FIRE at 52, how to draw down what we’ve worked so hard for
To FIRE or not to FIRE.
Is that really the question?
Whether you agree with the “movement” or not, many investors strive for Financial Independence (so they can Retire Early (FIRE)).
That said, I have full respect for folks that have financial goals and who work damn hard at them, sometimes obsessively, to achieve them – if that’s what they really, really want.
A reader of the site emailed me many moons ago about his early retirement dreams – wondering if they’ve reached their enough number to achieve FIRE at age 52.
Let’s look at their case study and find out!
Hi Mark – love the blog! Lurker here since I don’t comment on your site.
I know my wife and I are in a fortunate position: we live frugally, we’ve saved, we’ve invested and now we’re ready to leave the workforce around age 52. FIRE at 52!
Our only child is entering university soon (this fall) and we figure we’ll have enough assets to pay for part of her education for the next four years. After that, she’s on her own like we were in younger days!
Do you think we’re ready for FIRE? Here is our assets and some details so you can run some numbers and give us a take!
- Ontario based, up north of Toronto.
- $800k combined invested (such as $142,000 combined TFSAs; $510,000 combined RRSPs; $148,000 in a combined/joint non-registered account).
- Paid off home worth out $450,000, with no plans to move in next 10 years.
- Paid off x2 vehicles, no plans to buy a newer, used car for at least 5 years.
- Zero debt – yeah!
- I’ll have a military pension that will pay me with $40,000 per year (pre-tax) at age 55, indexed, for life. (The pension increases by Consumer Price Index (CPI) each year which is great.)
- My wife has no pension plan.
- I will probably putter-away with various side-jobs to keep me busy – so I expect to earn about $10,000 net per year from that until age 65 or so. We’ll see!
Given we only spend $4,000 per month, on average, including travel – I’d done my own math and I think we’re good to retire early at age 52 later this year.
Thanks very much for any insights…
Sam and Margaret
My take – can they FIRE at 52 and spend $4,000 per month?
Thanks for your email.
Given the fact you have zero debt, and don’t intend to take on any, I suspect you’ll be more than fine with your existing assets to retire.
I say that based on various case studies related to retirement, what I’ve learned from folks on this Retirement page here and some quick, back-of-the-napkin calculations.
Assuming you draw down your RRSPs via lump sum withdrawals or using a RRIF (Registered Retirement Income Fund (RRIF), that $510k inside your RRSPs should last a number of years even without needing your military pension. I would think that’s the best route to take myself.
Image courtesy of using TaxTips.ca RRSP-RRIF withdrawal calculator.
Without withdrawing all RRSP assets right away; leaving some ($100k+) for growth, you could withdraw $40,000 (or more) per year starting at age 52 and not deplete the RRSP/RRIF until almost 15 years later.
In making other assumptions, my own assumptions:
- You’ll both get full Old Age Security (OAS) later on, at age 65, around $7k per year ($14k combined).
- I’ll assume there are about 25 or so years of Canada Pension Plan (CPP) contributions for you Sam, and some CPP “drop out” years for Margaret. Combined, that should give you roughly $10k at age 60 to spend.
Lastly, I’ll assume you’ve ditched some very expensive mutual funds by now and you’re investing in low-cost, diversified ETFs for a stress-free portfolio.
In doing so (and not losing your assets to high fee products) when I quickly add up your $40k per year from your RRSPs/RRIFs, plus your $10k per year (net) from your odd jobs; along with a few thousand per year in distribution income from your non-registered account, you’ll meet your $4,000 per month in spending needs even without starting your inflation-protected pension, CPP or OAS benefits.
Awesome and yes, is my answer!
But…these are only my assumptions without any formal calculations nor insights into your tax situation.
Professional take – can they FIRE at 52 and spend $4,000 per month?
For details, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. I thought Owen could provide a more professional take on your situation.
Owen has provided other readers with some similar professional insights in these posts here:
What is a LIRA, how should you invest in a LIRA?
My mother is in her early 90s, she just sold her home, now what to do with the money?
This couple wants to spend $50,000 in retirement, did they save enough?
Owen, thoughts?
Well Mark, you’re not far off. Sam and Margaret are in a great financial position thanks to some significant savings, no debt, and a generous pension plan in their financial future.
Here are more assumptions and details I’ll use to help us figure things out:
- CPP: I will assume there are 27 years of full CPP contributions (age 25-52) plus child rearing drop outs for Margaret; which means she will have 69% of max CPP at age 60 = $6,118/year x2
- OAS: Yes Mark, let’s assume full OAS at age 65 = $7,217/year x2
- In addition Mark, we’ll assume for the couple that Sam is going to lose a bridge benefit associated with his pension, so it will actually drop to $31,000 per year at age 65 (not uncommon for workplace pension plans).
- Assume ETF portfolio with average fees 0.16% – low cost is a better cost!
- Assume no available TFSA contribution room
- Assume no available RRSP contribution room
- Assume both birthdates July 1, 1967
- Assume assertive risk profiles – given Sam has a pension.
