They want to spend $50,000 per year in retirement. Did they save enough?
Michael and Julie want to spend $50,000 per year in retirement. They are 35.
The “4% Rule” says they need $1.25 million at age 55.
But do they really need that much? This comprehensive case study will tell you the answer.
What’s That 4% Rule Again?
I suspect we all want some freedom to spend our days as we please. For many of us, our goal is to save enough to sustain our lifestyle indefinitely.
So much do we need to retire? The ‘ol 4% rule is a great starting point.
The 4% rule says that you can ‘safely’ withdraw 4% of your original portfolio each year, adjusted for inflation, for at least 30 years and have a reasonably high chance of having money left over. Based on the 4% rule, Michael and Julie would need 25x their annual expenses to retire early. If they want to spend $50,000/year in retirement they would need $1.25 million in retirement assets.
If $1.25 million seems like a lot (and it is!), some people go even further by targeting more conservative withdrawal rates of 3% or even 2%. At these low withdrawal rates Michael and Julie would need $1.67 million to $2.5 million in savings to retire early!
Do they really need that much?
Enough For Some, Not Enough For Others
When figuring out how much you need for retirement, understanding how much you intend to spend is the most important factor.
Mark wrote about that on his site many times including this article here.
But knowing your core spending isn’t the only factor. Having flexibility in your spending will assure that you have a more sustainable retirement. You see, core spending isn’t very flexible. Core spending includes things like property taxes, groceries and maybe Netflix. Accounting for flexible spending is important too. Spending on travel, hobbies, and major home renovations are just some examples of flexible spending that can, and do, occur in retirement. The more flexible you are with your retirement spending the more sustainable your retirement portfolio will be.
Rate of return also matters. Less risky portfolios might fluctuate less in the short term but over the long term it has a big impact on your returns. A lower return means a higher risk of running out of money in retirement. It seems counter intuitive, but a less risky, more conservative portfolio can actually increase the risk of running out of money.
Access to government benefits is another big factor not captured in the ‘ol 4% rule. How much you qualify for will depend on your personal situation, how much you’ve contributed (when it comes to our Canada Pension Plan), how long you’ve been living in Canada (when it comes to Old Age Security), and if you’re single or a couple. Don’t kid yourself – government benefits in Canada can be substantial and ignoring them can make things unnecessarily difficult when planning for retirement! As a rule of thumb, an average couple can expect to receive about $30,000/year, or $15,000 each, in government benefits if they start those benefits at age 65.
After you figure out your spending needs, then tax efficiency plays another big role.
Having 100% of your retirement assets in your Registered Retirement Savings Plan (RRSP) creates a huge tax burden (not to mention it can make you ineligible for many government benefits). Remember, the RRSP is a tax-deferred account and withdrawals are included in your taxable income.
Can you have too much money in your RRSP?
Using a mix of both the Tax Free Savings Account (TFSA) (tax-free withdrawals) and the RRSP (tax-deferred money) provides the flexibility to reduce your income taxes in retirement which will decrease the amount you need to save.
Getting back to Michael and Julie, who want to retire at age 55 and spend $50,000 per year, having just under $1 million is probably more than enough. Yet let’s see how their expenses, benefits, taxes and other factors play out from age 55 to 100, to see if their savings are actually enough.
Did They Save Enough? The Assumptions…
Michael and Julie are looking to retire 20 years into the future when they’ve both reached age 55. We’ve already mentioned they want to spend about $50,000 per year in today’s dollars.
By age 55 we estimate 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 since inception, 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 have no pensions to rely on.
Michael and Julie will also have a house worth $600,000 in today’s dollars, which by age 55, will be mortgage-free but they are not selling their house to fund their retirement.
For our calculations I will assume they both started their careers at age 25 and have maxed out their CPP contributions every year. Because they’re retiring at age 55 they’ll only have 30 of the 40 years required to receive the maximum from CPP. (They’ll receive more than the average but nowhere near the maximum benefits.)
At age 80, Michael and Julie anticipate their spending will decrease by $10,000/year as travel and activities slow down. They also plan on selling their home around this age and moving into an apartment or condo to rent. I’ve also assumed in doing so that will add $30,000/year to their expenses but don’t forget, they’ve freed up almost $600,000 in real estate assets (minus 5% transaction fees).
Again, lots of assumptions here but for the purposes of spending $50,000 per year, with almost $1 million in financial assets, a paid off home, at age 55 will Michael and Julie have enough?
Planning Retirement Withdrawals to Optimize Taxes and Benefits
Before we answer that big question – when planning their retirement withdrawals – we can help Michael and Julie by optimizing their taxes and benefits. Optimizing government benefits can be just as important as income taxes, this is because claw back rates on government benefits can be as high as 50-100% for retirees.
Even though all their retirement savings are associated with their TFSAs and RRSPs only, Michael and Julie will still have lots of control over withdrawals. This should be a takeaway message for all aspiring retirees – max out those TFSAs and RRSPs if you can!
