Q. I am 50 years old and currently have about $115,000 in total in RRSP and TFSA accounts. I’m putting $6,000 a year into each plan through payroll contributions. As a rough estimate, I figure I will require $35,000 a year (in today’s dollars) when I retire at around age 67.
I am assuming a 7% average annual return until age 71, at which point I would begin drawing on my RRSP. I’m also making the assumption that I will need it to last 25 years—or until age 95. Based on these numbers, am I on track?
A. In your question, Viki, you didn’t mention Canada Pension Plan (CPP) and Old Age Security (OAS) benefits that you may be entitled to, but no matter—I will focus on your RRSP and TFSA savings to make my projections.
Adding $12,000 annually to your $115,000 in RRSP* and TFSA* savings until age 67 should yield $733,346 in future value if we assume you are earning 7% on average annually in investment returns to age 71. This is a rather generous assumption to make as most estimates for future investment returns use 5% in gross average annual returns (3% to 4% net) for this calculation. But in your particular case, we will use 7% as indicated.
Other assumptions also have to be made. I’m assuming you will delay whatever CPP and OAS you are entitled to until retirement age 67 to obtain a higher benefit. But will you withdraw from your TFSA from ages 67 to 71 to help cover your living expenses? I ask because it’s a good strategy for you to delay withdrawing from your RRSP or Registered Retirement Income Fund (RRIF) until the latest age allowable, so you can defer paying tax on those funds as long as possible.
The $733,346 in RRSP and TFSA savings at age 67 will yield an inflation-adjusted income of $53,000 annually. Here, I have assumed that, starting at age 71, your savings will earn a more modest 4% average annual rate of return that will last for 20 years—or until age 91. To last to age 96—or 25 years—the annual withdrawal amount be would closer to $46,100 per year.
Keep in mind that if you do not achieve the 7% net annual investment return from your RRSP* and TFSA* that you are counting on, the annual withdrawal amount from the portfolio will have to be much lower. But given that we did not add in modest amounts of CPP or OAS payments that you will qualify for, these monthly payments should give you enough of a cushion to support a comfortable retirement. So, as you can see, you are well on your way to achieving your goal.
Janet Gray is a fee-for-service Certified Financial Planner with Money Coaches Canada in Ottawa.
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