How much do you need to retire on $6,000 per month?

How much do you need to retire on $6,000 per month?

In a previous post on my site, I highlighted how much you need to save to retire on $5,000 per month.

That’s a decent retirement spend for some, but based on reader feedback, maybe not quite enough for others. 

Inspired by more reader questions, emails and comments, when it comes to early retirement this post is about how much do you need to retire on $6,000 per month.

How much do you need to retire? It’s all about the math and some assumptions

To quote a reader comment:

“Interesting case study and very interesting comments. Different people will certainly have different cash flow requirements.”

Indeed.

Ultimately, I believe for all of us, you need to consider what your desired spend is to determine your “enough” number.

We’re all different.

Reference: The Behavior Gap

Ashley and Tim want to retire on $6,000 per month – how much is enough?

In our case study today, Ashely and Tim have done very well in my opinion.

First, they plan to enter retirement without any debt next year. 

Second, they’ve worked hard to maximize contributions to their Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). They needed to. Without any workplace pensions to rely on, they’ll largely need to fund early retirement on their own.

Third, although their base spending is really closer to $5,000 or so per month, they want to travel a bit internationally in retirement. Ashley and Tim want to travel to Portugal every winter for at least a month to get away from our cold Canadian winters. So, their retirement drawdown plan is required to fund another $1,000 per month in travel expenses or about $12,000 per year on average. Ashley’s part-time work in her 50s is likely to cover the international travel fund…but they don’t know for sure…

Can they retire at age 50 with what they have?

How much is enough to spend on average $6,000 per month in retirement in their “go-go” years?

I have those answers. See below!

Here are Ashley and Tim’s assumptions…

Retirement Assets and Liabilities:

• My fictional couple wants to retire next year at age 50.
• Like many people these days, they remain worried about inflation, both pre-retirement but more importantly during retirement when they are no longer working. So, I’ve pegged inflation at 3% sustained until age 90. Inflation could of course be higher near-term (and likely will be) or lower over time. Who knows! I believe 3% is rather safe for projections purposes over the coming decades. (Historically, our Bank of Canada has set inflation targets at just 2% but, in my opinion, they’ve totally dropped the ball in recent years and are now playing catch up.)

Reference: https://www.bankofcanada.ca/core-functions/monetary-policy/inflation/

• Ashley and Tim are sharp because not only do they read My Own Advisor all the time (thanks very much! 🙂 – but they know with inflation running higher, they will need more stocks than bonds over time to generate returns from their portfolio. They’ve learned to live with stocks in fact – and own many income producing dividend stocks like I do. So, they are 100% stock/equity investors + a cash wedge. 
  • They own a collection of dividend paying stocks that should deliver about 6% long-term equity returns (including dividends and distributions paid) over the coming decades, assuming they remain 100% equity for the coming decades. 
  • They also own one (1) low cost ex-Canada ETF in XAW. By owning XAW, they remove individual stock selection bias by owning thousands of stocks from around the world beyond Canada for long-term growth. By owning XAW they even fired their financial advisor 🙂

Reference: iShares

• Because they fired their financial advisor, my fictional retirement couple doesn’t pay much in money management fees as well. Beyond a few transactions per year, they don’t pay any fees – good on them to do so!
• To summarize their portfolio, they are 100% stocks, they own XAW, a mix of BTSX dividend paying stocks, and a few U.S. stocks as well for dividend income and capital gains.

What about cash??

Ashley and Tim are going to do what I intend to do: they will keep 1-years’ worth of cash in savings and do not intend to touch that stash-cash unless there is a major emergency and/or they absolutely need the money for living expenses as part of their drawdown order.

So, their general withdrawal plan is to slowly draw down their portfolio, expecting to earn about 6% on average for the coming 40-45 years and keep 1-years’ worth in cash savings just in case. 

No fixed income??

Correct. 

No fixed income. 

Scary?

Not so much!

Remember, for my fictional couple, they will eventually have income security from government benefits. In fact, they are being smart about those too.

Since they want to retire early, and therefore won’t have max contributions to their Canada Pension Plan (CPP), they intend to delay CPP benefits until age 70.

Why?

A few reasons:

1. They don’t need the money right now.
2. Ashley and Tim believe there is a strong chance one of them will live until age 85 so given that, they will use CPP and OAS to help fight longevity risk. In fact, using this assumption, they exceed a break-even point for when to take CPP at age 70 over age 65. Read on for more details here.
3. CPP offers an income boost by taking CPP at age 70 over age 65 = 42% more money!
4. CPP offers survivorship benefits unlike Old Age Security (OAS). So, if you are going to defer any government benefit past age 65, then CPP is the one to do it with.

Both CPP and OAS are fixed income benefits but you should know they also deliver inflation-protected benefits.

CPP is indexed in two ways for retirees and workers contributing to the plan:

First, CPP payments are indexed to the consumer price index (CPI), as measured over the 12-month period ending in October of the previous year. The changes take effect on Jan. 1 of each year. 

Second, CPP performs certain calculations based on the year’s maximum pensionable earnings (YMPE), which is indexed for wage inflation. The amount increases each Jan. 1 by the percentage increase in the 12-month average of the average weekly earnings in the industrial aggregate (as published by Statistics Canada, as of June 30 of the preceding year). It is then rounded down to the nearest $100. YMPE has been increasing year-over-year but for Ashley and Tim – they just care about CPI as retirees.

OAS is also indexed.