I’ve also made some additional lifestyle assumptions…
Added spending for infrequent expenses: another $912/month
This type of spending is something that many people forget when creating their retirement spending plans – but as a fee-only-planner I want to include this. Because infrequent expenses are typically short-term spending (within the next 1-7 years after retirement) the best way to plan for this spending is to include it in monthly expenses. The income for this spending can be placed in a high-interest savings account and drawn upon as these expenses arise. Here is what I’ve included:
- Vehicle upgrades: $538/month (2 vehicles, purchase price $30,000, trade-in value $10,000, upgrade every 7-years)
- Vehicle repairs and licensing: $103/month (2 vehicles, $240 annual license, 20,000km per year at $0.05/km avg. maintenance costs)
- Home repairs: $188/month ($225,000 structure value, age of home 30-60 years, 1% per year)
- Electronics upgrades: $83/month ($1,000 per year for computers/TV/newer cell phones, etc.)
So Sam and Margaret, I’ve assumed your total new expenses will be $4,912 per month or $58,944 per year.
Do they have enough for FIRE? $800k invested and a workplace pension?
You bet!
Sam and Margaret are in a great position for retirement but they’ll have a very high withdrawal rate their first few years. With $800,000 in combined investment assets their target spending of $58,944 per year is equivalent to a 7.4% withdrawal rate (and that’s even before we’ve calculated tax on those withdrawals). That’s rather high on the surface. The good news is that their pension is only a few years away which will drop their withdrawal rate considerably. They can start with a higher withdrawal rate and then decrease withdrawals as the pension, CPP, and OAS start to kick in.
Because of their high withdrawal rate in the first few years Sam and Margaret will see their portfolio value drop between age 52 and 55. This isn’t a problem per se, but it could be hard to manage psychologically given most investors are so used to seeing their portfolio value increase year over year, so it’s good to highlight now and prepare for it mentally.
After the pension, CPP, and OAS kick in they will begin to see their portfolio value increase again.
Here is what their net worth looks like over time:
Once Sam and Margaret reach age 55 their defined benefit pension will begin and their withdrawal rate will drop considerably. Pension income will be taxed at their marginal tax rate, and will trigger additional income tax, but Sam and Margaret will be able to split their pension income.
In a few years, at age 55, they begin to pay more income tax however they will have more than enough to meet their expenses. In fact, immediately from age 52 we want to make sure we maximize TFSA contribution room each year.
You can see below how their sources of income will change over time, quite substantially, thanks to a great mix of assets to a healthy retirement income:
Maximizing TFSA contribution room can be done using Sam and Margaret’s non-registered investments – in the early years of retirement. When those non-registered assets are depleted, they can make extra RRSP withdrawals.
The benefits of early RRSP withdrawals
Making RRSP withdrawals early, in their 50’s, and shifting those investments into their TFSA will help Sam and Margaret stay in the 20% tax bracket for their entire retirement. If we wait to draw on their RRSPs, the conversion to RRIFs at age 72 will trigger mandatory minimum withdrawals and these withdrawals will push them into higher tax brackets. By melting down their RRSPs, slowly over time, we avoid these higher tax brackets. The added benefit of this strategy is that most of their assets end up in their TFSAs towards the end of their retirement. This increases income flexibility and decreases tax on their estate.
Due to their income level and sources of income Sam and Margaret can expect a few hundred dollars per year in government benefits in the form of Ontario’s Energy and Property Tax credit but the effect on their overall retirement plan will be minimal.
Sequence of returns and withdrawal rate concerns?
Everything looks great so far but we’ve created a plan using a constant rate of return, which isn’t very realistic, so we need to look at how their plan fares using variable rates of return each year. We can look at the success rate of their plan by taking their current investment assets and planned withdrawals and projecting them over historical periods of stock, bond, and inflation rates.
When we do this projection, we see that the success rate of Sam and Margaret’s plan is 100%, which is fantastic, but there are historical periods where Sam and Margaret’s investment balance drops by a bundle – up to 2/3rds. Although still successful, such drops and scenarios could be difficult to stomach. This means it will be important to have some flexibility within their retirement spending during long periods of below average investment returns. Taking action during extended periods of low or negative investment returns may not be necessary but it will feel good to have a plan in place.
Overall Sam and Margaret have a great retirement plan. They don’t need to worry about their retirement income and can start enjoying their extra free time! FIRE at 52 is here!
As always, we recommend updating your financial plan regularly to take into account changes in personal goals, investment returns, tax rates, government programs, and much more.
Summary
Sam and Margaret have done very well for themselves, thanks to strong savings and investments, no debt, and a generous pension plan to draw down. Thanks very much to Owen for sharing his insights and expertise!
Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. He works with individuals and young families in their 30’s, 40’s and 50’s to create comprehensive financial plans from today to age 100.
Disclosure: My Own Advisor, and Owen, have provided this information for illustrative purposes. This is not direct investing advice nor should it be taken as such. Assumptions above are for case study purposes only. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
An oldie-but-a-goodie with this article, Mark.
Great getting into the detailed assessment of their situation. I was having the same thoughts, reading through, that they’re going to be just fine. They had clearly been making plenty of preparations along the way, and as soon as the pension kicks in, it’s off to the races.
