How Much Are You Spending? A Hack to the Inevitable Question Everyone Wishes to Avoid from a CFP® Professional

Written by Jack Lumsden, MBA, CFP®, Financial Advisor, Assante Financial Management, with additional editing by ChatGPT.

This question often induces unease as it delves into a reality many prefer to overlook. Before retirement enters the picture, the majority tend to align their spending with their earnings. If the inflow of money surpasses the outflow, tranquility is maintained.

For those on the cusp of transitioning into retirement or contemplating optional work years, a standard question directed at CFP® Professionals is: “Do we have enough? What’s the retirement fund we should target/need?”

Addressing this inquiry necessitates insight into your current spending habits.  Regrettably, the prospect of this task of budget construction or expense tracking is met with trepidation, echoing the sentiment of the Grinch, “Hate, Hate, Hate, Double Hate, Loathe Entirely!!”

However, a more expedient approach exists—a strategic ‘hack’ that harnesses your income tax returns to initiate this journey. The process is outlined below, streamlining the initial steps.

Calculating Your Day-to-Day Living Expenses:

The following five steps will assist you in determining the amount you are spending today for yourself(ves).

1. Of the income you (and your partner) earned, how much is yours? From your most recent income tax returns, calculate as follows:

	You	Partner	Total
Insert the figure from line 2600 (Taxable Income)
Subtract the figure from line 43500 (Tax Payable)
Your Money:

For the following sections, you can divide these items in the same manner as you and your partner pay them. For example, if you split the mortgage payment, then enter the amount under each heading or enter a total figure in the “Total” column.

2. From “Your Money,” how much goes to Debt Repayment and Child Rearing?  What is your monthly payment for:

	You	Partner	Total
Mortgage (include principal & interest only, ignore property taxes)	$	$	$
Personal loans (including lease payments)	$	$	$
Consumer loans (including interest-only payments on credit cards)	$	$	$
Regular costs for children (food, clothing, sports, allowances, etc.)	$	$	$
Monthly Total:	$	$	$
Annual Total: (Monthly x 12)	$	$	$

This is your yearly Debt Repayment and child support.

The leftover may be referred to as your “Personal use Money.”

	You	Partner	Total
Your Money: (from Step A.)	$	$	$
Less:  Debt Repayment/Childcare: (From step B)	$	$	$
Personal use Money:	$	$	$

We assume that you will be debt-free by the time you retire.  If that is not the case — e.g., if you have 15 years remaining to pay your mortgage and retire in 12 years— this must be considered. 

3. Of your Personal Money, how much goes to Long-term or Retirement Savings?

Once you are retired, you do not need to save funds for your future, so you must remove your current savings.

Do not include any RRSP or Pension plan contributions, as this has been deducted from Step A.  This category would consist of regular TFSA, RESP, or non-registered investment account savings.

	You	Partner	Total
Long-term savings (This amount is in addition to any Employer pension programs or RRSPs in which you and/or your partner may participate.)	$	$	$

4. Of your Personal use Money, how much goes to Work-Related Expenses you will no longer have once retired?

Another adjustment is to remove any work-related expenses, such as gas for commuting, ETR, Public transit, clothes, etc., that will expire once you are no longer working.

	You	Partner	Total
Work-Related Expenses	$	$	$

5. Your Day-to-Day Living Expenses Money

The monies left over are your Day-to-Day Living Expenses Money.  It is the amount required after tax to maintain your current standard of living, including everything you are doing today (assuming you are debt-free at retirement).  

	You	Partner	Total
Personal Use Money:	$	$	$
Less:  Long-term savings:	$	$	$
Less: Work-Related Expenses
Personal, Day-to-day Living Expenses Money:	$	$	$

Let’s look at an example for a single person:

Step 1: Your Money

• Income from Line 26000 – $215,000
• Less tax on line 43500 – $56,900
• Your Money – $158,100

 

Step 2: Debt and Child Care

• Less Mortgage: $24,000
• Less Childcare: $12,000
• Total:         $ 36,000

 

Step 3: Long-Term Savings

• TFSA of $6,500 per year

 

Step 4: Work-Related Expenses

• Work Expenses of $12,000

 

Step 5: Personal Day-to-Day Living Expenses

• Your Money $158,100

Less

• Debt, Child Care $36,000
• Savings $   6,500
• Work-Related Expenses $ 12,000
• Total $54,500
• Your Day-to-Day Living Expenses Money $103,500

 

The answer to “How much are you spending?” for this person is about $103,500 per year. This figure is an excellent starting point for crafting a comprehensive retirement discussion and plan. 

However, it’s essential to remember that retirement planning involves accounting for potential additional expenses that may arise during the retirement years. These could include unexpected costs and lifestyle adjustments. Let’s explore some key factors to consider when planning for a secure retirement.

Anticipating Future Expenses: Retirement is a transition into a new phase of life that often brings changes in spending patterns. To ensure a stable financial future, your retirement plan should account for the possibility of increased expenditures. Some notable expense categories to consider include:

• Travel: Many retirees prioritize travel to enjoy their newfound freedom. While you may currently have a good estimate of your annual expenses, factoring in travel costs is crucial to maintaining a comfortable lifestyle.
• Healthcare: As you transition from a company-sponsored health plan, it’s wise to anticipate higher healthcare costs. Personal health care premiums, prescription medications, and potential long-term care expenses should all be incorporated into your financial plan.
• Transportation: If you were accustomed to a company car or had lower transportation costs due to work-related commuting, it’s important to adjust for increased auto expenses in retirement.
• Child Expenses: While you may assume that child-related expenses will decrease in retirement, unexpected costs may still arise. Whether it’s supporting adult children or contributing to grandchildren’s education funds, having a financial cushion for such situations is prudent.
• Home Upkeep: Owning a home involves ongoing maintenance and repair expenses. It’s important to allocate funds for potential
• large-scale projects like a new roof, furnace, air conditioning, or driveway repairs over time.
• Business Ownership: Separating personal and business finances is vital if you are self-employed or own a small business. Ensure that you adjust your retirement plan to accommodate any co-mingled expenses. 

 

Summary

Utilizing the aforementioned methodology empowers you to assess your daily expenditures quickly and efficiently —a pivotal foundation in understanding your financial landscape— and answers the dreaded question, “How much do you spend?”

With this insight, a financial advisor can initiate a personalized analysis, determining the requisite retirement savings to benchmark your current and potential spending.  This is the bedrock for formulating a tailored retirement roadmap and effectively navigating this significant life transition.

For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP®.

For your FREE Copy of Preserving Wealth, CLICK HERE

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