This flexibility will let them reduce taxes and optimize government benefits like CPP, OAS, and GIS.
(For a complete summary of their withdrawals please see the charts below. All charts are in today’s dollars.)
To start, Michael and Julie will withdraw just enough from their RRSP to maximize the basic tax exemption, the rest of their income will come from their TFSA.
This mix of RRSP and TFSA withdrawals (with no other income sources) will help them pay virtually zero taxes for the first 15 years of their retirement. This will take them from ages 55 to ~ age 70.
But that’s not all, there are two other ways they can optimize their taxes and benefits during retirement.
1. They can reduce their taxable income between ages 64 and 71 by drawing primarily from their TFSAs. Unconventional but it can work. By starting OAS at age 65, but delaying CPP to age 70, using only TFSA withdrawals will allow them to be eligible for GIS, GAINS, GST and Trillium benefits – since TFSA income is not income-tested.
Between ages 65 and 72 these benefits will add $108,305 to their retirement income.
2. They can optimize their taxes and benefits by slowly shifting their RRSPs into their TFSA each year.
By taking advantage of the lowest tax bracket, they can slowly draw down their RRSPs at a low tax rate and shift these investments into their TFSA.
Moving money into their TFSA makes these funds easily available in the future and reduces the taxes on their final estate.
These are some of the retirement income planning considerations Mark wrote on his site here.
Maintaining TFSAs “until the end” also has huge potential estate planning benefits:
Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts
Optimizing taxes and benefits will add a total of $134,780 to their retirement income and will reduce the final taxes on their multi-million-dollar estate to just $25,989.
Planning withdrawals in this way will also help grow their net worth over time.
For the first 10 years of retirement their net worth will decline slightly as investment returns struggle to keep up with withdrawals and inflation.
However, once their government benefits kick in, their net worth will begin to accelerate, leaving them plenty of cushion in their 70’s, 80’s and 90’s.
The Verdict? 4% rule or 5% rule?
So far, even with a 5%+ withdrawal rate, things look very good if not great for Michael and Julie!
Check out their net worth!
Mark’s editor’s note – it looks like they could spend even more than $50,000 per year…look at those TFSA assets! Read on*
One Last Thing – It’s All About Timing*
You have to admit, their retirement plan looks great on paper, but there’s one problem.
We’ve used a constant rate of return for stocks and fixed income, which isn’t very realistic.
To be more realistic, we should accept Michael and Julie will face unpredictable short-term returns. If they’re really unlucky, they may retire right before a huge recession, which could decimate their retirement portfolio. Ask retirees about 2008-2009, they will tell you all about it!
To be confident in their retirement plan we need to look at their unique income requirements over multiple historical scenarios.
Timing of investment returns (and retirement withdrawals) will have a BIG impact on the sustainability of their retirement portfolio. A few bad investment years early in their retirement can be very detrimental. This is called sequence of returns risk. Ideally, ‘surviving’ the first 5-10 years in retirement without a major portfolio crash is what Michael and Julie should hope for, but nobody knows what the future holds!
Sequence of returns risk is especially important for Michael and Julie because they need to sustain themselves entirely on their own retirement savings for 10 years before government benefits start kicking in at age 65. Their withdrawal rate during that time will be above 5%, which is quite a bit more than the recommended 4% ‘safe withdrawal rate’.
Luckily, they don’t need to sustain that withdrawal rate forever. Once they reach age 65 their withdrawal rate drops dramatically as Old Age Security (OAS) and other government benefits kick in. Then it drops again at age 70 when their Canada Pension Plan benefits begin.
You can read more about when to consider deferring your CPP benefit here.
Over every risk scenario I tested, they have a 100% success rate. Historically, their worst year would be equivalent to retiring in 1929. Faced with this situation their portfolio would drop by more than two-thirds (!) over the next 10 years before government benefits kick in at age 65, but their portfolio would recover. Even though those first 10 years would be hard to stomach, they’re very successful!
You bet they did, and then some.
Michael and Julie can retire with just less than $1 million in the bank while still spending $50,000 per year. If you have saved that much, you can do the same!
They can enter their retirement knowing that they’ve saved more than enough to sustain themselves for 40+ years. In the process we’ve helped them gain almost $135,000 in benefits and reduce the income taxes on their estate to nearly zero. Most importantly though, we’ve helped them gain confidence in their retirement plan so that they can stop worrying about saving more money and start spending more time on the things that really matter.
Thanks to Mark and his site for allowing me to share this case study with you. Again, lots of assumptions here but I hope it has been beneficial to see how much you might need to save for your situation, how you can maximize the benefits of the TFSA and RRSP for retirement, and what tactics you can take (with government benefits) to reduce your tax burden while maximizing the longevity of your own personal assets.
