Spend more or retire earlier in this bulletproof retirement plan

Spend more or retire earlier in this bulletproof retirement plan

The following case study was a prepared a few months ago prior to our world getting rocked by the COVID-19 pandemic. Although some of the portfolio values have changed it remains an outstanding case study in retirement preparedness. I hope you enjoy the post.

The opportunity to listen and learn from others is invaluable in many cases. Sometimes, it doesn’t cost a thing. Such as reading this site and my case studies!

You can find out here why you should ignore any 4% withdrawal rule on your path to early retirement.

Both passive (indexing) and active investing can build retirement wealth and exist in retirement harmony. You don’t have to choose one over the other.

If you know your average yearly expenses will be about $50,000 per year in retirement, this case study will tell you definitively how much you need.

A few months ago, a reader asked the following questions to me for the basis of today’s case study:

Mark,

How do I know I have enough? I definitely think I do but I’m wondering if I could get some help with the numbers. What do you think or what would any of your financial expert friends think? 

Here goes, some facts to help you with your exercise:

  • I’m 60 now, planning to retire when I’m 65. I plan to receive $4,662.80/month from a defined benefit pension plan at that time after many decades of full-time work. 
  • If I take my CPP (should be $1,324.58/month) and OAS ($684.08) at the age of 65, I figure I’ll end up with about $80,000 before taxes (which is far beyond the $45,000 per year after-tax that I think I’ll need based on my estimated yearly expenditures).
  • I’m concerned about OAS clawback. Should I put off CPP and/or OAS till I’m 70. My other concern however: I might not live beyond early 80s (family heritage plus diabetes issues now). Might as well take it now..?
  • I have a sizable defined contribution pension plan worth $490,000; in an accelerated growth fund of PEPP (PEBA). (Mark – I have highlighted that fund here.) I plan to convert this to a RRIF by December 31 the year that I’m 71 (variable pension benefits) and start withdrawing the mandatory amount of >5% when I’m 72. 
  • I have a small $16,000 RRSP in TD Comfort Balance Growth Portfolio.
  • I have a small $5,000 GIC at TD earning 2.55% maturing September 11, 2020.
  • I have a $77,000 TFSA and a $23,000 non-registered account, both at BMO SmartFolio in the “Balanced Portfolio”.

I know I have enough to retire but my real questions are:

  1. Should I take CPP and OAS sooner to avoid the OAS clawback? (I think so but not sure.)
  2. What order should I draw down my investments and why? Should I keep my TFSA “until the end”?

For what it’s worth I live and work in Saskatchewan (hence the PEPP accelerated growth fund from the Government of Saskatchewan); I own my home worth maybe $350,000-$400,000 now (?) and I have no debts. I aspire to live on my own and move into a smaller $250,000 valued-senior’s condo when I turn age 65, spend a bit of money renovating it (say $30,000) before I move in and spend the rest.

Thanks so much!!!

Samantha (Sam)

Wow, great details to work with.

My Own Advisor take

On the surface, without doing any detailed analysis, Sam is going to be just fine. I mean, that $490,000 defined contribution pension is near-gold considering she only plans to spend $45,000 or so per year in retirement. Without any debt, using one of my favourite, simple retirement calculators, that $490k alone will generate almost $30,000 per year (pre-tax) assuming a 5% return lasting until age 82 or so.

That income coupled with Sam’s “big bond” ($4,662.80/month pre-tax) from a defined benefit pension at age 65 and she’s definitely earning more than her planned expenditures.

But those are just my assumptions. I don’t want to offer any direct advice but I did want to help Sam out so I once again enlisted some help.

Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (QAFP) and founder of PlanEasy.ca.  He specializes in budgeting, cashflow, taxes & benefits, and retirement planning – working with both individuals and young families to help them with comprehensive financial plans from today to age 100.

Owen, detailed thoughts for Sam’s situation?

Professional take

Mark, to say the least, Sam is in a great position for retirement. With very reasonable spending expectations, a good defined benefit pension worth $4,202 per month in today’s dollars, plus Canada Pension Plan (CPP) and Old Age Security (OAS) in her future, she will have absolutely no trouble reaching her spending goal in retirement. On top of all this she also has a very healthy defined contribution pension plan (DCPP) currently worth $490,000.