Take care,
Ryan
Oh for sure. Thanks guys. The biggest thing they have on their side is modest spending and a pension.
“…pension that will pay me with $40,000 per year (pre-tax) at age 55, indexed, for life. (The pension increases by Consumer Price Index (CPI) each year which is great.)”
Anyone with modest spending and cash in the bank, with no debt, is largely set. A good case study to prove that!
Good to hear from you Ryan and hope your investing plans are coming along in 2021! Keep me posted!
I hope my lonely little comment doesn’t get buried by the hoardes of others that came before me!
I just want to say, what a thorough and impressive job you and Owen did with this case study. I was smiling and so excited for Sam and Margaret as I read your analyses.
I think FIRE in our late 40s and 50s is likely the norm for most in Canada who choose to pursue FIRE. (We’re in the late-40s boat ourselves.)
I’m happy to read your take on “the movement” as you’re such a respected voice in the Canadian personal finance scene!
Nice to hear from your Chrissy. How did you enjoy the podcast? I recall I saw that on the Twitter machine?
Thanks for the kind words.
Ya, if my wife and I really hunkered down – we could be FI now – but we don’t want to be. We like some simple luxuries in life like travelling and we also want to own our home in Ottawa (not an easy feat!). We’re more than 60% to our FI/semi-retirement goal of earning $30k per year in dividend income from our non-reg. + x2 TFSAs. That, and our RRSPs, and part-time work, and workplace pensions in the future should be >$2M portfolio and “enough”.
The “movement” is taking off for sure and although we don’t actively pursue FI I suspect it might just happen all the same!
Best wishes on your goals with family and I’ll check out the podcast this weekend.
Cheers!
Mark
Hi Mark,
The podcast was nerve-racking, but turned out really well! I had fun, and I hope those guys do well with the show. I think they do a great job.
My jaw dropped when I read your numbers. Wow! You and your wife are doing well. It’s not easy to build a big enough dividend portfolio to live off of, but you’re obviously well on your way. Congrats on that!
We’re the same with our lifestyle in that we could reach FI sooner, but we choose to stay in Vancouver near our families. We also choose to travel a lot with our kids now while they still have time and the desire to hang out with us! None of that is cheap, but it’s worth it to delay FI for them.
I hope you enjoy the podcast (just try to ignore my nervous awkwardness)!
Thanks Chrissy. I think you did well! I haven’t heard of those guys much but now following on the Twitter machine.
Ha, well, I don’t know if the numbers are jaw-dropping from my end but we have saved and investing diligently over the last decade or so in CDN and US stocks, and with low-cost US ETFs, and the results are starting to show. It is our hope (?) we could reach one of our FI goals (e.g., $1 M portfolio without pension, without considering CPP or OAS benefits) in the next 5 years. That would be great.
We could have been largely “retired” by now but I’m not into living in a small one-bedroom apartment with 2 cats only to call myself “FI”. That doesn’t seem right to me 🙂
Totally agree with your recommendation of Andrew Hallam’s book. It was a great book.
Vancouver is definitely not cheap but a great place to live! Like everything in life – just filled with choices!
Stay in touch online!
Mark
Thanks for your comment Chrissy!
One other observation…the taxes paid in the early years seem very low. On 75K income you are only paying a few thousands? What is the assumption on taxes for the Non-registered income? is that all dividends or capital gain?
Good question Kevin, the taxes are lower those first few years because they’re drawing down some of the adjusted cost base, so zero tax there. For the equity portion of the annual return in the non-reg account I have it split 20% for foreign dividend, 20% for Canadian dividend and 60% capital gains. This could be optimized with some asset location strategy but in their case the complication isn’t likely worth the tax efficiency. If the non-reg account was larger, and it was around for longer before being depleted, then some asset location strategy could help.
Great stuff Owen. A good reminder that tax optimization can make a HUGE difference in any retirement plan. The need for asset decumulation strategies and software is going to be insanely important as Boomers and Gen Xers age – far more important than asset accumulation.
I was entertaining the tax problem of retirement using this site to get a rough idea. Of course this is the very simple one, the actual tax calculation will be more complicated.
https://www.taxtips.ca/calculators/basic/basic-tax-calculator.htm
Depending on what is the income resource, the difference can be big. Let’s say 75K divided equally by two people.
With regular income of 37.5K, tax is 5172?
Regular income 20K, dividend 17.5K, tax is only 1185, almost $4K down
For two, that is $8K less tax, enough for a very nice vacation, might be even two.
So I guess tax optimization will be a big thing worth lots of consideration in retirement.
I think tax optimization is HUGE in retirement – it can actually make or break a withdrawal strategy in my opinion.
I agree with that.
I would also say its also important in working years. How does your savings/investments/account types during working years affect your tax during employment? One has to consider this in the big picture in addtion to in retirement so there aren’t surprises or missed opportunities. Like not using a spousal RRSP in some cases, or putting too much into RRSPs if a person or couple have good pensions etc.
How will a change to retirement and to generating cash flow affect all of this? How does your retirement age, government benefits, work pension and timing of all of this come together to optimize taxes?
Lots of factors.
