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.

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