You can find more retirement essays from folks that have successfully “been there, done that” on this Retirement page here.
Thanks again to Owen Winkelmolen is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca for the collaboration.
Very detailed. I liked it. Some questions and clarifications were within the comments 🙂 I am looking forward to reading your own projected retirement plan in few months or whenever you post it.
And I have been maxing out both our TFSA accounts in addition to RRSP and RESP with 1 income! Let’s see how much longer I can do this. Fingers crossed. It is not always about being smart to max. It is to have the right opportunity when needed. We shall see what the future brings.
I have posted that actually!
Well done on the accounts, on 1 salary, that’s incredible. Keep it up if you can but you have to live your life too 🙂
Perfect. I am going to read your plan.
Thank you! That is the trick to save but still have fun and enjoy life. I am happy with how we have managed it so far (and I hate the Covid drama and all the travel restrictions).
Hopefully 2021 be a better year!
Yes, let’s hope the rest of this year is more positive! Read on and ask questions 🙂
$570,623 in their TFSA?? Really? Sounds to me they don’t need financial advice….they should be giving it! That is almost an unbelievable amount and I would sure like to know how to accumulate something even close to that. Good on them.
Ya, those are projections though but I wouldn’t think it would be totally out of the question (as long as TFSA rules do not change) that some couples might have $500,000 in their TFSAs when combined in the coming decade – say by 2030.
A good amount of money for sure but it’s amazing what compounding can do 🙂
I think you did a mistake in your text “The first is to reduce their taxable income between ages 64 and 71 by drawing primarily from TFSA”
That should be from a RRSP, TFSA withdrawals do not create any fiscal burden at all, the gouv. benefits are not affected by withdrawing money form TFSA.
Correct Max. I have updated the post to be more clear that Owen was in fact speaking about the TFSA withdrawals not being income-tested 🙂
That’s a great thing unless the government changes the rules!!??
Something that is rarely mentioned in these presentations is how to maintain a similar income once one of the spouses dies. In our case there will be a 18-20k reduction (CPP/OAS) reduction. It may be useful to present several scenarios that could offset this loss of income. Given the very unfair (IMO) CPP survivor benefits the surviving spouse may receive little or no benefit. My plan is a more aggressive RRSP drawdown and likely downsizing from our large detached home.
That’s a considerable impact indeed. I will consider that including when I write up my own projected plan in the coming months. Do stay tuned for that!
I like your call on a more aggressive RRSP drawdown since I’m intending to dissolve/spend all RRSP monies available before age 70. At least that’s my plan.
question: In your initial description you stated “they’ve been smart to max out their TFSAs every year, so it now contains $570,623”
How did you come to this number?
Thanks for your comment. I would have to confirm Owen’s calculations…but…
I recall Michael and Julie are 35 and want to retire at 55.
“Michael and Julie are looking to retire 20 years into the future when they’ve both reached age 55. We’ve already mentioned they want to spend about $50,000 per year in today’s dollars.”
Very conservatively assuming they started investing inside their TFSAs going forward (nothing contributed to date), averaging $6K per year in contribution room, earning 6% return over the next 20 years – each TFSA would be worth = $233K.
“In building this near $1 million portfolio they’ve been smart to max out their TFSAs every year, so it now contains $570,623.”
So, assuming they have already maxed out their TFSAs to date, containing $570K wouldn’t be a stretch in 20 years.
I hope that helps?
I have a great TFSA calculator on this page here:
I wanted to inquire about Owen’s original strategy of using TFSA funds for income and then creating contribution room for the following year. What is the ultimate benefit with this approach? If a person took $50,000 from their TFSA without any taxation they would create contribution room of $50k for the following year. If they removed $50k from their RRSP to then contribute to their TFSA they would be subject to 30% tax on the withdrawal amount, would they not? Does the benefit come from getting $50k back into their TFSA and then allowing it to grow tax free for another period of time into the future?
What is the limit for their personal exemption that you referred to?
Well, the withholding tax is 30% but that doesn’t mean that is their taxation – those monies are simply withheld until income tax calculations/return submission.
Beyond that, I believe where Owen was coming from is that you could also withdraw from your TFSA in order to claim GIS.
“The first is to reduce their taxable income between ages 64 and 71 by drawing primarily from TFSA. By starting OAS at age 65, but delaying CPP to age 70, their TFSA withdrawals will allow them to be eligible for GIS, GAINS, GST and Trillium benefits. Between ages 65 and 72 these benefits will add $108,305 to their retirement income.”
Retirees can follow some unconventional wisdom and draw down their TFSA first, taking advantage of their lowest tax bracket; defer CPP and OAS, and also prolong RRSP assets to grow tax-deferred.
I believe the personal exemption Owen was referring to was the basic tax exemption. Federally here:
Thank you Mark for writing an excellent well-crafted article. What I do find particularly annoying is when whiners like Lloyd find it necessary to criticize someone’s hard work with what is essentially smart tax planning. Lloyd you should get off your moral high horse and spend your time more productively.
