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.”
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.)
- 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 🙂
- 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??
No fixed income.
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.
A few reasons:
- They don’t need the money right now.
- 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.
- CPP offers an income boost by taking CPP at age 70 over age 65 = 42% more money!
- 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!
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:
- 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.
- 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:
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:
- 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.
- 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 🙂
- 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.
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!
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!
If you are interested in obtaining private projections for your financial scenario, check out all the details here!
I look forward to helping you out!
The amount of content you produce is amazing! I don’t know how you do it, but really well done!
I am going to mention a few things I would do differently if I was preparing a plan for these folks. It’s not the right way or anything, it’s just what I would do.
1. I would do calculations to at least age 95. The odds of one of them living to 95 (if both alive at 65). That is high enough of a risk that I would want to cover it. If they have health issues and for sure won’t make it that far, then that’s another story. Same if they don’t care about what kind of home they end up in.
2. Rate of return. Depending on asset allocation, my returns end up around 4.8% (I don’t choose the return, this is where the FP Canada guidelines come in around). I also do an stress-tested scenario of 1% LESS than this, to illustrate what life look likes to cover all eventualities.
3. As they are stopping work early, these folks are going to have a lot of CPP dropout years. They may want to revisit the timing of CPP when they are approaching 60 years old and speak with an expert (like Doug Runchey or David Field) to see what makes the most sense for them. They will have a lot of early years with $0 income where they can draw down RRSP/RRIFs.
4. For a cash wedge, I use one to three years normally. Black swan events happen more often than we’d like to think, and bear markets can last longer than a year. Having to cash out investments when they are down obviously isn’t ideal for long-term security.
These are just my two cents. 🙂
Keep up the fantastic work!
Steve B., CFP®
Sorry, I had a typo and couldn’t get the ‘Edit’ button to work.
In my thought #1, I meant to write that the odds of one of them living to 95 (if both alive at 65) is something around 25%.
Gotcha! 🙂 Those are decent odds I will take if I have my health 🙂
LOL. Thanks Steve.
Happy to reply to your comments to see how different our approaches might be!
1. Yes, true, for any suggestions that come my way (never advice, I can’t!), I also suggest age 95. I decided to do age 90 in this scenario to show primarily how much $1.4 M can really last. Even then from my post:
“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.”
2. That’s good guidance I think, lower is better. I tend to align with FP Canada but less.
I don’t go any higher than 6% with 100% equities. You?
3. Yes, CPP dropout. I don’t think I put those details in but they are only collecting 50% of max CPP. The thinking behind CPP deferral is they can actually draw down RRSP/RRIFs better.
4. You’re more conservative than me personally since I think 1-years’ worth is great for any retiree or semi-retiree but I can appreciate up to 3-years is likely very comfortable.
“A total portfolio value between $1.3 – $1.4 million (which is a lot and very well done).” = for sure!!
Thanks for your detailed comments as always,
You are spot on about the house. I missed this, my bad. Like I believe you do, I treat a paid-off home as a back-up plan to rely on later on in life. I might add a downsize at some point, maybe around age 85 so they can use some of the equity to pay for health care.
I’m with you on no higher than 6% for equities. Your asset allocation of 100% equities is super-interesting. Research-wise, this is technically the best way to go to ensure success in retirement. I do not have the stomach to implement or even recommend it for clients, but happy to have a discussion with people. As we know, every situation is different – some people only need capital preservation as opposed to growth, so a more conservative slant works. The other part of this is the ‘can you sleep at night with 100% equities?’. For some, the answer might be yes, especially if you have a good amount of CPP, OAS and maybe even a defined benefit pension. For those without a DB pension and maybe not so much CPP, it will take a strong stomach to ride a 100% stock portfolio. As the saying goes, “Markets can stay irrational longer than you can stay solvent” (Keynes). There is a lot that goes into being a solid DIY investor, most of it behavioural/psychological (my best guess is 5-10% of people max are cut out for it), and holding on while your life savings goes down by 30% can rattle even the most confident in us.
100% yes on early drawdown of the RRSP/RRIF. They will have 10 years to draw down these funds at a very low tax rate and I am not sure about adding more dropout years to CPP and delaying to 70. For later retirements, almost always yes to delaying to 70. I would want to revisit at age 60 to see what the added dropout years would do. At 50% CPP, you’re only looking at adding about $7k per year in taxable income (at 65), so still lots of room to draw down RRIFs in a low tax bracket.
Again, these are just my thoughts and not necessarily the best answers.
Thanks for letting me share!
Awesome stuff, Steve – as always!
Yes, those dropout years for CPP can have an impact and certainly delayed CPP is not for everyone nor a perfect answer IMO. Pay tax now/get income now since you need it or pay tax later kinda thingy. 🙂
Mark, this is one of the most comprehensive posts and deep-dives on the subject. One question I have though is why do you have an equity only portfolio returning just 6%? Historically it has been closer to 10%.