Guys like Owen can really help.
Very fair statements. I know for us, it’s a crazy amount to think about – we’re fortunate enough to have workplace pensions but that also complicates things. I suspect I will get my wish re: a tax problem/tax efficiency headache is a good problem to have in semi-retirement.
Mark
I think you’ll get that wish and “good problem” too.
For sure lots to think about. But in reality there’s only so much that can be done and plan for. Things sometimes can change also. If you get the big & important decisions mostly right that will serve you very well. You’re certainly doing that.
Thank you for bringing us this analysis, it’s very helpful. I do have a few observations:
1) I think that Sam and Margaret’s net worth chart should include a value for their DB. Perhaps have two charts, one with and one without the DB. Materially it makes no difference to the plan, but it could, and should, make them feel way better about their situation. I’ve settled on a value of 24x my annual pension income at the point I start to draw the pension. The DB pension is like an annuity, so, if my net worth is $1M today, and it’s all in cash, then tomorrow I buy an annuity with the 1M, does that mean my net worth is now zero i.e. the same as someone who, sadly, has absolutely nothing!
2) The drawdown chart shows CPP and OAS starting at 60 and 65, respectively. The calculations for my/our personal situation, also show that drawing CPP and OAS as per this plan, is the optimal time to start these pensions. This is often a major point of discussion (read disagreement) on financial blogs.
3) In the net worth chart, the value of the property never increases. Perhaps I missed that the chart is inflation adjusted in some way. In which case, that may well be correct.
Good insights Bob. I think the DB is golden and earning $40k as fixed-income is really their ticket. That’s worth $1 M or more right there.
“I’ll have a military pension that will pay me with $40,000 per year (pre-tax) at age 55, indexed, for life. (The pension increases by Consumer Price Index (CPI) each year which is great.)” Crazy good!
As for CPP and OAS – I have no idea what my wife and I will do. I’m leaning on taking CPP at 65 and OAS at 65 or later. We have 20+ years to think about it if that’s the case 🙂
Owen might have an explanation for the house but you have to live somewhere and yes, while it should increase it value over time, it’s not something liquid they can spend.
How is your investing coming along?
Mark
I’m inclined to agree with you Bob re pension. However with the DB another consideration is the survivors benefit percentage, so it may not be worth as much if the plan holder dies first. One also has to consider change with any applicable pension bridge loss. ie what number is the 24x based on with these 2 factors? We are in this same boat with 1 DB pension. I know it’s there but haven’t officially counted it in our net worth, but it’s definitely worth a considerable amount.
Our plan right now is to take CPP at 70, my OAS at 70 and my wife’s OAS at 65 to partially offset loss of pension bridge, which is optimal in our situation. What we actually do is very much subject to change.
Yes, I also noted the house value being shown as a constant in a post above.
Mark: Our investing is coming along nicely, but it’s very boring at times: My pay goes into the bank, I transfer money to the discount brokerage account, check my spreadsheet to see what to buy, buy the required ETFs, update my spreadsheet, wait two weeks, and repeat! Around the middle of this year our money will start going into GICs to build our three-year cash cushion.
Our savings ratio is now at 45% of our take home pay, down from around 50% as we’re doing a few necessary house upgrades/repairs. We’re aiming for “comfortable FIRE”, and we’ll arrive there in 1 year and 17 days; that’s 29 paydays. We didn’t like the idea of “lean FIRE”, which is the kind of level we are living at right now to bank the money, but when we retire, our annual disposable income will jump $20K more than it is now, so, we retire and get a $20K pay rise AND have the time to spend it! In three or so hours, it’ll be just 1 year and 16 days – this is so hard.
Bob, that’s very good re: …to build your three-year cash cushion. We hope to have a modest (not big) cash wedge in year 1 of semi-retirement in 5 years. About $50k or 5% of the invested assets just or take.
https://www.myownadvisor.ca/overlooked-retirement-income-and-planning-considerations/
We’re going to go with some sort of bucket approach in retirement:
a bucket of cash savings ($50k)
a bucket of dividend paying stocks (ideally churning out > $20k per year across all accounts, I suspect we’ll be closer to $30k)
a bucket of a few equity Exchange Traded Funds (ETFs) (ideally churning out > $20k per year but we’re not quite there yet, maybe just shy of $10k per year now).
I’m going to update that post in a few months.
Wow – that’s great!! “We’re aiming for “comfortable FIRE”, and we’ll arrive there in 1 year and 17 days; that’s 29 paydays.”
I think our comfortable FIRE is our $1 M portfolio and no debt.
Please keep me posted as you march to the finish line! 🙂
RBull: I gave a lot of consideration as to how best to represent my DB plan in my net worth, and as you say, in the event of my death, my wife will receive a lower pension than when I was alive. When we are both dead, our kids get nothing from the DB; it dies with us. In the end, I decided to consider it from my perspective, as it’s my net worth spreadsheet. So, I just consider and calculate how much “I” would need in a low risk portfolio today to achieve a guaranteed life-long indexed income at the level my pension pays for joint life. As it turns out, my calculation brings me in about 10% under the commuted value, so I’m not too far off the cash-out value.