Happy to post the article Joe but not sure we need any mud-slinging on the site 😉 I am happy to have different opinions on the site and Lloyd has been a great contributor over the years.
What are your plans for retirement? re: use of RRSP, TFSA, pension, non-reg., rental income, other?
My apologies Mark. I certainly want to be respectful of your site. I agree that everyone’s opinions should be respected. My disagreement may have been too blunt.
All good Joe. Thanks for being a fan!
lol…what “others” might that be?
LLoyd: “lol…It might *help* to consider that each of us knows our family and financial situation better than you.”
True – but that does not mean that you are making the right decision. With a comment like “I don’t care” actually shows that you don’t care about others (just yourself).
Some very good points! and I Could agree if one has a huge RRSP it MIGHT be better. But if one does not have a huge RRSP but a huge Non-Reg Act – then perhaps your decision may change. I don’t buy the “well I don’t care – I would be dead” comment! You should care!!! and think of your family too!. Why drain your money first and defer the CPP – when the CPP ends when you die or gets cut back to a spouse and then eventually ends. When you can keep your money working for you in a non-reg acct (and have some to pass along to wife or family) rather than drain it down to nothing – just to defer CPP? The CPP is not controlled by you and eventually comes to an end – so why not keep your money in a non-reg act and always control it? (joint act is best) – why do u want to touch these funds first? (over the CPP?)
“and think of your family too!.”
lol…It might *help* to consider that each of us knows our family and financial situation better than you.
I have been clear I am speaking about our own situation. I am not making generalities about others without knowing their situation, needs and wishes.
I have also been clear I have thought of my family- my wife and stated she will be fine. Better for that matter if I am dead.
I think it is clear that no one controls any of the rules regarding govt benefits (CPP, OAS, GIS), or tax rates or related rules on any of their investment acts. including unregistered, or market performance for that matter. This is not unique to ccp which for those who have done their homework know it is projected very safe for 50 plus years and unlikely to have negative adjustments.
Previous unregistered cap gains inclusion rates have been much higher in the past so there is prescedent for them being taxed much higher. It is also quite possible eligible dividends in unregistered will be taxed higher as governments continue to spend more. Unfortunately investors do not control these rules and those who do not consider this may have an unpleasant surprise.
I think people are wise to plan their own retirement funding strategy based on their own unique situation with the multitude of factors involved. This includes the timing of CPP since there is no one fits all solution.
I’m having a real dejavous with all of this.
I agree RBull, two people with the exact same assets, in the exact same accounts, will end up with two very different plans for their retirement. (This is part of the reason I find financial planning so interesting.)
I think its important to understand the trade-offs when making those decisions (which can be hard sometimes given the complexity of taxes/benefits). Taking CPP early might only mean +/- $10,000 in some cases, that trade-off might be well worth it for someone based on their situation/goals/risk tolerance etc.
For sure on different plans and I agree 100% on understanding the options, trade offs and the complexity involved.
I’m sure this would be interesting and rewarding helping people with the best options for them.
It all sounds great to use your own funds (like RRSPS) first and to defer the CPP to get higher CPP at 70 (rather than 60 or 65). But if you die at 70 – You missed out on receiving any CPP $$. Even if you die at age 75 with 5 years of collecting CPP – is that better than collecting at age 60 (collecting 15 years of lower CPP $$)?? Who knows when we are going to die? So collect when you can 🙂
If deferring is so great – then why not wait to age 80 to start collecting?
A) If I’m dead, I don’t care if I missed out on receiving CPP. It’s not like I’m going to be scrimping by deferring CPP or OAS.
B) No one, absolutely no one, is telling you to defer. Take it whenever you like, it is a PERSONAL choice.
C) There is no financial benefit to deferring CPP past 70. (maybe a review of the CPP is in order)
This conversation feels familiar.
I totally get the “I’ve paid into it, I want to get it” but from a tax efficiency perspective Mike, longevity risk perspective, other reasons – it can make sense to defer CPP and OAS too.
The choice, at least, is personal 🙂
Considerations for CPP deferral for me/spouse. Not certain what we’ll end doing but I recognize there isn’t a one fits all decision.
1. If I die before I collect CPP I wont care. I’ll be dead. My wife will be more than fine with only hers & my top up, work pension, assets. Age 78 is the break even point for CPP @65 vs 60. Longevity ages for men and woman in Canada is well over that now and increasing.
2. Although we don’t yet qualify we’re doing well without it. I’d rather delay and reduce my own registered acts earlier so that:
-TFSA s and possibly unregistered can be topped up
-delay additional income source CPP during larger registered acct withdrawals while reducing or eliminating OAS clawback (minimize and smooth taxes)
-reduce reliance on markets way into the future (reduce risk)
-ensure larger amount of indexed secure income for as long as needed – till death(eliminate longevity risk)
3. Most people worry about trying to get everything they can now even if the odds are they will get less money that way. I prefer to focus more on improving the odds we won’t run out of money/income 35 years from now, and will also most likely collect more based on averages, our health so far and family history.
