-related, it’s primarily great on paper. Andrea would like to sell the house and move somewhere closer to the water while staying in Ottawa. If we sell, we still have to buy a replacement place, and the financial risk of finding somewhere closer to water while maintaining access to transit does not generally bend in our favour. That either means drastic downsizing, drastic reduction in quality, or increasing our mortgage. We haven’t paid our current one off yet, it’s sitting at around 50% of the original house value. Call it a third of the overall current value. We’re in good shape, with a good plan, but we won’t be debt-free at my retirement, nor likely at Andrea’s either (several years after mine).

That time differential creates some challenges of its own. I’ll be retired for about 4-5 years before Andrea is able to retire for an unreduced pension. Ideally, it would be great to sink some cash into the mortgage and pay off more of the principal faster, but I’m only 3 years out. It’s not a great time to dramatically change our overall financial picture, at least not without major lifestyle changes. It’s partly on the table, but as you’ll see below, that’s only part of the equation.

I also have RRSPs, although potentially less if I transfer some of it to my employer pension, and we have some decent emergency cash reserves, but we need to finance some potential renos, definitely J’s education, etc. in there as well. We’re not rolling in cash, but we’re doing better than average. We recently moved our funds to a financial planner that we are quite happy with, and I confess, I wish I had done that 15+ years ago. Sigh.

Category 2: Employer pension

I’m with the federal government and the employer pension is generally available in “three” versions, depending on how many years of service you have when you retire (and your age, where applicable). For me, I’m already over 55, so the age component is met. For the purposes of planning, this means I can retire either early, with between 30-35 years of service or with over 35 years.

Officially, on the government clock, I show 28 years of service. Which means a flashback to the fall of 1996. But that number is a bit soft.

First and foremost, there was a six-month probationary period before that, i.e., taking me back to the spring of ’96 when I officially became a government employee, and not a contractor. Second, there was an eight-month co-op period back in ’93.

This means that I can buy back up to 14 months of service. Or, in other words, I could potentially have 29y, 2m of service currently instead of 28 years. If my finances earlier in life had worked out, I could have bought that all back long ago. You buy it back not at the wage you earned it but at the wage you earn now. I don’t know the exact amount, but pre-pandemic, it would have cost me $20K. It’s probably closer to $25K right now, at least that’s my guess (hey, good guess, just confirmed today!). I’ve asked the Government Employee Pension Centre to run the numbers for me. And then I’ll have to make a choice of whether it is better to buy it back or not.

If I do, theoretically, I could retire in August of next year (2025)! But I won’t. I’m planning on going through to 2027. Which puts me likely around 32+ years of service when I’m done (also confirmed!).

If I went before 30y, there’s a reduction/penalty of twice the earning rate or 2 x 2% a year (about 8% less if I went today, i.e., 52%). If I go at 30y, I would get 60% of my income, no penalty. At 35y, it becomes 70% of my income, or rather, as a percent of the average of my best five years. If I go at 32y and change, it’ll give me 64% of my income. Andrea will likely go at 30y-ish, so another 60% of hers too, eventually, after 5 more years of working at her regular salary.

Of course, compared to most employer pensions, it’s a gold-plated option. Guaranteed for life and indexed for inflation. There are some pensions that are more lucrative or generous with bigger ROI, or based on larger private-sector salaries, but the indexing takes a lot of sting out of comparisons.

And we can still figure out some pretty good health benefit coverage for my retirement years.

Yet, even knowing all this, there’s an extra factor in there. The federal government has mushroomed in size, particularly during the pandemic. If there is a change in government in the coming year, there’s a good chance there will be reductions in the number of employees in the federal public service. Cuts. And when the government does cuts, it offers buy-out packages to entice people to leave willingly. I won’t put in my official notice papers until I see what may happen with the potential downsizing. It won’t be super lucrative, it won’t change my pension much, but it might give me an extra few thousand upfront or pay for some transition stuff.

Category 3: Government pension

The Canada Pension Plan (CPP) and Old Age Security (OAS) will require some juggling as to when I take it, with some tax implications tied to bridging as well as RRSP withdrawals, Andrea’s continued employment, etc.

But it’s there, it’s part of the calculation.

Category 4: Passive incomes (or small-scale side hustles)

I said above that I’m negating continuing to work. That’s not what retirement looks like to me. I have a good example to illustrate this, at least for the theory of what I’m “avoiding”. My brother and I had huge differences in life and careers, but we have similar outlooks on some things. And when he retired, he set up a company to do small contracts here and there to both keep busy and to do interesting things. It can be quite fulfilling, for example, by keeping fees down to a reasonable level and picking and choosing what you are willing to do. You don’t NEED to work, so you can afford to take only those jobs that appeal to you. Some people go overseas, some people go up North, some people work 2 days a week, some people only work on Tuesdays, etc. A little extra cash. A side hustle of sorts, except you’ve already built the business, you’re just keeping a hand in.

