by Scott Ronalds
If you’re at the point where you’re starting to think seriously about retirement, you’re probably wondering how much money you’re going to need to enjoy life after work, and where it’s going to come from.
Everybody’s wants and needs are different, so there’s no magic number as to how much you should have saved by a certain age. Plus, the face of retirement has changed significantly, with many people working part-time into their seventies and eighties, and others hanging it up in their fifties.
That said, by making a few assumptions, we can give you a rough estimate of what you can expect from government sources and your portfolio when you decide to retire.
To keep it simple, we’ll use a scenario which assumes you’re 65 and plan to fully retire from your job this year. A few other assumptions:
You don’t have a pension plan with your employer.
- You’re eligible for full Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
- You have an RSP that you plan to convert to a RIF this year, and you plan to take the minimum required payments (which will start next year) from your account. (Note: you aren’t required to convert your RSP to a RIF until the calendar year you turn 71, but you can convert at any age before 71 if you choose).
- You don’t have any other investments or sources of income.
First off, let’s look at what you’ll get from the government. You can expect monthly CPP payments of roughly $1,114 ($13,370/year) and OAS payments of about $578 ($6,936/year). In total, you can plan on collecting about $1,690 a month, or just over $20,000 a year. These amounts are indexed to inflation. You can decide to defer taking CPP benefits until you’re older, or take them earlier, in which case your benefits will be increased or decreased, respectively. You can also defer taking OAS to receive a larger monthly benefit.
More than likely, this isn’t going to cover your living expenses or fund the lifestyle you want in retirement. So you’re going to need to rely on your portfolio to cover the shortfall.
Converting your RSP to a RIF means your minimum withdrawal next year will be equivalent to 4.0% of your portfolio’s year-end market value. This figure is based on your age, 65, at the end of the current calendar year.
The minimum percentage you’re required to withdrawal from your RIF is determined by Canada Revenue Agency (CRA) and will increase every year going forward until you’re 95. At age 72, for example, you’re required to withdraw 5.4%. For the full table of withdrawal rates, see the last page of our document Converting your RSP to RIF.
Back to our scenario, let’s say your RSP’s value is $500,000 at the end of the year. Your minimum withdrawal in this instance will be $20,000 next year (4% x $500,000). With your government benefits, this means you’ll generate an income of about $40,000. Is this enough? Again, it depends entirely on your wants and needs.
If you have a good sense of how much annual income you’ll want in retirement, you can ballpark how much you’ll need to save in your RSP. Let’s say you want $80,000 in income. About $20,000 of this will come from government sources (although your OAS may be clawed back), so your portfolio needs to provide you with $60,000. Considering your minimum RIF withdrawal rate of 4%, this means your account’s value would need to be $1,500,000. (Note: you can withdrawal more than the required minimum from your RIF, but any excess is subject to withholding tax and you run a greater risk of outliving your portfolio.)
You can calculate your account’s desired value by dividing your wanted income (minus government benefits) by the minimum withdrawal amount expressed as a fraction. In this case, it’s $60,000 / 0.04. If you retire at 70 instead of 65, your minimum withdrawal factor would be 5.0% and thus your portfolio’s desired value would be $1,200,000 ($60,000 / 0.05).
Because your RIF’s minimum withdrawal percentage increases every year and your account’s value will fluctuate (if invested in stocks and bonds), it’s difficult to know exactly how much income your RIF will provide you each year. Further, if your account falls in value, your annual payment will be lower. For these reasons, it’s important to have some flexibility in your retirement income planning. And to be sure, your circumstances could change along the way and adjustments will be required.
It’s crucial to make sure your RIF is invested in a mix of stocks, bonds and cash that you’re comfortable with and is appropriate for your objectives. If you only hold low risk, low return assets such as GICs, your account’s value will decline each year (after factoring in withdrawals), and thus your annual income payments will too. Some investors are OK with this. If your asset mix is heavy on stocks, on the other hand, your account and annual payments will be much more volatile. Again, some investors are fine with this.
Our example is simplified and is meant to provide you with a rough idea of the income streams you can expect to receive from the government and your RIF account in retirement. Everybody’s situation is unique and the markets are unpredictable, which means retirement planning isn’t an exact science.
If you’d like to discuss a portfolio that’s suitable for you in retirement, give us a call (1-888-888-3147) or schedule an appointment with one of our Investor Specialists. We provide advice on asset mix and withdrawal strategies. Or if you want to explore some of the more nuanced aspects of retirement planning such as when to take government benefits, income splitting, estate planning or whether to commute a defined benefit plan, it can be beneficial to speak with a fee-for-service retirement planner. We work with a number of independent planners and are happy to provide you with recommendations. Just give us a shout at 1-888-888-3147 or send an email to firstname.lastname@example.org.
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