I was very conservative with my numbers (6% vs. 10%). While I would aspire/wish to have 10% equity returns in the coming decades, there is no bet on that. I think anything closer to 6% from a 100% equity portfolio is more realistic. Worse case, I have more money to spend over time.
I’ve read many of your posts and your sometimes write about a “RNT” withdrawal order and some other times a “RTN” order (like in this case study). Is there a particular reason why you would recommend a withdrawal order over the other? Or maybe, it’s just that your mind isn’t completely set on the “right” withdrawal order yet… 😉
Ha. Well, I believe my order will be RNT/NRT. So, RRSP withdrawls combined with slow drawdown of non-reg. and definitely keeping TFSAs to compound away tax-free until the end.
We don’t intend to touch our TFSA assets in any early retirement.
“By our early 70s, with most if not all non-registered assets gone and our RRSP/RRIF assets likely gone, our plan is to live off income from any workplace pensions, government benefits (CPP and OAS) and make tax-free TFSA income/withdrawals.”
I figure in our late-70s, if we don’t touch our TFSAs, and we keep contributing to them between now and age 60 or 65, they should be worth about $1M combined by then. That’s a solid $40k-$50k per year to spend in our late-70s and 80s. We’ll spend everything else before that.
Then again Paddy, I could change my mind 🙂
What’s your drawdown order?
Hi Mark, here’s the drawdown order I had in mind :
– age 60 to 64 : small workplace pension + LIRA + RRSP
– age 65 to 69 : pension + LIRA + RRSP + AOS (still debating whether to delay QPP or AOS ’til 70, I know your position on this one 🙂 )
– age 70 to 71 : pension + LIRA + RRSP + AOS + QPP
– age 72 to 84 : pension + LIRA + RRIF + AOS + QPP
– age 85 and over : pension + LIRA (if any left) + AOS + QPP + non-reg first and then TFSA
I thought that, for tax purposes, it would be better to withdraw non-reg first over a few years, then end with TFSA.
What do you think?
Generally speaking, without running all the detailed math – makes sense!
For many folks with a small pension or even large pension at all at Cashflows & Portfolios, we see a combination of “RNT” or “NRT” as being the most efficient therefore leaving the TFSA “until the end” as the pension income continues + CPP + OAS when folks are 70+ and beyond. This means non-reg and RRSPs/RRIFs are largely gone by the 70s or 80s via slow withdrawals over a few decades leaving the TFSA last.
Again, not a must by any means but certainly a good drawdown order consideration. 🙂
This scenario is very similar to mine, thanks!
Now retired, should I be withdrawing an excess $7300 from RRSP at 25% marginal tax rate to fund my $5500 TFSA annual room?
Or should I just be moving $5500 cash from my 3.6% yield Canadian Dividend producing non registered portfolio to top up my TFSA?
I suspect Option 2, but I am attached to that idea of the dividend tax credit.
Our CPP our be delayed till 70 as I consider it a big inflation protected Bond. So should be living in the 25% Marginal Bracket for 15 years until age 70.
Sorry Mark, confusing blogger’s names 🙂
LOL, all good, I know what you meant 🙂
Another excellent article. Thanks
Thanks very much, Greg.
Always great to hear from readers!
Not tax advice at all, BK…but….if the tax rate doesn’t climb for you re: put you in a higher tax bracket then I would strongly consider pulling money out of the RRSP, over time, and moving into TFSA every year for tax-free wealth building power.
We have seen some couples or individuals at Cashflows & Portfolios have > $300k in their TFSAs projected in the next few years, which is $10-15k tax-free income per year. Not trivial at all 🙂
Very smart to delay CPP if a) you don’t need the money now and b) you can withdraw RRSPs/RRIFs comfortably now in your 50s and 60s. CPP is very much a BIG bond in my book and inflation-protected too!
BK the answer is likely.
Since you are retired at 55 and said “our”, i will assume you have a partner to share the tax burden with.
TFSA room is 6K now so you might have to draw out less to meet the tax obligation however it depends on so many factors. Two people can create 50K of income cheaper then a single person. If you are in Alberta and each are drawing 25K from your RRSP to create income the effective tax rate isn’t 25% but rather 4307 tax/50K = 8.6%.
Since you have dividend income as well a scenario with 40K RRSP and 10K dividends where you each claim 20K rrsp and 5K dividends, has an effective tax rate of 3393 tax/50K = 6.8% on every dollar withdrawn. 3393/40K = 8.4% on the RRSP portion.
Since you will have a withholding tax of 30% on the RRSP withdraw, you will get a nice tax refund to deposit into TFSA.
Use the taxtips calculator to run scenarios.
I strongly encourage you to reach out to Doug at drpensions and have him run your CPP numbers. You get more by waiting but because you have added more zero years, it might not be as big a boost as you think. The chart will allow you to calculate % increases for each year and pick the sweet spot to start CPP. Make that decision on the accurate information Doug creates.