If I wanted to do contracting, a similar model would work for me. I have had a decent career, and I’m good at writing (policy), planning (frameworks), and hunting down gremlins (projects, initiatives, etc.). I could likely nudge some people in my network and get some occasional work throughout the year. If I wanted to, I could even stand a good chance of working as much as I might want to, including some work for Treasury Board. A few years ago, my brother asked me if I was interested in joining him, as he has great experience in finance and HR. Between us, we’d make a really good management consultancy team. Interesting work, potentially quite attractive as a side hustle.

Except there’s a rub.

I don’t have much interest in working according to other people’s vision any longer. I have many things I want to do, projects that in some ways look a lot like what I’ve done elsewhere in my career. Except when I did them, I couldn’t do them MY way. Frank Sinatra, I was not. I was beholden to the powers that be, and as a result, I’ve had quite a few experiences over the years where I felt the task was unfinished. I don’t need to go into it here, as I’ll cover it later, but I feel like I have several potential sources of income tied to doing those projects on my own terms, albeit likely small.

First and foremost, I intend to write up a storm. I’ll curate, write, and publish several non-fiction texts. Will I get rich from them? Not on your life. They’ll take me so much time to research and write that if I make any money back, it will likely be almost like slave wages.

Second, yes, I can do consulting contracts with the government. I don’t have a burning desire to do contracts, but on the other hand, sometimes mama needs a new pair of shoes. I admit that I sort of like the idea of using contracts to “buy something”. Like, for example, if I took a short contract to help plan a conference and out of it all, I earned enough to buy myself a new kayak. That would seem a nice trade — x number of hours for a new kayak. Free money, almost, as it wouldn’t affect my other sources of income, except in terms of taxes perhaps.

Third, I am completely on the fence about some HR coaching that I might consider. I really don’t like the idea of charging for it, I confess. But there are some small germs of ideas where I might not feel quite so mercenary if I did them a certain way.

Lastly, I’m thinking about some other types of income, mainly from fiction writing and perhaps even a little from some other hobbies. I’m definitely going to write fiction, and maybe it will generate some passive income; maybe it won’t. I won’t know until I try.

I’m not generally an entrepreneurial type, so I don’t really know yet what those income streams might look like. For now, I’m counting them as zero. I’m certainly not expecting or relying on them for planning purposes.

Junk math for planning for retirement

I have to confess that I was surprised when I started doing the secondary and tertiary calculations past the basic aspects of retirement. I just assumed most of it would be easy to do, everything would be entered into a good spreadsheet, or a dozen good spreadsheets, and BAM! there it would be on paper. After all, most financial planners suggest that very thing. And like most consultants, if you hire them to tell you the time, they start by borrowing your watch. In this case, if you give them all the details on your expenses and your life expectancy, they’ll generate a financial plan for you. Except if I had all that info already, I’d be able to do the plan myself. I wouldn’t need them. I went looking for guidance, and I have to admit, I was underwhelmed. To me, anything beyond the basics seemed like junk math.

I tend to think of expenses in three categories.

• Ongoing expenses regardless of income (housing, utilities, transport, food, taxes)
• Semi-discretionary lifestyle choices (regular expenses like eating out, movies, etc.)
• Luxury lifestyle choices (choice-based expenses like trips)

For some, they might put eating out and movies as luxuries on their more austere budget, or count trips in their semi-discretionary. It doesn’t really matter, there’s no perfect answer, and the three categories and their relative sizes will vary for everyone. Maybe you eat mac and cheese and bologna sandwiches; maybe you drive a high-end vehicle. Regardless, I have those three categories.

To me, the ongoing is relatively stable. Andrea and I don’t have extravagant tastes in homes or vehicles, except to the extent I buy new cars rather than used or that our house is higher-end than we likely needed (which had more to do with location and functional size than styling preferences).

For semi-discretionary, I drive our expenses more than Andrea does, with greater preference/more frequent opting for going out to eat in restaurants. But we don’t have expensive tastes nor particularly extravagant hobbies. We don’t belong to any country clubs, or have golf memberships, etc.

For more of the luxury stuff, that, too, is a misnomer. I’m referring more to the idea of taking an annual holiday, for example, which is more in the category of semi-discretionary most of the time. But we do have some options for more travel in retirement, and a couple of them are likely in need of good financial analysis and options than a jaunt around New England.