I’ve gotten into watching snooker lately. There is a fantastic player by the name of Ronnie O’Sullivan. One thing he does is control the cue ball in every shot to put it in a place that gives him options. I’m like that with the CPP/OAS debate. I won’t likely need any of that money at 60 (early CPP) or 65 (normal OAS) so I’m just thinking about keeping options open. Deferring gives the option of getting a decent raise every year. Not saying I will or won’t, but I’ll look at it from time to time and see where it fits. Decent chance I’ll creep into the OAS clawback range at some point anyways and I’m fine with that. So the “plan” is to get actual estimates and determine course of action based on facts and data. Kinda radical I know.
Pretty well the same approach (options open) I’m taking. If I creep into clawback that will be a good problem but trying to spend now etc so less chance of it. What I’m not worried about is losing out some CPP if I die early. Lean more towards indexed longevity insurance with-secure larger funding of delayed CPP.
That’s the major benefit I see – delayed CPP means you can use up some of your personal assets in favour of indexed longevity risk after age 65 or even up to age 70. I will probably take CPP around age 65.
Ha. You make me laugh Lloyd. Your plan is a great one and I hope to be there someday.
Lloyd: One of the most classic snooker matches was between Davis and Taylor in 1985:
Hi Mike, everyone’s situation is different, it’s not always about maximizing the $’s but also maximizing your comfort/stress-level in retirement, taking CPP early might be the best choice for some.
I agree, things can change quickly. With any plan, having flexibility is important. It’s good to know where that flexibility is too, that way if things change you don’t have to worry too much about it.
Things can change very fast. What would you do if tomorrow your doctor says you have cancer. You might have 1-10 years to live. Will you change your plan? Will you start collecting CPP early rather than deferring it? Life deals us many curve balls. The Gov can change the rules on all investment accounts and your health could also change over night. These new changes will cause us to make new changes to our plans. I am going to take CPP at 60 because i don’t know when I will die (so better collect some of the $$ i put into it). OAS the same – will collect ASAP!. Because we do not controls CPP, OAS etc or control when we will die – You collect early! IMO the Gov plans take too much of our time trying to figure out what is best to do. We can all agree – we have no control over them – so stop wasting time worrying about them. Take them when they are available to you and control what you can control. Use your time on the things that you can control.
Curious what inflation rate you used for this analysis ?
Also, did the success rate analysis at the end, including varying inflation rates ?
Hi Alfred, I use a 2% inflation rate, which is the recommendation from FPSC at the moment.
The portfolio scenario analysis is using actual historical results. The inflation rate and rate of return vary based on actual values from each historical period.
Thanks for your question!
My plan is still to liquidate RRSP beginning 4 yrs ago to age 80-85, adjusting amounts as other benefits may arrive ie CPP, OAS, growth performance and continue to contribute to TFSA for as long as it makes sense with all assets considered -maybe another 15yrs?
lol…my “plan” seems to change every time I read a good article about retirement planning. The quit date on the farming stuff also changes frequently. Some days it’s fun and keeps me *sane* and other days I could burn the whole darn crop and not give a hoot.
I have my RRSP and LIRRSP to deal with. The RRSP is fairly simple but the LIRRSP has more rules and options to deal with. As it stands *now*, farm for a couple more years to age 60, check on taking CPP at 61 or 62, redeeming as much RRSP as feasible (tax bracket wise) and deciding on OAS at 65 or later. Have to keep in mind support for the wife in the event anything happens to moi, she is arthritic disabled so without me she’d need extra support which would in turn burn through the funds that much faster. There’s lots, but I have to keep it in mind with any “plan”.
That’s the thing eh Lloyd. A “plan” is only as good as the day it is written. Then, it’s still a moving target of assumptions.
You’re in great shape I think Lloyd, for what I know, so you have options. Most folks are not as lucky!
Lol, I get it on reading and considering options. Understood with the consideration for your wife.
I’ve been steady with my plan to date and only a life or market crisis is likely to change it. G/L whatever you choose on farming.
2 RRSPs here, my LIF -started min withdrawals last yr, joint unregistered, TFSAs of course.
We’re “burning” through funds with all this travel.
I think if you have RRSP assets to take you into your 80s, you are set! Well done.
Thanks. So far so good.
Good points. Although my guess is changes in OAS may be limited to those at the higher income levels ie somewhat reduced clawback levels, so those truly “relying” on it may not feel an affect. GIS is a cluster **** as we can see from the example above. Could be some pain but typically governments avoid that and take the easy way out letting future generations pay.
Doubt I”ll delay OAS to 70 (assuming it’s still here and we qualify). Less benefit than with CPP @70 which we will strongly consider.
