Why are we working so hard if we can’t have a little fun once in a while?
My old boss and good friend Fred used to ask me that on a regular basis.
Fred was a partner at the record company where I worked 20 years ago. He was a real “Jack of All Trades” kind of guy. He did graphic design, built the website, packed deliveries, met with artists, wrote and co-wrote songs and produced records.
At first glance you might think Fred was just your typical aging rock star, come business owner. He wandered into the office most mornings around 11:00 and left again by 4:00 pm but his 5-hour workday only told part of the story. What most people did not see was what happened after he left the office. Most days, after he picked his daughter up from school, Fred started his second shift working from his home office/studio well into the night, often not getting to sleep before 3:00 or 4:00 am.
Fred made very little distinction between work and play, it was all just life. More than once I walked into Fred’s office to find him playing video games. He did everything with the same level of intensity, and he got results.
When it came to managing money, Fred was not a saver. He wasn’t what you would call rich, but thanks to a few hit songs he co-wrote back in the 80s he received enough residual income on top of his business interests that he never felt the need to think about such things. Nevertheless, in 2009, when the government introduced the TFSA Fred immediately saw the value in setting aside some of those royalties in a tax-free account, just in case.
Fast forward a couple of decades and Fred is now in his sixties. While the royalties he still receives are likely to act as a nice retirement annuity for several more years, he recently retired and approached me to help plan what to do with his money.
On a recent zoom call the conversation came down to this, how should he spend money in retirement?
Fred has three potential sources of income, the quarterly royalties, CPP/OAS and about $125,000 in his TFSA. He figures he needs to supplement his current income by about $1,000 per month to maintain his current lifestyle and smooth over the irregular payments that come with the quarterly royalty cheques.
We crunched some numbers and decided that if he is able to keep putting about $5000 a year back in to the TFSA as he takes it out, that money should last him at least 25 more years.
That is the real beauty of the TFSA. As you take money out, (tax free!) you can recontribute the same amount next year, on top of any additional room the government gives you. In Fred’s case, if he takes out $12000 this year, he can put it all back next year, in addition to the $6000 room the government is probably going to release on January 1st. If all he does is continue to contribute $5000 from his royalty cheques and take out a steady $1000 per month, as long has he can maintain an 8% return on investment, he won’t deplete his nest egg until he’s 90 years old!
Granted, Fred’s is a unique case. How many people are receiving royalties from songs they wrote when Regan was president, really? But if we think about Fred’s royalties like a standard pension, then more people can relate.
Regardless of how good your pension is, a lot of people are still going to find themselves having to supplement their income with investments to some degree. Like I was able to show Fred, TFSAs are one way to do this without incurring extra tax.
For more information on how to take money out of a TFSA check out this article from Canada Life and let me know if you need any help managing your spending in retirement.
Have a great day – Lauren
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