Why is this all relevant? Because my three categories are very different in terms of their predictability in retirement.

Let’s go to the first approach that I consider junk-y. Almost every financial planner or text on retirement uses a common financial tool. Revenues and expenses. If you can list all your revenues and all your expenses, bam, your “plan” is relatively done. Oh sure, they’ll tell you how to adjust both to “achieve your dreams”, but it’s somewhat misleading. You probably already know most of your income streams and how to structure / time them. They are mostly straightforward until you start getting into time-limited instruments or the timing of large-scale movements of assets. Which means if you know your expected income, the plan really comes down to the premise, “first calculate all your expected expenses in your retirement”.

That seems legit, right? After all, every financial planner dusts off their expense tracker templates when they go to help a new client set a budget, figure out where their money is going. Track every expense, add it up, estimate what continues in retirement, add in your special plans, put in a date when you expect to take a dirt nap, and bam, you’re ready to go.

Except, as I said above, it feels like junk math to me. It assumes that you know what all your expenses will be in retirement. Do you? CAN you before you get there?

At first glance, it seems easy. If you stick to the basic expenses, which likely don’t change much. You may choose to move or you may not. You likely won’t do it on day one, at least. Most people don’t. That’s for when they’re old and decrepit, and they don’t feel that way at retirement. They feel young again! A new friend mentioned the other day that when he studied the psychology of retirement, most people initially felt like they were on vacation and that the feeling lasted for 18 months. Nobody moves just for vacation. And buried within this category is a potentially huge future expense on health care. Do you know if/when you’ll become infirm? Age 62? Age 82? Never? Are you planning to die in your sleep at age 110?

Jumping ahead, you can probably estimate some big-ticket luxury expenses. Do you want to take a world cruise? Go to the Antarctic? Visit Fiji? (My friend is there right now, those aren’t things she’s keeping until retirement!). But can you estimate what all the luxury expenses look like all the way to age 75? 85? 95? Probably not. When I look at travel, I have two really different travel experiences in mind, as well as annual trips to different places with Andrea. I don’t yet know if I’ll do all of them, some of them, or none of them. Some of it depends on my health. Or working out the relative costs. But I don’t know which I’d do, not yet.

However, my real sense of anxiety, if you want to call it that, is when I try to apply those techniques to the semi-discretionary category. I know that when I retire, I will have a lot of free time, initially. That is the goal, after all. So what am I going to do with that time? Let’s look at a few different possible hobbies.

First, I like golf. So let’s say I start golfing a bit more regularly, and I decide, “Yep, this is great, I want to golf 3x a week.” Am I buying a membership? Going with people who can sign me in aka mooching off people with memberships? It’s not like I can golf in random parks; I need to pay to be on a course, and golfing regularly isn’t that cheap. A course membership near me is $3K a year, with an extra $500 in food bills required. So, $3500 a year for about 8m of the year. If that’s my only real hobby, it’s likely doable. Yet, what other leisure time expenses do I have?

Second, I like reading. I buy some books, but I get most of them from the library on my Kindle. So, the cost would be minimal. And available year-round.

Third, I like writing. At first, it seems like it is zero-cost, but I’ll likely pay for some cover art, maybe an editor or formatter. So, maybe $500-1000 a year. Not every year, maybe only once or twice in total. Or maybe it WILL be every year. I don’t know yet.

Fourth, I’m hoping to take up kayaking. After an initial outlay of about $2K, most of my subsequent costs will be event fees, overnight travel and/or gas and food while travelling. Relatively minor in the grand scheme of things, but not zero, and also coinciding with the same time frame as golf.

Finally, I also might do a bunch of 3D printing. Great, but it doesn’t likely pay anything, and filament isn’t cheap. I could end up spending hundreds of dollars a year. Which again is fine if it is my major hobby. Not so fine if I have three other ones too.

And that’s just five hobbies that interest me on my own. It doesn’t include joining a social club for lunches or breakfasts, or meeting friends for coffee. Or astronomy outings. Or cross-country skiing. Or downhill skiing.

Why do I mention all this? Because I have no idea which ones I will do. Maybe I’ll fall in love with golfing and downhill skiing, costing me hundreds yearly. Or I’ll read and write and tinker with 3D printing at a much lower cost. I literally have NO IDEA what I’m actually going to do when I retire; I just have ideas of things I would like to try. For now, that means I have many “options” and not much hard data to put in a financial plan.

The alternative approach that I see, and it is equally junk-y, is the formula approach. I shouldn’t discount the expertise of the advisors, as they’re trying to get past the previous junk and give you a broad usable number. And it is usable, if not useful. They’ll tell you:

If you’re going to retire, you should aim to replace x% of your income.