Yeah, I think the benefits of delaying CPP are greater than OAS – no?
Looking at pure numbers, OAS is 0.6%/month deferred. CPP is 0.7%/month deferred. But there is the effect of exceeding the eight year general dropout provision by retiring early. I am not confident I understand that last part fully so I am going to request estimates from the CPP when I turn 59 to compare some start dates. I retired in May of the year I turned 55 (so almost max) and have max contributions since age 20 with ages 18/19 below max and ages 56 on with zero contributions. So this is still a work in progress in my case.
Yep, as Lloyd posted.
Ha, I retired in May the a few weeks before 55th too.
I have 30.0 max pensionable yrs for CPP due to some non contributory self employed yrs and a few low earnings yrs. Did my own calculations using holy potato and Doug R. formulas I found. In a few yrs will get govt to confirm a few scenarios.
I think for our plan starting OAS and CPP is a given. I don’t know if I will defer CPP beyond 65 but you never know. I intend to work as long as I can, in my 70s, but on my own terms. Maybe a golf course marshall!
Appreciate that above.
65 is a given here too unless something really goes off the rails before that, and ideally maybe we can make it to 70 on CPP.
Yeah, the marshalls I know don’t get paid but like the free memberships.
Exactly, free golf. 😉
Oh, and I’ll have some suggested bucket list destinations for you!
Perfect. I’m planning on it from you!
“Maybe a golf course marshall!”
I always joked that I wanted to be a condom tester when I retired…..then I found out how they actually did it. 😉
(that’s an attempt at humour folks)
LOL!! I won’t even Google that 🙂
Hi Lloyd, if you want to get a rough estimate of your CPP benefits now, you can try this calculator from John Robertson.
The only thing to note is that the smallest time increment in the calculator is 1-year when calculating drop outs, whereas your actual CPP will be calculated down to the month. This calculator also doesn’t account for any special drop outs like the Child Rearing Drop Out. But it’s a good estimate.
If you want a detailed estimate, I’d suggest Doug Runchey, he does detailed CPP calculations for $30 each. He knows the CPP calculation inside-out.
Thanks Owen. I’ve looked at and tried various online calculators. I’ll just ask CPP for the three estimates next May and get it straight from the horses mouth. I’m not in any kind of rush for this.
Based on my age now, and assuming I work full-time to age 50 these are my numbers in 2018 dollars based on the calculator:
Take CPP at Age Yearly Pension
That’s pretty much what I have assumed…~ $500-$600 per month from CPP. About the same from OAS for ~ $1,000 per month per person in retirement at age 65.
Which raises the question…..for those that are counting on OAS (and possibly GIS) to fund a decent portion of their retirement, do they have contingency plans if a future government changes some or any of the rules? I have wembled on deferring OAS to 70 whilst liquidating the RRSPs. Then I stop to consider that those rules can easily be changed and I’d be stuck with a reduced OAS and liquidated RRSP. Now they could also change the TFSA and RRSP rules but I would imagine that there would be some grandfathering involved (or at least I hope there would be). My gut instinct is to keep all my options open. Rather be safer than sorry.
Remaining flexible is definitely important. Remember the change to income trusts in 2006? That surprised a lot of seniors who had invested heavily in them for the steady income. They crashed overnight as the tax rules changed.
Relying too much on one type of retirement income can be risky.
Yup, the income trust issue is a perfect example. The OAS age qualification change was also an issue for the younger folks. Losing two years of benefits might not be a dire situation, but it had to be taken into account in any “plan” (until it got cancelled). Nothing says it, or some other derivative, won’t develop in the future.
“My gut instinct is to keep all my options open. Rather be safer than sorry.” This is where my preference to “live off dividends” comes in.
This way, I believe we’ll have options and be able to work or retire or a bit of both on our own terms.
Overall, yes, Owen did a great job with the case study.
The Gov most likely will change the rules for collecting GIS – once the TFSAs get larger. They may even tinker with the OAS & RRSPS.
See the problem with registered accounts? – The GOV sets the rules (not you). All we can do is play by the rules and take the changes in stride. I have to agree – its smart financial planning if you can structure your income – in order to qualify for the GIS.
Not everyone will be able to do this – if you have work pensions and other income. But for those that do not have a work pension – why not structure your Million saved in such a way to qualify for the GIS for a few years?
Now lets talk about the real problem: We are letting too many immigrants into this once great country for free! and give them free money. (welfare) free medicare (need a 65K heart surgery? – no problem!). and if they are disabled – CPP! and just stay a few years and collect OAS & GIS with your 65 year old wife and together collect (for free) 30K from the Canadian tax payers that HAVE NO SAY!
*** So if you are a Canadian that was born here – paid into the programs – then go ahead and collect the GIS – you deserve it!
Mike, it might be smart to structure your income to qualify, if you can, I don’t see any big problem with that but this is not a goal of mine.