Should Sam take her CPP and OAS sooner to avoid OAS clawback?

One unique aspect to Sam’s plan is that because her DCPP is regulated in Saskatchewan she has the option to convert these funds to a Prescribed Registered Retirement Income Fund (pRRIF) at retirement. Unlike other provinces where these funds would be placed in a locked-in account with both maximum and minimum annual withdrawals, (I know you wrote about your own locked-in account here), the Prescribed RRIF (pRRIF) only has a minimum annual withdrawal. This gives Sam more flexibility in retirement and there is no need to plan for unlocking of a LIRA/LIF in the future. If Sam wants to retire earlier this will be an advantage.

In retirement OAS clawbacks will definitely be a concern for Sam. With pension income, CPP, and mandatory minimum withdrawals on the pRRIF, Sam will certainly face OAS clawbacks in retirement. This clawback currently starts when net income reaches $79,054 for an individual and reduces OAS by 15% of every additional dollar of income above this threshold. Because OAS is a taxable benefit the net after tax impact of this 15% clawback is closer to 9.2% for Sam.

When we combine Sam’s marginal income tax rate of 38.50% and the after-tax impact of OAS clawbacks of 9.2% this means Sam will face a marginal effective tax rate of 47.7% in retirement. That’s quite high!

An additional $10,000 in retirement spending will require registered withdrawals of $19,120 ($10,000 for spending and $9,120 for tax and net OAS clawbacks).

Even with this higher tax and OAS clawback, Sam will have no issue meeting her retirement spending goal. In fact, I don’t think the right question is being asked. I think instead of thinking about OAS clawbacks I think Sam should be thinking about retiring earlier or spending more in retirement.

Sam is thinking about delaying CPP to age 70 but intends to take OAS at age 65. I think it’s worth pointing out for Sam and your readers Mark, the lower actuarial adjustment when delaying OAS makes it less attractive than delaying CPP.

Mark, you wrote about those OAS facts for your readers here:

“When it comes to deferring CPP instead of OAS – people need to consider this:  CPP payments have a benefit bump of 42% if Canadians wait until age 70 to take their CPP benefit (versus 36% for OAS benefits starting at age 70).”

Sam would like to at least $45,000 in after-tax spending in retirement – again, not going to be a problem! With no mortgage payments on her home this is more than enough to meet her core spending and provide a generous amount for travel and hobbies in retirement.

Sam plans to delay drawing on her registered assets for as long as possible. Often this isn’t an attractive strategy, as it can mean increased marginal tax rates once withdrawals begin, but because Sam doesn’t need this income to support retirement spending, and seems to have maxed out her TFSA, we’ll see later on some options Sam should consider.

Sam has also planned to downsize her home at age 65 to a smaller home worth $250,000 in today’s dollars. She’s assumed $30,000 for renovation costs and we’ll stick with that. I’ve assumed up to $20,000 for selling and legal fees on the old property (~5% of the value). This adds a bit to Sam’s spending (age 65 – I’ve rounded up a bit) in the first year of retirement but this is more than covered by the proceeds of the sale. I would suggest any extra funds are used to maximize TFSA contribution room for the coming years. 

Base Plan: Retirement Spending

Owen bulletproof first pic

Base Plan: Retirement Income

Owen bulletproof second pic

(Note: Although labelled as a “LIF” these withdrawals are actually from the pRRIF)

Base Plan: Net Worth

Owen bulletproof third pic

Base Plan: Success Rate

(Based on historical stock returns, bond returns and inflation rates)

Owen bulletproof fourth pic

As we can see this plan is bulletproof. 

So with such a solid plan I’d like to offer Sam the opportunity to retire earlier or spend more in retirement.

Option 1: Spending More In Retirement

With her defined benefit pension, CPP, OAS, and registered assets, Sam has the ability to increase her spending level incredibly by 50% without greatly impacting her success rate.

Even after adding an extra $25,000 per year in spending this is still a very solid option. Sam will be able to dramatically increase her level of spending in retirement unless faced with a series of very poor investment returns early in retirement.

Option 1: Net Worth – Spending More In Retirement

Owen bulletproof fifth pic

But instead of just telling Sam she can spend more given her fixed income from pensions and government benefits, we want to ensure Sam is comfortable with this higher level of spending. So, we test this new withdrawal plan to see how it would perform over historical scenarios of stock returns, bond returns, and inflation rates. Each line in the chart below represents one starting year. It’s as if Sam retired in 1910, 1930, 1955, 1970, etc.

