• Ryan Sheriff

Budgeting before retirement: A discussion with Jason Heath

Updated: Jun 4


Last month, Open Access’ AVP of Group Retirement Solutions, Ryan Spaulding hosted a webinar about budgeting. He was joined by Jason Heath, CFP from Objective Financial Partners. The following are some excerpts from their discussion.

Please note that the excerpts have been edited slightly for brevity.

Ryan: We know that budgeting is one of the cornerstones of good financial planning. But recent studies have shown that Canadians are struggling with budgeting. What do you think are the main challenges that people face when attempting to create and follow a budget?

Jason: It’s a loaded question! I think one of the main reasons why it’s difficult is that it’s not fun. I don’t know if it’s ok for me to say this, but even as a financial planner, I am not a fan of budgeting. It is a necessary evil sometimes. There are certainly people that are having a tough time budgeting and saving because of the high cost of living, especially in expensive cities where real estate prices are quite high. But one of the biggest challenges that I often see is if you have someone sit down and try to estimate how much they spend on a monthly basis, or often times we get a client fill out a questionnaire on what they’re spending on food, clothing, utilities and they total it up, then you look at their after-tax income, and you say “OK, here is your after tax income and your expenses, you must have saved $20,000 last year”. And invariably, the answer is “no, I didn’t save anything”, or “no, I added $5,000 to my line of credit”.

So, a lot of people, left to their own devices, will drastically underestimate what they spend and overestimate what they think they can spend. I think it’s really important to be realistic in any budgeting you’re doing.

Ryan: And what would you say are the main steps when creating a budget? What should individuals be looking at?

Jason: I like to start by looking at what somebody is actually spending. These days you can do it a lot easier, you don’t necessarily need to take out a calculator and a pencil. You don’t even need to use an app necessarily. A lot of online banking websites have tools that will link right to your bank and credit card accounts and total up all your spending in various categories. It can be a good thing for budgeting but a bad thing seeing how much money you waste. But going back and seeing what you actually spent over the past month, six months or the past year, people will often say “that was an extraordinary expense; that’s not going to happen again”. And sure enough, there are five or six of those expenses over the course of the year, and there will be five or six other things in the next year. But start with what you are actually spending, and we will often work with people to try to project that based on current spending and saving, here’s how the future looks. And some people can retire at 55, some at 65, and some people at 75. Once you start building a retirement planning model like that, you try to get a sense of what you do need to save and spend.

Ryan: We often get the question from plan members and individuals “how much should I be saving for retirement?”. And we’ve heard of the 10% and 15% rules of thumb, and you and I had chatted about maybe starting backwards in.

Jason: The statistics often say 10 to 15%, And the RRSP contribution limit is 18% of your earned income, so there must be some sort of significance to that. But depending on the individual, it could be 0%, 30%, it could be more and it could be less. If you try to figure out how much money you need to save to retire by a certain age, you can work backwards and try to figure out how much do I need to save every year and every month between now and then.

And the reason its going to be so different for different people is because some people are going to retire at 55, others at 70. Some people will have long life expectancies, while others are expecting an inheritance or planning to downsize their home. Some may need to provide financial support to a child or parent in retirement. So, the rules of thumb I think are good starting points but nothing beats you as an individual actually figuring out how much you need to save to have the retirement that you want.

Ryan: How often should people be revisiting their budget?

Jason: I am going to go against the grain here, and I would say that sitting down once a year and revisiting your budget or revisiting your savings target may be enough for a lot of people. This probably flies in the face of a lot of financial planners’ recommendations or these apps that cause you to look at your spending and saving on a day-to-day basis. But I think if you are sitting down once a year and you’re setting targets, and that’s all things; your investments, your overall finances, and taking a look at your saving and spending, that’s good for most people. If you spend too much time looking at your spending, especially as a family or couple, that is a recipe for disaster. If you are doing your savings first and setting your savings targets and sticking to them, you may not need to spend a lot of time focused on what you’re spending money on, as long as you’re hitting your savings targets.

Ryan: That’s fair. Some people might say though that it’s easy enough to create a budget, the challenge is to stick to it. What are some of the things we should be doing to make sure this is happening?

Jason: Umm, I kind of like those commercials from a Canadian robo advisor that shows young people their future selves. I think its really important when making financial decisions today to realize that you’re not budgeting or avoiding things you want to do just to cause yourself pain. Its delayed gratification so that your future self, your older self can live a better life and not work forever. I think that the easiest way to make sure we stay on track is to save first; to have pre-authorized withdrawals. That’s easy to do with a group RRSP or a defined contribution pension plan because it comes right off your pay. But if you’re doing other saving or debt repayment beyond, have it come off right out of your paycheck, set it so that its automatic, and spend the rest, because if you save what’s leftover, there might not be anything leftover.

A complete recorded version of this webinar is available to all members of the Open Access Retirement Readiness Club. In addition to webinar recordings, club members can also access a retirement planning toolkit that includes worksheets that help with budgeting. If you are an Open Access plan member but have not yet joined the club, you can get register here.

As a group retirement plan provider, Open Access is changing the way retirement plans are run by unburdening employees from the need to make investment decisions on their own and instead managing portfolios on their behalf. We do this as a fiduciary, meaning no proprietary products, zero conflicts of interest, and no hidden fees.

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