You could go even further to say this is akin to striving to live off EI if you could. I don’t think that’s a good goal.
Governments can always can legislation, etc.
Personally, generalizing immigration this way is very short-sighted.
While I only expect a tiny number of Canadians to maximize their income this way you can bet at some point the Star will run a story about “rich” seniors paying no taxes and there will be loads of faux outrage. This will give Trudeau the cover he needs to kill the TFSA. I expect it will go down in one of 3 ways from most likely to least likely
1. TFSA income is taken into account when calculating OAS/GIS clawbacks
2. The government guts the TFSA
3. TFSA is cancelled and RRSP is converted into a tax credit while still being fully taxed as income upon withdrawl
Sam aka Financial Samaria gets similar complaints for promoting the idea of taking a buyout rather than quitting when you want to leave you job. Some how it feels unfair even though you’re following the rules.
As an aside I find it interesting in spite of the utter incompetence of both Trump an Trudeau they both will win re-election. I put this down to the fact that economy is still strong. @Mike that should read family reunification not immigration. Bringing over your 80 year old parents is the issue, from a healthcare point of view anyways
#1 does seem like the most likely change, it’s the easiest to implement, but it would also hit low-income seniors who have a modest amount of savings in a TFSA with no other assets, so it would probably be an unpopular choice.
The other possible change is a means or asset test, but that’s not very easy to implement either.
I suspect the TFSA and RRSP rules will change, eventually, government can always do that but the reality is we don’t need both OAS and GIS. We can DEFINITELY simplify the tax code and that’s one way to do it. Leave the TFSA alone, it’s a HUGE incentive for Canadians to save. Time will tell!
Can’t edit comments but I wanted to add that I’m generally progressive in my point of view expect when it comes to taxes. There I’m outright libertarian. My goal is to pay as little as possible in (income) taxes while at the same time getting as much benefit as I can. Not to worry just because I might pay less in income taxes doesn’t mean my overall tax burden is any lower. Each and every one of us pays a dozen different taxes every day!
Probably stating the obvious but the government sets the rules on all investment accounts,employment, business and investment income, and taxable sources etc. This isn’t unique to registered accounts.
People don’t set their own rules for unregistered accounts or other income sources.
True, it’s likely rules and tax rates will change in time as people evolve to being less self reliant and less concerned with debt, governments continue to buy more votes with greater spending and debt.
I would not classify anything that I’ve read (or written) here as whining. Interesting you would use that term. I’d go with criticizing maybe even sanctimonious, but not whining. The unfair thing is that other Canadians that fund their own retirement have to subsidize those that don’t want to because they’d rather freeload off others. Just as you and others have a *right* to take as much as they can from society, I reserve the right to criticize them for doing so. And yes, this does make me feel superior to them. Deal with it (or not).
Thanks for your comment Rob. Speaking of low-income retirement planning (from your comment above), John Stapleton has put together some great guides for those retiring on low-income. Your advice matches one of his suggestions for those retiring with a low-income, take CPP early, even if still working, to maximize GIS in the future and then save the extra using a TFSA before age 65.
For more details see his guide…
Wow thanks, I will pass it on!
@Lloyd:” No able bodied person of sound mind should aspire to qualify for GIS,”
Expand that to include all the other gov’t programs. Include EI. Many have the attitude that since they paid into it, they shouldn’t bother to find work when they can earn as much collecting EI.
Look back to when these programs didn’t exist. People had bigger problems but managed to get by, too what work they could or their families helped. It’s a mindset and unfortunately too many feel they are owed the help rather than helping themselves.
FWIW, I don’t want GIS. I’m happy to pay my taxes to support folks earning GIS. Many people are not that fortunate.
Self-respect and pride in my case.
Rob, I think any senior earning over $100k per year doesn’t need “old age (income) security”. I mean really? Nobody can reasonably defend that.
No, not all seniors are sponging off government benefits but I do have concerns these programs are not well structured for folks that need help the most. It’s frustrating CPP, OAS and GIS are not being looked at for optimization. Alas, not our government focus.
i think the word you are looking for cannew is “ENTITLED”!
I would imagine few aspire to qualify for EI. The concept of the program was sound but political pandering kinda skewed it a bit (understatement). It isn’t the using of these programs that irritates me, it’s the going out of one’s way to qualify for them that does. They are supposed to be safety nets, not a main pillar of one’s financial plan. I suppose we all have the “right” to partake at the local food bank or soup kitchen as well. Just not something I’d do.
I agree. GIS is there for a reason. Does it need adjustments? Likely but I don’t believe this is a threshold folks should aspire to. Just me.
@Lloyd, while I do understand your perspective, and the case presented here is an extreme one, there are definitely a number of seniors (or soon to be seniors) in Canada who are on GIS and are making retirement income (or saving) decisions without fully understanding how it impacts their benefits.
