Am I saving enough for retirement?

How to find the answer using a reasonable set of assumptions

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Q: I have $160,000 in my RRSP. I am 58 years old and would like to retire at age 70. I am currently making $50,000 per year. I invest my RRSP into mutual funds as well as ETFs. I would like to know whether my portfolio will last up to age 100, if I withdraw $4,000 per month from my RRSP starting at age 70. I am planning to contribute $10,000 per year until age 70.

Manhar

A: We can do a number crunching exercises to see if your contributions will grow your RRSP big enough to fund your target retirement income, Manhar. Of course, there is always a rate of return that will accomplish your goals, but is it reasonable?

Assuming 12 more years of contributing $10,000 annually and a 5% rate of return, your RRSP would grow to about $455,000 by your target retirement age. Withdrawals of $48,000 per year would deplete your RRSP by about your age 82.

In order for your RRSP to last until age 100, you would need to earn about a 7.8% rate of return annually.

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Of course, we don’t earn the same return annually when we invest in stocks. Some years are good and some years are bad. If the sequence of returns was such that you had bad stock market returns in the early years, your retirement plan could be in trouble. So to need such a lofty portfolio return to achieve your goals may be risky.

A 50/50 portfolio of Canadian and U.S. stocks might have returned about 9.9% annually over the past 30 years (at least based on historic returns for the TSX and S&P 500 in Canadian dollars), but if you’re in mutual funds, you might give up 2% of that return to fees. This might have netted you about 8% based on historic numbers—close to your required rate of return to make your portfolio last until 100.

As a retiree, it’s hard to imagine staying 100% invested in stocks. So I think a mid-single digit portfolio return is a more reasonable target for retirement planning.

Have you taken into account your CPP and OAS pensions as part of your target $4,000 per month in required RRSP withdrawals? These pensions could be as much as $22,467 per year by your age 65 depending on your CPP contribution history and your years of residency for OAS entitlement and a 2% inflation rate.

I note that you haven’t suggested that you need $4,000 per month indexed to inflation. In other words, you’ve assumed that you need $48,000 per year in RRSP withdrawals forever, but $48,000 today will be about $110,268 by your age 100 based on a 2% inflation rate. As such, you may be understating your retirement income and capital needs.

The good thing is that expenses typically fall during retirement. Even if you think you need $48,000 per year in the early years, you may need less in later years assuming your health doesn’t fail you.

The bad thing with planning an age 70 retirement is that you may or may not be able to work that long. Hopefully you can. But retirement sometimes isn’t up to you and can come earlier than you might otherwise expect due to layoff or health issues.

Our retirement planning calculations here have been very rudimentary. A proper retirement plan is more comprehensive. In your case, Manhar, our quick calculations suggest a potential shortfall relative to your stated target. That doesn’t mean you can’t make up the difference by using home equity or an eventual downsize. But your target RRSP drawdown may be a bit on the high side.

Retirement planning is more art than science, but using reasonable assumptions, we can set reasonable expectations for your current retirement trajectory.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

6 comments on “Am I saving enough for retirement?

  1. Manhar, unfortunately, did not look like he saved enough as Manhar is 58 years old and has only $160,000 in RRSP’s. unless he has other income sources like a company or government pension plan or a LIRA that the company has been taking a one time transfer out to Manhar then he is not really prepared for retirement.

    Don’t forget about how long savings accounts, government bond yields, rates, GIC rates are now compared to just 6 or 7 years ago, 2.5% to 3.35% today compared to 4.25% to 5.00% in 2008, 2009.

    Even dividend yields and corporate bond rates are no much more than 3.5% to 4.25% for quality companies. What about we have another deep downturn in equities, stocks, mutual funds, interest rates. This will make Manhar’s retirement more in peril and difficult.

    He should have at least 70% more than the $445,000, around $775,000 at the minimum. He should save $24,000 a year in RRSP’s and TFSA’s but it seems Manhar is doing the best of Manhar’s abilities.

    Many Canadians need to be more realistic about their retirement and scale back, downsize and even Manhar may have to deal with the CHIP with a primary residence.

    we don’t know Manhar’s debt situation and if or what debts are in Manhar’s household. Canadians are in deep debt $1.85 trillion in just mortgages.

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  2. Manhar, you may not need as much as $4,000 a month to maintain your current lifestyle. If the $50,000 a year that you’re making is before tax, then you are living on less already. Plus, you won’t need to save the $10,000 a year either. You may find that the income you need to replace in retirement is closer to $3,000 a month? (ignoring inflation)

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  3. I am 46 years old how much should I start putting away for retirement?