All OAS benefits are indexed, on a quarterly basis (in January, April, July and October), so that they maintain their value over time, even as prices increase. Increases to OAS benefits are calculated also using CPI – which measures changes in prices paid by Canadian consumers for goods and services. OAS payment amounts will only increase or stay the same.

In fact, for seniors over age 75 now, OAS just got a benefit bump as well!

Reference: https://www.canada.ca/en/employment-social-development/news/2022/07/increase-to-the-old-age-security-pension-for-seniors-aged-75-years-and-older-begins-this-month.html

So, even as 100% equity investors, with a cash wedge, Ashley and Tim won’t always be 100% equity since both CPP and OAS will eventually come online to support some inflation-protected, fixed income benefits in their 60s, 70s and beyond….

Before we get into the numbers, here are the assumptions:

Retirement Profile:

• Ashley and Tim – age 49 – want to retire next year.
• Retirement age = 50.
• Retirement longevity plan = 40 years until age 90. Can go with a “nuclear” plan to sell their home after age 90 if they need more money. 

Retirement Assumptions:

• 1-years’ worth of cash, expected return = 1.5%.
• 100% equity/stock portfolio return = 6%.
• No plans to take on any more debt.
• Expected CPP benefit age 70 for both = 50% of contributions.
• Start OAS both age 65. Both Ashley and Tim have lived in Canada for 40+ years and intend to recieve max OAS benefits accordingly. Government benefits will be prorated the first year. 
• Inflation 3%.
• No TFSA contribution room left for either. 
• No RRSP contribution room left for either.
• Ashley plans to make some semi-retirement income from pet setting from time-to-time, about $12,000 per year after taxes in her 50s until age 60. This income is not indexed at all. 
• Ashley and Tim own their home, here in Ontario. Selling their house in their 80s or 90s is part of their “nuclear” plan to fund any older-age retirement income needs.
• They’ve amassed an impressive $1.35 million in portfolio assets at the time of this post. The majority of their assets are inside their RRSPs ($950,000 combined). The rest is a mix of TFSAs ($250,000 combined) and non-registered assets owned by Tim. 
• A reminder they have no workplace pensions at all.
• CPP and OAS are both indexed to 3% inflation.
• They own their home now worth $900,000 with real estate to appreciate by 3%. 
• There is no inheritance in their future to speak of…

Finally, I’ll assume somewhat of a die-broke plan for them, until age 90. That means beyond keeping their paid off home, they intend to spend $6,000 per month on average with 3% inflation every year, and only keep their house for estate planning or that nuclear-plan I wrote about above. 

How much do you need to retire on $6,000 per month results

With a retirement drawdown order of “RTN”, (R) for RRSPs first, then (T) TFSAs next, and then finally (N) for any cash savings leftover, here are the results with 3% sustained inflation and 6% all-equity returns.

Table 1 – After Tax Spending:

Success!

Only at age 90, does our couple Ashley and Tim run into a financial shortfall. Even then, at 3% real estate inflation they now have a $3 million dollar real estate asset to liquidate. 

Table 2 – Sources of Income:

Some notes about this RTN drawdown order, including why RRSPs first over TFSAs:

1. RRSP/RRIF assets are a tax liability. Therefore, slow, methodical drawdowns tends to work to smooth out taxes before tapping any government, inflation-protected benefits like CPP and OAS. In our case study today, that means age 70 for CPP in particular. 
2. TFSA assets have no tax liability. This makes TFSA withdrawals not only tax-free but it also makes keeping TFSA assets until later in life, an excellent estate planning tool! Remember you heard that estate planning idea here first 🙂
3. Keeping non-registered assets until the end can also be tax-efficient. They happen to own many Canadian dividend paying stocks for the dividend tax credit. 

How much do you need to retire on $6,000 per month summary 

After running some math, I can conclude that the following:

• Canadians can retire around age 50 with a total portfolio investment value between $1.3 – $1.4 million (which is a lot and very well done) assuming a strong bias to dividend paying equities/a portfolio of equities that earns 6% returns on average throughout retirement (dividends + capital gains).
• If folks consider CPP at age 70 and earn max OAS benefits at age 65.
• Keeping 1-years’ worth of cash as an emergency fund/cash wedge just in case things come up in retirement that you absolutely didn’t see coming.

Most couples, who have been smart and focusing on maxing out contributions to their TFSAs and RRSPs for decades on end, even if they have no workplace pension whatsoever, should be just fine in retirement.

The keys beyond saving and investing with equities of course is keeping your money management fees away from greedy financial piranhas, being very selectful of your retirement drawdown order, and ensuring you’re smart with CPP and OAS decisions.

Thanks for your readership and do consider sharing this detailed case study with others!

I look forward to your comments.

Mark

Do you have some ideas for a case study? Got something on your mind? Leave a comment and ask away. I will do my best to accommodate some more!

Related Reading:

Here is the tax treatment of Canadian dividend paying stocks – for tax efficiency.

How much do you need to retire on $5,000 per month until age 95.

Can this couple retire at age 55, with $800,000 in their RRSPs, with higher inflation?

When to take your CPP benefit.

Can you retire early, on a lower income?

This couple wants to retire early at age 52. Did they save enough??

All figures, tables and assumptions above are for educational and illustrative purposes only and never implies any financial or tax advice. I look forward to posting more case studies over time.

There are other case studies on my Retirement page here.

Need help or support with your retirement projections? I can help!

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.