I personally would be happy if more seniors (or soon to be seniors) understood the options they had when planning their retirement income.
Thanks for your comments, I appreciate the discussion.
At age 35 or so and planning to draw GIS when retired with $50k income, doesn’t strike me as much of a goal or much personal character. Falls into the same category as those who manage to live off welfare when they don’t really need to. Spend your time and savings to generate as much income as you can and leave GIS for those who actually might need it.
Hi Cannew, that’s a fair comment. I think its up to the client and the planner to decide on the right strategy for them. The median income for a retiree couple is above $60,000, so retiring on $50,000 isn’t extravagant and GIS benefits can actually extend into the $38,000-$50,000 income range for a retired couple depending on their situation. The GIS program isn’t small either, almost 1/3rd of seniors who receive OAS benefits also receive GIS. So it’s something important to consider when planning for retirement (especially given GIS clawbacks range from 50% to 75%).
” almost 1/3rd of seniors who receive OAS benefits also receive GIS.”
Ya, but some may only be getting a dollar or two and many of today’s elder seniors never had the same opportunities we have.
“So it’s something important to consider when planning for retirement ”
I fundamentally disagree with that line of thought. No able bodied person of sound mind should aspire to qualify for GIS, especially at age 35 intending to retire at 55. Work a few more years and fund your own retirement rather than partake in a program not intended for that scenario.
Lloyd, I tend to agree with what you’ve said here and above on GIS.
Somethings wrong when when people with decent savings, a substantial home asset can retire relatively early, pay virtually no tax and can use GIS (welfare) as a core pillar to achieve this.
Our programs need review and serious changes.
OAS is too generous, GIS should be tied to all assets/income to be tougher to qualify for and be more generous for those truly needing it, CPP benefits to surviving spouses too low.
Maybe I spent too many hours on the tractor in the sun today but why use the TFSAs from age 55? Why not use the RRSPs with the intent of deferring OAS and CPP to age 70? TFSAs would be the last thing I touched.
Hi Lloyd, good question! In this case, from age 55 to 64 they’ll draw from TFSA and RRSP almost equally. They’ll draw just enough from RRSPs to maximize the basic exemption. They’ll pay no tax but draw over $20,000 from their RRSPs each year. At age 64 they switch to mostly drawing from their TFSA, this reduces their net income for tax purposes, and lets them qualify for some seniors benefits until CCP starts at age 70.
Because they don’t have overly large RRSPs it works in this case. With a larger RRSP you may need to draw it down faster in those early years to avoid higher taxes in later years.
Thanks for the question!
Ah, so one major goal is to qualify for GIS to the maximum extent possible. Not a fan of this but to each their own. Personally I wish that some government eventually grows a pair to prevent relatively wealthy people from taking advantage of a program not intended for them. I doubt that will ever happen but hope springs eternal.
You go it, based on the current rules it’s definitely one withdrawal strategy available, but it depends on the situation. If this changes in the future there is still one reason why using TFSA earlier in retirement is interesting, and that is to shelter profits from their future downsizing. By using their TFSA earlier in retirement they create room to shelter the proceeds from their home. All TFSA withdrawals turn into contribution room the following year so this lets them shelter the majority of the proceeds from their eventual downsizing in a tax advantaged account. If they used their RRSP early in their retirement that tax advantaged room would disappear, their TFSA would still be full, and more of the proceeds would have to go into a non-registered account which would incur taxes each year.
This is an interesting tactic for sure…since like Lloyd, I’ve always assumed I would follow the following draw down plan:
1) RRSP first before workplace pensions
2) Non-registered account with workplace pensions
3) Draw down TFSA “til the end” with workplace pensions
4) Government benefits (CPP and OAS) are deferred until age 65 or 70.
I would suspect there is little way to qualify for any GIS if you want a) $50,000 per year and b) you have little to no TFSA to draw from.
“it depends on the situation.”
I see that now. This case is a fairly specific set of circumstances. Childless couple, well paid jobs, specific age, large asset to be liquidated, perfect RRSP assets (not too little, not too large). Interesting case study though.
I think that’s the thing Lloyd, between Owen and I, we were simply looking at one case study amongst thousands (rather, millions) that are out there.
At the end of the day, whether they take advantage of GIS or not, I don’t think that’s my personal takeaway from this. What I do takeaway is, if you save enough (i.e., close to $1 M before your 60s) that 1) should be “enough” with modest spending plans, 2) you have options in retirement, 3) more options in retirement occur with no debt and 4) folks that save and invest well throughout their 30s, 40s and 50s shouldn’t worry as much as they are right now about having enough.
Always appreciate your contributions.
Owen, although this case study might be a bit unusual it’s a good read that gets some of us looking a little differently at retirement approaches.
Mark, fair points. I agree overall with what you’re saying. Although I don’t think our GIS program criteria have adapted to the way people not needing it have been able to utilize it.