Q: I’m 56, have no debt, make about $78,000 a year and own my townhouse. I will have a small defined benefit pension (about $17,000 per year) at 62. Right now I have about $450,000 in RRSPs, non-registered investments and pension combined. I plan to quit at 59, then work three more years at an easy job just to maintain my expenses. Then I’ll retire for real at 62 and work part-time. I forecast that my pension and CPP will amply cover my essential expenses. I’m single. I’ll probably make about $10,000 a year in a part-time job. I forecast I’ll have about $600,000 of savings by age 62. I can see myself turning into an old miser and be able to live on the part-time job. I’ve been such a saver my whole life–starting to draw on all that hard saving is going to drive me nuts. I know I’ll be forced to after age 71 to withdraw from my RRSP. I live a simple life–some golf, the odd trip. My son is on his own, pretty much. I know a RRIF can generate me another $25,000 or so a year, and they last a good long time–but I know myself, I won’t want to do it, until I’m forced to. Watching that balance deplete will be hard to take. Help! I have deplete-savings-phobia.
A: For what it’s worth, David, your fear of depleting savings is a chronic emotion that I see with many retirees. I’m much more of a mathematician than a psychologist, but I have definitely observed a common fear of switching from saving mode to spending mode as a retirement phenomenon. Your phobia might not be so unique after all.
I’d caution you that generally, people should be careful about assuming they will work part-time for the rest of their lives–at least not to count on that assumption from a financial perspective. I’d also caution you that you may be able to cover a good portion of your expenses with your $17,000 per year defined-benefit pension now, but in 20 years, $17,000 of expenses will grow to $25,261 at 2% inflation. Your pension might not cut it if it’s not indexed at 100% of inflation.
I think you should be careful about deferring your RRSP as long as possible so as not to draw on your savings. It sounds like your taxable income will be fairly low for about 10 years prior to the age of 72 when you’re forced to take withdrawals from your RRSP. At a 5% growth rate, your RRSP will more than double from now to when you turn 72. As such, your eventual required taxable withdrawals will keep on growing over time and may put you into a higher tax bracket if you wait too long. I’d argue that there’s a potential benefit to drawing down some of your registered funds earlier than you are required to do so. It doesn’t mean you need to spend the withdrawals, David. You can use it to fund your TFSA. Or maybe even your son’s TFSA (just keep in mind this is considered a gift–it becomes his, not yours).
In the long run, smoothing your taxable income with RRSP withdrawals over time rather than deferring the withdrawals and growing a great big RRSP time bomb might make you better off 30 years from now. Running some retirement projections can help you assess this strategy.
In your case, if you think you can notionally live off of your pensions and some part-time earnings, your projected $600,000 in savings would grow at $30,000 in your first year of retirement assuming a 5% return. Compound growth would quickly turn $30,000 in year 1 into $38,288 in year 5 and $48,867 in year 10 and so on. In other words, your savings could be growing at an increasing rate.
So I think you’ll be fine from the limited information you’ve provided, David. A retirement plan could allow you to do stress testing and reconfirm things. However, if your stress testing is what you need to do to maintain your capital, it’s a much different goal than someone who just wants to make sure their savings will last until age 90 at a modest rate of return. Thus the personal nature of retirement planning and all things financial, quite frankly.
I’m not a big fan of maintaining investment capital in retirement. To me, that means you worked too long or took too few vacations during your working years. If leaving a large inheritance for your son is important to you, more power to you.
My kids are too young to really understand what I write about. My columns don’ t make for great bedtime reading (at least for a kid). But my own goal is to slowly pass along a notional inheritance through experiences while they are young, as well as education funding and help along the way in their early adult years when they arguably really need it.
My biggest concern for you, David, is that you may end up leaving too much money to your son. Or that you forgo truly enjoying your retirement to maintain some notional level of capital. What happens if and when stock markets drop 20% in a correction? Will your part-time job turn into full-time and will you cut your spending to maintain your savings?
Most people will draw down on their retirement savings eventually. Retirement planning can help you do it with comfort and the peace of mind that you can afford to do so. Maintaining your capital in retirement is up to you. But if it were up to me, I’d spend my last dollar on my last day. To each their own.
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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ont. He does not sell any financial products whatsoever.