Not surprisingly, adding 50% more spending to the bulletproof plan changes things a bit. If faced with a series of poor or negative investment returns early in retirement Sam may experience some large drops in her portfolio value. To offset this risk, she could decrease some of that extra $25,000 per year discretionary spending in “down years”.

Actually, this practical way of spending in retirement is what Mark wrote about when he discussed Variable Percentage Withdrawal.

Option 1: Success Rate – Spending More In Retirement

Owen bulletproof sixth pic

Although historical scenarios are a good test of a retirement plan, it may not fully capture the variability we could expect in the future. We’ve all seen what COVID-19 has done to the markets recently.

Who could have predicted the speed and dept of this impact?

Still, because this extra $25,000 is really discretionary spending each year, Sam has the ability to cut back if she were faced with something worse than we’ve ever experienced in the past. She can always “revert back” to the base plan which has a 100% success rate.

Option 2: Retiring Earlier

Another major option Sam may want to consider is retiring earlier while keeping to her original spending goal of about $45,000 per year. Because the pension is available at age 65, this would require spending down some of her investment assets between now and when the pension begins – to avoid any early retirement pension penalties. This option leads to a dramatic decrease in investment assets between ages 60-65 but this decline stops after the pension begins.

This decrease in investment assets can be slowed down by taking CPP earlier (now, age 60). This may be attractive if Sam faces a recession in early retirement. If Sam experiences depressed investment values in the first 5-years of retirement (before her defined benefit pension begins), CPP at age 60 can help slow down the draw down on her personal investment portfolio.

The other big benefit of retiring earlier is that Sam could downsize now rather than waiting 5-years. Who knows what the future might hold? 

Option 2: Net Worth – Retire Earlier

Owen bulletproof 7 pic

Again, this option is successful in all historical scenarios but faces some risk in early retirement if Sam experiences prolonged decreased asset values in early retirement. Her plan is still very successful by historical standards.

Option 2: Success Rate – Retire Earlier

Owen bulletproof 8 pic

A bulletproof retirement plan

Sam has an extremely solid retirement plan. She is very fortunate thanks to that defined benefit pension plan alone…

Given Sam’s sizable net worth coupled with modest spending plan, she should have a great deal of confidence knowing her plan can withstand even the most difficult historical periods including the one we are going through now. Her fortunate financial position means that she will face some big financial decisions around possibly retiring earlier or increasing retirement spending (or perhaps a mix of both which we could also explore with her).

As Mark always says on his site, assuming good health, many financial options in retirement are great problems to have.

Even with higher marginal tax rates and OAS clawbacks, Sam will be able to enjoy a high level of retirement spending without ever having to worry about possibly running out of money in the future.

Good luck Sam and let me know if you need some extra help – I’m here to help!

Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (QAFP) 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.

A big thank you Owen for working through this case study. While there is no affiliation, feel free to reach out to Owen about running some numbers when it comes to your financial plan. I know he’s only happy to help.

We’ll have more case studies in the future. 

Disclosure:  I (My Own Advisor) along with 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 general case study purposes only, including for Sam. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

16 Responses to "Spend more or retire earlier in this bulletproof retirement plan"

    1. With that great pension, and modest living expenses, Samantha will be just fine and should consider retiring sooner…just me! Life is short and precious.

      How is the dividend income flowing in cannew?

      Mark

      Reply
    2. In terms of personal finance they’re definitely in a good place financially and its more about personal choices now rather than financial ones. Retire earlier, spend more, do both, those can be surprisingly hard decisions for someone who’s used to living well below their means.

      Reply
  1. Congratulations Sam on what you have accomplished financially. Your real questions aren’t so much financial but personal. Consider what you want your financial legacy to be and work backwards. Money to charity, family, grandkids etc…
    What do you want the next 30 years to look like? I would rather stop full time work at 60 and live an active life with a smaller bank roll then end up having substantially more money but unfit to enjoy it. Life is more than work. Time to FIWOOT!
    Can’t see how you can avoid OAS recovery tax but that’s a nice problem to have.
    Take the CPP early and enjoy it. You could donate it to help with taxes or fund your TFSA/ Non registered accounts. Grandkids RESP
    Consider winding down RRSP now. Look at your current tax bracket compared to future tax bracket. If they are the same or your awesome pensions push you into higher bracket, there is little point having an RRSP.
    You won’t have an income problem but a tax problem. I would definitely seek professional advice.
    Well done and best of luck.