Now, if I do die before my wife, my life insurance (which runs into my early 70s) will pay out and go some way towards filling the gap caused by the reduced pension. Making it not as financially bad for my wife.
If you’re not going to be cashing out your DB pension fund, knowing, estimating, or guessing its value for inclusion in your net worth is purely psychological, it feels good to see that all those years of hard work has a value in terms that can be measured against other ways you could have invested your money. I say, include it in your net worth, you can use a multiplier of 24 or 20, or the actual commuted value. In my book, it produces a better picture of your true financial wealth.
Bob, I think that’s a fair way to look at your DB pension. Yes, including it makes for a more realisitic net worth estimate. I’m focused mostly on how to generate our overall cash flow vs net worth, now 5 years into retirement and planning to reduce NW over time.
Similar deal here with life insurance on my wife to partially offset any loss of pension survivor amount to me. Pension value, didn’t get commuted value, hard to say, with the 2 factors I mentioned. Age 60.4 and she’s already collected 290K from it so definitely worth a few bucks.
Sounds like you’re in a good place ready for retirement. Good luck to you.
You’re right May, tax optimization is BIG, and at certain income levels government benefits are just as big (if not bigger).
You might like this blog post I did a while back, it looked at a scenario where a couple had all three accounts, RRSP, TFSA and non-reg and looked at how to best draw down those assets.
The best strategy created $2,550,000 in income and paid just $57,000 in tax!
The worst strategy created $2,550,000 in income, but paid $193,460 in tax, over 3x as much!
https://www.planeasy.ca/retirement-income-start-drawdown-with-rrsp-non-registered-or-tfsa/
Nice article Owen. I would think if many Canadians can get to $1 M re: a nice mix of assets as you say – they will do just fine to spend at least $50K per year starting at age 50. That’s a young full on retirement but doable for some.
“If our couple plans their RRSP withdrawals strategically they will pay zero income tax from age 50 all the way until age 70. Twenty years of zero tax even though they’re spending $50,000/year in today’s dollars.”
That article reminded me of Garth’s legendary comment about taxes
Most people, of course, simply don’t understand how they’re taxed or what to do to minimize the impact. They also don’t realize how the tax system is skewed to ensuring the rich stay that way.
As Owen points out, there is a huge difference between 50 grand pre tax and 50 grand post tax.
I’ve had to learn myself how to best manage my taxes. I’m certainly not perfect but trying to get better over time!
Fantastic post Mark. Love seeing these analysis. Lots of ideas flowing and would love to see more scenarios. Thanks Owen for analysis.
Sam and Margaret – thank you for your service to this amazing country. Sam has the military pension but military families pay a price as well.
You guys deserve a fantastic retirement. Congratulations.
Re: Pensions – I took the 100% option which brings huge piece of mind should I go early. It’s only partially indexed but better than nothing.
My mom (75) collects only 60% of my dads small pension but it is not indexed at all so she loses ground to inflation every year. Wish my dad had kept life insurance. We downsized the real estate to free up some funds for investing in TFSA. Between CPP, OAS, Pension, GIS, and Provincial Gov’t support for Senior health care she makes just over 24 K per year and is very comfortable. We really don’t need a huge nest egg to cover basic needs in Canada.
FWIW, I enjoy these case studies too!
I’m sure they (Sam and Margaret) will do well. Stay tuned for most case studies…
Interesting information about your mom, and you’re right, depending on your expenses you really don’t “need” that much. If you want to drive new cars, live in an expensive condo, travel around the world – totally different 🙂
Thanks for your comment Gruff!
Just a side note, the $800k is or was market value at whatever point discussed. Not that that’s bad, but market value is not static or grows as mentioned above.
I always prefer to refer to my investments at investment value, how much I’ve invested, then look at how income my investments generate and does the income grow. Then planning for the future is straight forward and there is little if any guess work about meeting expenses or how much one needs to draw down.
My understanding is this was market value Cannew, but I certainly see your point.
They look like they will definitely meet their FIRE goals. To each his own, but like RBull, I would love to see the simulations where they have a 95% chance of ending up with >0$ at age 100, and the maximum amount they could spend annually so they don’t end up the richest people in the cemetery. I’m with May on the TFSA amount not applying currently and is my situation also. We are currently 53 and plan to retire at 55 mostly on RRSP withdrawals. My plan is to withdrawal an additional $12k annually from our RRSPs and keep contributing to our TFSA until age 65, then stop with about $500k tax free by the time our RRSPs run out and we start collecting CPP and OAS
That sounds like a good plan Carl. Melting down RRSPs and shifting those funds into a TFSA is usually a good strategy.
In the case above their investment returns in the first 5-15 years are going to provide a good indicator for their future spending. We didn’t get into it here but I like to talk about spending flexibility with clients. No one knows what will happen in the future, we could be in one of those sub-median scenarios or above-median scenarios, the best thing is to have some flexibility within planned spending.
Agreed. I think anyone in their 60s should strongly consider melting down their RRSPs – moving any funds they don’t need into TFSAs – and then deferring CPP and OAS to get some inflation-protected income.