All the best
Great comment and insights, thanks Gruff.
Great information… as always Mark! My wife and I are doing this already. We have NO pension…either of us. We have one last rental house to sell in 2023. Our TFSA’s are both maxed out, RRSP room almost used up..( saved some room for capital gains on the last rental property).
We invest in Canadian companies..tsx. We are sitting at 1.3 million invested!! We are going to live off the Canadian paid Dividends. Will be making more on Dividends than I did while working… PLUS the HUGE Canadian Tax benefit. Paying NO TAX! And no management fees , just the small fee to purchase or sell the stocks.
Very encouraging to read your article Mark.
With $1.3M in the bank/portfolio and then some with the future rental sale I suspect you are WELL on your way to financial independence.
The math tells the tale: average 6% returns with $1.3M in the bank, a focus on equities, and that should allow you (or others) to spend $72k or year per increasing with inflation so for 40+ years without fail 🙂
Trust me, I love Canadian dividend paying stocks too! :))
Ross, can you please explain what do you mean by “saved some room for capital gains on the last rental property”?
Thank you for taking the time to provide readers who are planning their retirement.
This is a very detailed analysis and synopsis. 👍👍
Great info to think about when planning one’s retirement and financial security.
Thanks very much. 🙂
This is very promising! I would have thought they need a portfolio size of well over 2 million based on 4% rule to cover their 72K annual spending. Very enlightening Mark 🙂
When you focus on the 4% rule, for 30-40 years (or more), that assumes as very conservative withdrawal IMO.
Hey Mark, love these case studies and thank you for doing them.
The couple will need $60K per year excluding travel as it is mostly offset by the part-time job and adding another $10K for taxes will get them to $70K/ year. That is 5.2% on the $1.35M investments.
Is this based on Variable percentage withdrawal at age 50 and 100% equity?
If it is what is the success rate and the backup plan in case of a market crash of 30% or higher given that CPP and OAS will not kick in for at least another 15 years?
Yes, but this is not really based on VPW (Variable Percentage Withdrawal) since the VPW model spening more in “good” years and spending a bit less in “bad” years. This couple Ashley and Tim surely could make their portfolio last longer but spending a bit less/travelling a bit less in years whereby the market is terrible. 6% for 100% equity returns is also a bit conservative but I wanted to do a scencario whereby even a 100% equity portfolio might be tested.
Essentially, 5.3% withdrawal rate on $1.35M investments lasts at least 40 years with >6% returns and 3% sustained inflation.
I think for this couple, a good back-up plan is more part-time work in the first 5 years if the stock market totally when into the tank whereby they don’t need to withdraw anything from their portfolio at all – no dividends or capital gains. That would be VERY safe IMO.
Thoughts on that?
I entered the assumptions you have made in CFIREsim and the probability of success is 80-85% which I think it is very low. I did not take into account the additional part-time work in case markets tank.
I would be more comfortable with an initial portfolio of around $1.6M which is approx 4.4% but that is just me and that is why it is Personal Finance 🙂
80-85% is pretty good I think. I would say anything under 50% is low.
Again, this couple has a >$3M home they can liquidate or downsize or sell at or before age 90. The home is worth >$2M at age 70. Pretty good deal I think overall.
If this couple is in trouble at age 50, with ~ $1.35M in portolio assets, I think the majority of Canadians are doomed.
Very simplistic but enlightening.
One would have to presume that they are going to equally withdraw from their RRSP’s so as to minimize any taxes withheld on withdrawal and/or when they file their income tax files in April. So again we have to assume that their RRSP’s are equally balanced value wise.
When I had my first pre-retirement analysis review (approx 2015) one of the first questions asked was – How much do you want/need? My answer was $40K NET. The immediate reply was $60K gross to take in a projected 30% income tax rate (QC). So A&T would need $102K gross if it was all coming out of one account. If they have equally balanced RRSP’s then their tax rate could be lowered as each would “only” need approx $3K net per month – $51K yr gross- to achieve their goals. Having said that married or CL couples do have to combine their revenue so taxes are still higher than a single person.
OAS is pretty well a given amount. As you mentioned the CPP might be less than the max if they have not achieved the minimum # of years as well as yearly maximum contribution amount to be eligible for the max CPP payment.
As to A’s dog sitter job, any bets that it is “under the table” LOL
$1.35 million is not a hell of a lot to live off of at age 50 unkess they have some reliable occasional income.
You got it Ricardo, RRSP withdrawals before age 71/RRIF established, taxes withheld, then settle up come income tax time.
I think $72k per year, per couple, then doubling to spending $140k in another 20 years is pretty good in fact.
The fact that A’s pet sitting gig is established, puts them over the top and in fine shape. It’s actually not doable if Ashley’s pet sitting work/income doesn’t happen since 3% inflation combined with wanting to spend $6k on average per month makes it very tight to age 90.
Ashley’s pet sitting job does in fact count for taxes owing 🙂
Thanks for your comment and kind words.