So, what is that x% that they suggest? Well, then the math gets REALLY interesting.

One set of pundits suggests 50-70% is a good number. Others suggest that 70-90% is a better estimate. I don’t know too many people who are retiring and keeping 90% of their income, unless they have either legacy commission sales that will continue (passive income streams like brokerages, insurance commissions or licensing) or significant investments that they weren’t counting as part of their original income.

But I initially liked the approach. People had done the math, worked their way through, came out the other side, and said, “Bam! Here’s a good ballpark number!”. I liked the premise. It resonated with me.

Yet as I tried to find a consensus, I noticed some small cracks in the foundation. Some of the pundits were not taking into account changes in basic tax situations or deductions. They all noted that work-related expenses would go down, but seemed to ignore the elimination of current deductions off my paycheque too. I won’t be paying union dues, for example. There is also the obvious impact of the lower tax bracket. So, if they didn’t adjust for that, how accurate was their estimate?

Others had a more nuanced approach. They said, “Well, if you earn less than $100K, you should aim for 80%, and if you earn more than $100K, you should aim for 65%” (for example). Which seemed good, if for example your initial $100K covered all your basic ongoing expenses, and part of your semi-discretionary expenses. Then anything over $100K might be covering the luxury category for me.

Yet this takes us back, in effect, to the same part of the original junk math. It’s trying to pre-estimate what your expenses will be in retirement without any real way to predict. Yet by trying to come up with an average that applies to everyone, you run into the giant challenge that nobody’s situation is the same.

If I own my house outright, my housing expenses are VERY different than that of someone who still has a mortgage.

If I have a cottage and that is my primary vacation expense, that is very different from someone who might make road trips around Ontario or want to take a year-long cruise.

And, again, there’s the issue of discretionary recreation that I mentioned above. Golf and downhill skiing are generally more expensive than kayaking and cross-country skiing. If your needs are greater, or lesser, how does a ballpark average help?

So then, what?

I found myself thinking more about calculating what my income replacement number actually looks like instead of what I should be aiming to achieve. I gathered all my pension income from the pension centre, and sent it to our financial advisor. I gave him the options for buyback, but even that is a pain in the butt, too. I basically have two options to do the buyback.

First and foremost, I can move money from my existing RRSP into the pension. This is a relatively straightforward comparison. If I estimate I’ll live to 85, I can calculate what I would get from the increased pension (an extra $275 a month approximately). Nominally, I get about three times my investment back spread over 30 years or so. That’s a pretty good return. With an obvious comparator…how much would I get from the RRSP investment projection? Easily calculated and compared. The financial guy will send me the #s.

Secondly, there is the option of directly paying for the buyback out of savings or payroll deduction, or making a totally separate investment. They’re great comparators, but they’re also a little misleading. Unlike the first option, where the total invested stayed the same, I’d be adding an additional $25K here. More like the question, “If you could put an extra $25K somewhere, where is the best return?”. That is similar in some ways to the first options, yet also very different. Instead of asking where is the best return, the original asked more simply “what is the best allocation of existing pension investments between RRSP and government pension?”.

And I haven’t even started to work through the aspects of it that involve tax liability and timing of withdrawal vs. overall CPP bridging and TFSAs, etc.

I feel like I risk turning myself into a financial squirrel. I wanted to reframe things for myself. Some of my thoughts at the base are:

1. The government pension is pretty dang good.
2. I will not be at the bottom of the replacement value, nor will I be at the top.
3. I don’t have some huge elaborate lifestyle or huge expected health bills.
4. We have decent equity in the house.
5. Andrea has the same pension.
6. If I decide that I might want some additional income, I can do some contracting to pad the savings account while Andrea is still working.

In the meantime, I asked the financial guy to work out what my replacement income would be in either scenario. But I’m strongly leaning toward the buyback. I like the premise of extra income guaranteed for life and indexed for inflation. There’s a small hiccup that I have to do a health check-up before buying it, just to prove to the government that I’m not days away from death and just trying to boost the death payout for my family. But I’m not worried about that. There’s nothing I know of that would disqualify me, even if my health isn’t fabulous. That’s a topic for another day.

I guess that’s “it” for finances right now. It’s not very satisfying or precise. It’s a more general belief that we’re in good shape, faith in our plan, and acceptance that we’re not signing up to buy the next Airstream that comes available.

For the other parts of this month, I had a good to-do list to work with, while this one is more “talk to the finance guy.” In my wrap-up post, I’ll see if any of those to-do list items need extra “enhancements” to get me ready for my last two years before retirement.