I’ll see what comes into my inbox Carl. I like your point about avoiding being the wealthiest person in the cemetery. I suspect it’s all very easy for us, as morbid as it is, if we know when we’ll die.
I think you’re very wise to withdraw from your RRSPs to fill up your TFSAs over the coming decade. Fat TFSA(s) and CPP + OAS will set you up very well.
“avoiding being the wealthiest person in the cemetery.”
OTOH, there is the story of the Gimli Glider. Running out of fuel halfway to destination sucks. Being from the aviation world I really like and adhere to the fuel requirements for destination, plus alternate, plus anticipated delays and 45 minutes on top of that. I’m not advocating for this, just admitting my fiscal conservative bias.
I hear ya….it’s a balancing act with so many unknowns.
I agree Lloyd. However, I think there’s a balance there, at least for us.
With this example it certainly seems they could step it up a fair bit and still be very safe, especially after CPP/OAS, if they wanted that.
If they both have healthy lives they have it made. I worry about the untimely demise of the only pension holder and what that pension reduction (as well as CPP and OAS) could do to the picture. Again, I’m biased as four men in our unit alone died prematurely leaving wives with only 50% of their pension.
Great point, an important part of planning for sure Lloyd.
Yes, I could see that impacting your perspective. That is a valid concern for many of us, and even could be a consideration for the timing of CPP and OAS. That would be the situation for my mother if my father died, and she is now not able to live on her own. I understand.
That happened a few year after I left Winnipeg. Used to drag race with my car a few times up in Gimli.
“Being from the aviation world I really like and adhere to the fuel requirements for destination, plus alternate, plus anticipated delays and 45 minutes on top of that.”
I like that analogy Lloyd!
If I were in this situation with these criteria, I’d pick up some insurance to cover some of that loss of pension income in the event of untimely death. I understand the 80% potential of success for death at 65 but what if one dies at 56? We had a life insurance option upon retirement. It’s twice the annual salary but at age 60 it falls by 10% per year until 65 when it becomes a flat $5k. I’d not take the chance of my wife being that 20%. I’d also make very sure of the CPP numbers. YMMV.
Fair points. Insurance is probably more critical in those earlier years until their capital starts to grow, OAS, CPP come.
And yes, being pretty sure of CPP makes sense.
With my wifes pension there’s a flat l. insur. amount – about .75 X 1 yr final salary for life. We purchased other term life insurance that would likely allow me to recover to the 85-90% range income wise. expect to cancel when I/we start CPP. If she was gone and this was not enough, a final option is to find a gal with a few dollars. lol
Interesting concept about self-insurance if you will. I mean, if you’re meeting your income needs + no debt – what are you really using life insurance for anyhow?
Funny comment.
I think you’re referring to me…..
In plain terms if she was to die without insurance I would lose a noteworthy portion of her pension immediately and for life. My guaranteed income would drop noticeably. I am insuring to partially replace/protect much of this potential loss. With the guarantee of OAS and CPP I would have enough to offset this loss and I expect will lose the insurance.
Do you mean the gal with a few dollars being funny? Ya, I guess that is.
Yes, the latter part! 🙂
Wow, < 4 years to go.....congrats Rob. Hopefully my wife and I can stop full-time work at age 55 or sooner. <10 years for us assuming we kill the debt!
“There are no do overs in life.”
This is where my thinking is really maturing or changing Rob. I see so much waste around me and I’m trying to do my part to get better at that – leave a smaller footprint. It’s part of the reason why we’re moving into our condo. We simply don’t need the space. It’s an expensive move short-term but long-term better for us and a road I’d knew we go down eventually.
Lots of people define their lives by possessions. Not me. Sure, I want a nice home and a nice car maybe but I really don’t need much. I’m learning more and more about that/myself every year.
Thanks for the insights.
I think the problem is that nobody can predict the future. If we don’t have certain answers for questions like: how long will I live? Will I continue to be healthy or will I have serious health problem? Will I need long term care and how long?
For me, the questions also include: Where will my kids go for university? What kind of career will they pursue? Will they want to be a doctor or a lawyer (in this case education will be much more expensive).
So we would like to be prepared. But if what we prepared for did not happen, we might end up with too much money. With kids, maybe that’s not too big a problem……….
We have no idea what the accurate weather will be like tomorrow. How on earth are we going to plan 5, 10, 15 years into the financial future? We can’t. So, it’s the process of planning and re-planning that’s important. Just me 🙂
May, you and family are prepared and doing very well. Keep doing what you are doing – maxing out accounts – you’ll be more than fine!
Based on the plan it would seem they can easily retire at 52 with little worry other than possibly concerning the pension survivors benefit gap. But based on the excess of income and capital perhaps this is insignificant.
The plan looks good to me other than:
It seems they have a very modest lifestyle relative to the significant growing income generated and also their capital projected to continually grow. This would very likely leave a large estate and tax obligation for someone else. Perhaps growing their net worth forever in retirement is their goal but that was not stated, as their main concern seemed to be – did they have enough savings + pension to retire @52, and to help their daughter for 4 years with school funds and send her on her way.