    Reply
    1. I agree Gruff, nice to have options and I think Samantha should definitely consider retiring early assuming her DB pension is secure. That income alone will almost cover all possible expenses for life. Once CPP and OAS are added in, she is going to be just fine to say the least.

      Sam will likely have a small legacy to consider which is a great opportunity 🙂

      I hope she is reading her case study!

      Thanks for your comments,
      Mark

      Reply
    2. Well said Gruff. Leaving a financial legacy is a great opportunity for the extra assets. Gifts to charity earlier in Sam’s retirement could definitely be an option and could help with the tax situation.

      Personally my wife has a block of shares that she’s had since starting her first job over a decade ago. We’re still holding onto those shares and hope to donate them in the future. They’re non-registered so the idea is to use them for larger annual donations in the future and avoid the capital gains tax.

      Reply
      1. Great stuff Owen and keep up the good work on donations. We try and give back where we can too…I feel it’s always important to help others.
        Mark

        Reply
  2. First of all, congrats on your position, Sam. You have myriad options as far as how you’d like to play this out. Retiring even earlier than planning seems a judicious option given you’re going to be so far above the levels of capitalization you’d need to pull off even a modest retirement. Thank you for sharing—great case study.

    Take care,
    Ryan

    Reply
  3. Great info. I always look forward to these weekend posts. Question, has anyone ever modelled using the ‘Minimal RRSP withdrawal’ as simple drawdown strategy? Just take what the government says you have to take, but from both registered and non-registered accounts. In comparison to the 4% rule with annual inflation adjustments.

    Reply
    1. Hi Doug,
      Not a tax expert but I was goofing around with the taxtips.ca calculators. Apparently a 55 year old can take 12 K from RRIF and 26K in eligible dividends and pay no tax. Age 55 can take 50K of eligible dividends and pay no tax as long as that’s their only source of income. It’s when you add on other income sources like pensions and eventually OAS and CPP etc.. that taxes are a challenge to reduce. Trick is to minimize tax over time. That’s why people need to look at all sources of future income. Many with pensions get caught with large RRIF/RRSP tax owing so sometimes you need to consider drawing down RRIF/ RRSP before age 72. Interesting question.

      Reply
      1. So, that’s $12k RRIF + $26k from eligible dividends (non-registered I fully assume) = $38k. Not much to live on but doable! Then you add in some CPP for 55 year-old in a few years (age 60), OAS, starting to look not too bad as long as expenses are modest.

        I’m not sure what I’m going to do for taxes… I hope to earn close to the following in the next 5-10 years:

        1. Up to $20k from taxable account alone. (Say $1,500 per month. Ideally covers our property taxes, condo fees and condo utilities for life.)
        2. Blog?? Say $1k per month.
        3. RRSP withdrawals in 50s = about $15k from each RRSP per year (mine, my wife’s). Do that 10-20 years before workplace pensions kick in. (Say another $2,000 per month).
        4. Hopefully wife can work part-time and earn another $1,000 per month after tax.
        ______________
        ~$4,000 – $5,000 per month after tax assuming no debt for semi-retirement.

        “That’s why people need to look at all sources of future income. Many with pensions get caught with large RRIF/RRSP tax owing so sometimes you need to consider drawing down RRIF/ RRSP before age 72.”

        Very smart!
        Mark

        Reply
    2. I haven’t myself Doug but I think it’s worth a look depending upon what pension or other retirement income you have in the pipeline. I have plans to tap my RRSP in another 5-10 years in my 50s. I intend to draw it down over a period of 10-20 years and likely defer any workplace pension for as long as I can to ensure I don’t get hit with any early withdrawal penalties.

      At least that is my thinking now!

      Have you seen this article? A 4% withdrawal rate would be very conservative for the RRSP if you’re starting in your 50s or 60s I would think.
      https://www.myownadvisor.ca/the-benefits-of-variable-percentage-withdrawals-vpw/

      Reply

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