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  4. I go by the rule of thumb that you need 25 times your yearly spend to retire. So if you need $40k per year to live on, you need $1m in invested funds (liquid net worth). I retired at 50 yrs old (3 years ago). Just for fun, I am creating an app to track the days until retirement or financial independence (see http://www.CountUsDown.com/Retirement). It’s fun to count down to your retirement day!

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  5. The short answer is no and the assumed annual rate of return is more like 2.5% You’re advisory fees will chip away and pay themselves first each month and that’s significant. You cannot save yourself towards retirement you must invest towards retirement and at the end of the day all of this is just paper anyway vs owning tangible assets like real estate earning positive cash flow each month plus equity growth. . Take a look at the Robert Kiyosaki of Rich Dad Poor Dad fame startup story of buying a single detached rental home pyramided into two then three and four and so on leveraging equity. Take a weekday afternoon off sometime soon to watch CNBC and Bloomberg and the hype and speculation that goes on under the guise of investment advisory. No less investor than Warren Buffett warns about the fees charged by the investment advisory community. And so at age 58 with a age 70 retirement target date your plan is not doable unless you change direction and unload some of yourt fee overhead. You also might take a look at a RRSP meltdown strategy to give your give your portfolio some lift.

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  6. Good Q&A, Jason. I know that I often prefer the “Family Finance” articles in the National Post when you are the financial planner for which they consult (you’re not my “favourite” but you’re among the “top 3” that they use). :)

    Sometimes, or often, I think that both potential retirees and financial planners often overestimate the amount of retirement income they’ll need to enjoy a “comfortable” retirement. There’s always a lot of calculations and variables that come in to play but, even if someone plans to travel 2-3 times per year and still enjoy eating out in restaurants several times per month, it seems to me there seems to be a reluctance to looking at a full-fledged expenditure review (much like governments themselves hate to entertain this exercise but I digress!). For instance, if both spousal partners are fully retired (other than maybe occasional once- or twice-per week paid work or volunteering as part of active living in retirement), do they really need to maintain two vehicles? Typically, when they could get by with one vehicle as they’d either go out together or go out at different times or, where they go out to different places at the same time, one vehicle and one transit pass might solve this problem. Similarly, in these “Family Finance” columns, a recurring “theme” I see is that the “grooming/clothing” expense item and/or the “entertainment” and “restaurants” expense items rarely seem to get substantially “shaved down”. Instead of spending $300 per month on “restaurants,” if one cut this to $150 per month and ate at home more, that’d cut easily over $1000 per year in expenses. Similarly, do we really need more than $25 per month on clothes (if one buys good, quality clothes and has only enough outfits for one week, they’ll not only save money but they’ll halve their closet space requirements) and $25 per month on grooming? People could opt for simple haircuts, do their own hairstyling and buy home hair colouring products from the local grocery or drug store/pharmacy and save a bundle.

    Another factor, which Jason rightly raised, did Manhar incorporate the CPP and OAS he would be getting? I often see estimates of $50,000 in after-tax retirement income separate from government and/or private pension plans. This always seems so high to me.

    Another thing about cutting expenditures: these are after-tax dollar savings, meaning a greater “windfall” in terms of lower income requirements and ability to not have to have as much saved for retirement.

    Also, these projections often assume one would need to, in this case, pull $50,000 per year from his RRSP/RRIF to his age 100 (or age 90-95, or whatever the case may be) whereas, in my view, expenses do diminish (other than maybe prescription drugs) as one ages. Once you hit 80, you’ll be lucky if you can still be a “snowbird” or travel more than once per year. And, once you move into full-blown residential care, my understanding, at least in my province of residence of B.C., is that the local health authority and/or provincial Ministry of Health, basically take 80-90% of your (usually) after-tax Net Income for your “rent” *and* ongoing healthcare, bathing, laundry, daily administering of medication and housekeeping needs. Not sure if that includes prescriptions or not, but it would seem to me, the lower your Net Income, the better. Plus, being confined to a residential care facility, do you really need more than $100-200 per month for “sundry expenses” (going out for coffee or a quick lunch several times per month with your offspring)? I’m 33 but, certainly, if it were me, I’d be happy with the government taking my $3000-4000 per month for residential care. So, I’d suggest people look at a “sliding scale” of RRSP/RRIF monthly withdrawals, adjusted downward annually beginning at age 80.

    Anyway, perhaps I’m “out to lunch,” but I’d appreciate any feedback on any of this. :)

    Cheers,
    Doug

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