I also note unregistered used early on and seems to deplete but some reappears later on. Lastly is it realisitic to have such modest tax projections that don’t seem to rise proportionate to income on the graph?
Hi RBull, thanks for the comment!
So the reason non-reg reappears late into retirement is because by the time they reach their late 90’s they mandatory minimum withdrawals on their RRIFs are so high that they’ve maximized their TFSA contribution room and need to use non-reg to hold any excess withdrawals that are not needed for spending. The min. RRIF withdrawal goes from ~12% around age 90 to 20% at age 95 and then holds at 20% until the RRIF is depleted.
They can minimize their estate tax by shifting $ into the TFSA each year. This doesn’t always work but in this case it helps them shift $ from their RRIF into TFSA. This lets the assets continue to grow in a tax advantaged account but makes these funds more accessible and also decreases the tax on their estate.
Although it doesn’t look like it from the graph their effective tax rate averages right around 10% for the majority of retirement.
Thanks Owen.
I had another more careful look and can see estate @ 100 would consist of roughly 1.5M in TFSAs, 300K unregistered and very small amount of registered.
Ok on the effective tax rate. I’m doubting over the long haul TFSAs will grow tax free unlimited $$$, and not be income tested for OAS etc at some point into the future. But a person can’t plan now for what isn’t known.
That was the only thought I had as well RBull – since I only have a small DB pension at work – and I know there is a survivor benefit with that. This is the exact wording from my statement:
“Survivor Protection
Under the normal form of pension payment, your retirement income is payable for your lifetime with a
guaranteed minimum of 120 payments.
In the event of your death before you have received 120 monthly pension payments, the balance of these 120 monthly payments will be paid to your beneficiary.
However, if you have a spouse when you retire, your monthly pension will be automatically reduced so that your spouse will receive 66 2/3% of your monthly pension after your death, which is the 66 2/3% joint and
survivor form of pension payment.
If you do not have a spouse when you retire, or if you and your spouse have both waived the required 66 2/3% joint and survivor pension form, your pension will be paid in accordance with the normal form or
other form you selected under the Plan.”
A modest amount of spending is really their key to success. They can spend more, but run the risk of not having enough. They can spend less, but run of risk of leaving an estate.
At the end of day, it’s all about choices when it comes to spending and it seems they have a good plan and have saved enough.
That’s a sweet pension plan. As Lloyd said feds are all 50%, my wife’s is 60%. We had options to raise it to 80 or to 100% but considering pension reductions vs. probabilities we decided to do the default 60%.
Agreed on their savings/pension situation being well over what their stated goals are. Although I wouldn’t agree a modest amount of spending is really their key to success. It was a key to their success in their savings years for sure. In retirement they don’t “need” to be nearly so frugal, unless of course they want to, or if investment results were much less than projected and it wouldn’t be hard to adjust accordingly from a much higher level. Maybe I’m reading this wrong but the plan shows their capital grows to 2 or 2.5 times what they started with to ~$1.8M. Most retirees I know are utilizing original capital to some extent. And they still have their house which is likely to be worth much more than the constant 450K shown. However, I’m thinking its unlikely they’ll live to 100 and still be in their own house.
Bottom line is they have a lot of options. That’s good.
I am very lucky. My wife’s plan is DC, so definitely not the same.
Yes, they absolutely have options. Life is good for them and I wish them well.
For sure on both. Your wife may be fine with the 2/3 and self insuring given your assets and if working p/t for a while especially if you’re starting pension@65 when other benefits are available to her. I wasn’t fine with 60%.
For us my wifes pension is a decent chunk of our income, and she’s been collecting it since 53 (7.5 years ago), so a longer period is at stake.
Not too many people would be lucky enough to retire at 52 with a $40k annual pension. 60% of their needs are already worry free, depending upon how much they need to live on.
Having said that, give them a lot of credit for not only keeping out of debt but making the effort to save a sizable amount, good work.
I dislike those straight line future projections. No one is ever going to see their annual return on investments as a fixed amount, as the RRSP example shows of 7%. It looks neat but is totally unrealistic. Why not ask how the $400k is invested in and how much income has it been generating. If it is ETF’s than the funds are dependent upon the market and its growth will never be in a straight line or fixed rate. For example, if we started in 2018 with $400k,
$400,000 x 1.04 = $420,000
TSX Market down 11% $420k x .89% = $370240
Withdraw $40k $370240-$40,000 = $346240
Difference from straight 7% $388,000 – 346,240 = ($41,760)
So now they are starting 2019 down by $41k more than they expected. Possibly they had some US holdings so they might only be down 7% or $25k for 2018.
I’m not saying it may not average out as projected, just that I would not want to base my income projections on it.
Regardless I’m sure given their total investments, frugal life style and general common sense I’m sure they will do fine.
Hi Cannew!
I agree 100% on the straight-line projections! What you’re suggesting is exactly what happens in the success rate analysis graph. We’re taking the starting investment balance at the beginning of retirement, and projecting that forward using historical stock, bond and inflation rates as well as the actual withdrawals we’ve planned year by year.
Each line in that success rate graph represents one start year, so 1901, 1902, 1903, 1904 etc etc. We’re basically looking at what would happen if our retiree were to go back in time and start retirement in each of those years.
Very fair point about straight-line return projections which is why the “success rate” graph was shown I think but Owen can clarify his software.
Cannew, I suspect this is why you love dividends – you can “rely” on income (i.e., straight-line) and some increases over time which makes the need to cover expenses more predictable 🙂 I’m with you on that.
BTW – stay tuned next week for a post about a particular book.
Mark
Excellent analysis and very insightful. When I see these case studies, they are usually done for people who have a pension plan which makes the calculations easier and minimizing the risk of outliving your money. In the case above around 70% of the expenses are provided by the pension plan. I would love to see a case study for a couple of do not have a pension plan so we can see the size or the portfolio and drawdown strategies……as it is for most of us.
Hi Kevin, thanks for your comment!
You might like this case study that Mark and I did a few months ago. It’s almost exactly what you’re looking for.
https://www.myownadvisor.ca/they-want-to-spend-50000-per-year-in-retirement-did-they-save-enough/
Agree with Kevin. Also want to see a case study without pension as most of us don’t have it. The case study of 35 years old couple want to retire at 55 is rather extreme. And for people are close to retirement or already retired, their TFSA cannot be half million.
For people without pension, does it mean they should try to have a bigger RRSP? Let’s say to match a $40K pension, they should have $1M RRSP?
Hi May! Mark has been kind enough to invite me back periodically to do case studies, if you have a particular situation that you’d like to do a case study on then my reco would be to reach out to Mark and see if it’s something that could be presented in the future. I’d love to do another case!
Agreed, happy to run some assumptions and case studies on the site so a) Owen can help – including more detailed planning with you and b) so readers can also learn. Win-win. Flip me an email May.
Mark
Hey May, thanks as always for your comments.
Did you see this case study and others on this page?
https://www.myownadvisor.ca/they-want-to-spend-50000-per-year-in-retirement-did-they-save-enough/
https://www.myownadvisor.ca/retirement/
Basically, any couple that wants to spend ~ $50k after taxes, this is more than enough:
“By age 55 they’ll have saved $994,329 in retirement assets, in today’s dollars, plus an emergency fund equal to 12-months expenses. In building this near $1 million portfolio they’ve been smart to max out their TFSAs every year, so it now contains $570,623. The remaining $423,706 is in their RRSPs. Overall their portfolio has a 70/30 mix of stocks and fixed income. We’ll assume a 6% rate of return on stocks and a 2.5% rate of return on fixed income.
Michael and Julie will also have a house worth $600,000 in today’s dollars, which by age 55, will be mortgage-free.”
I will consider some other reader questions I have in my inbox (flooded at times!) for a case-study without any pension whatsoever 🙂
Yes, I saw that one and not related to it very much.
a) People already retired or close to retire cannot have half million TFSA
b) People like me don’t want to count on GIS for retirement.
c) Not every couple can retire on $50K. I am pretty sure I need more than that to be comfortable.
It would be nice to see another case study.
OK May, send me some ideas at myownadvisor.ca@gmail.com and based on what I have in my inbox – I could likely come up with something 🙂
Thanks for that.
Some good points May. I hope you get your wish for another case study. I’m retired just under 5 yrs and what you’ve stated fits me too, and possibly a lot of us.
I’d also consider sending CPP statement of contributions to Doug for a clearer estimate on CPP. We can probably safely assume Sam was mostly at CPP max but there isn’t enough information to say if Margaret was.
Doug is a good guy and happy to run some numbers as well! I think Margaret has some drop-out years related to CPP in the article – again, some assumptions!
One thing I didn’t see is any mention of pension survivor benefits. What happens to that pension if Sam dies much earlier than expected? I’ve seen too many wives left out to dry with an early spousal death. Other than that this financial picture looks pretty good
You know, great point. I’ll see if Owen has a take on that but I didn’t get those details from the reader. I would assume the pension could be 66% survivor benefit. I know of many DB plans are like that.
My survivor benefit is 50% and my health plan would be gone as well. With a chronic illness involved this would add a lot of expenses as there would only be 80% prescription coverage with the one remaining plan. Obviously, not everyone has this concern.
GREAT question Lloyd! As great as DB plans are, this is one of the few small drawbacks.
As Mark mentioned we didn’t get that detail for the case but I looked at a survivor scenario with an assumed 60% survivor benefit. If Sam were to pass away at age 65 then the plan’s success rate drops to 81%, but this assumes absolutely no change in spending and the earliest failures happened in Margarets late 80’s, so with some spending changes the plan would still be very successful (plus Margaret still has the house to fall back on).
I googled it and found this. Same as my pension plan.
“In the event of your death, your eligible survivor will be entitled to a monthly allowance equal to exactly half of the benefit you would have received had you become entitled to an annuity or annual allowance immediately prior to your death.”
https://www.tpsgc-pwgsc.gc.ca/fac-caf/srvv/rnsrgm/aapr-sbe-eng.html
Thanks Lloyd. Just for fun I re-ran the numbers with a 50% survivor benefit and the success rate drops slightly to 80%.
Interesting stuff – thanks for running the math Owen!
Mark