How much do you need to have saved in order to retire? That seems to be the quintessential question facing most individuals nearing retirement. The answer to this question is different for everyone, because it depends on how you want to live.
‘How you want to live’ of course comes down to your lifestyle choice, as it relates to dollars and cents. Some people want a lavish retirement. They want to travel, eat out more than they eat in, help their family financially, or perhaps even buy that sports car they’ve always wanted.
Others are content to live more modestly. To some, perhaps the freedom that retirement affords them is rewarding enough. You’d be surprised at how modestly you can live*. In my experience, many retirees are surprised at how little they actually need in order to simply maintain their lifestyle. Many people underestimate how much we all spend on work. Anything and everything from work clothing, to commuting costs, to payroll deductions (CPP/QPP and EI), to last-minute take-out lunches all add up. When you retire, these types of expenses largely disappear.
Considering the retirement lifestyle that you want, in terms of how much your living expenses will be month to month, is the first step in figuring out how much you need to retire – your way. You can do this by listing all of your anticipated expenses on a monthly or annual basis.
The next step in figuring out how much you need is to forecast your retirement income – from all sources. Here are a few sources to consider:
1) Canada Pension Plan or Quebec Pension Plan (CPP/QPP)
If you are 60 or older, you can first consider CPP/QPP. Every individual has a different level of entitlement, which depends on how much you’ve contributed over the course of your career. Individuals can contact Service Canada (or Retraite Québec) to request their own entitlement. For a full career’s worth of contributions, the current maximum CPP (if taken at age 65) is $1,114.17 per month. You can also choose to defer your CPP.
2) Old Age Security (OAS)
If you are 65 or older, you can also consider OAS. OAS is a little different than CPP. It is based on the number of years that you were a resident in Canada. For individuals who have lived in Canada their whole lives, the OAS entitlement is $585.49 per month. One other thing to note regarding OAS is that if your income is too high (specifically, more than $74,788 in 2017), then your OAS will be clawed back $0.15 for every dollar that your income exceeds the clawback threshold. Once your income reaches the highest threshold ($121,314 in 2017) your entire OAS entitlement will be clawed back. You can also choose to defer your OAS.
3) Company Pensions
Your entitlement here depends on whether your pension is a defined benefit one (where your payouts are predictable, and noted on your statements) or a defined contribution one (where your payouts are not predictable, and are dependent largely on the investment performance of the plan contents).
4) Your Assets
Herein lies the uncertain part of retirement planning. People often ask how much income they can safely withdraw from their nest egg without depleting it. The answer to this question depends on your intentions for the asset pool. If you never want to touch the principal, you can likely expect ‘income’ of about 4% per year. In other words, if you have $500,000 saved up, you could expect to withdraw $20,000 per year (4% x $500,000), and you will in all likeliness maintain that $500,000. If you withdraw more than 4%, say, 8% per year (or $40,000 from savings of $500,000), then you should expect to slowly deplete the $500,000.
How quickly you will deplete your nest egg of course depends on a number of things, such as how much you withdraw, market conditions, how long you live, etc. The message here is that a saved amount can provide a stable source of income, but there is the conceptual difference of a ‘safe’ withdrawal rate, as opposed to an ‘unsustainable’ withdrawal rate to consider.
Once you know how much income you can expect from all the sources noted above, the final thing you should consider is income tax. CPP/QPP, OAS, company pensions, and RRSP withdrawals are all fully taxable so you can expect the CRA to take some of each payment you receive. The average and marginal tax rates in Canada can be found on the CRA’s website.
The income you generate from your non-registered investments is also taxed; however, the rate is a little better than the average tax rates applicable on the above noted income sources. Your investment income will likely consist of a combination of interest, dividends, and capital gains – all of which are taxed, but at different (and sometimes preferred) rates.
Once you have a sense of your total anticipated income, level of income tax, and anticipated expenses, you should know whether or not your retirement is affordable. Breaking things down in this manner is methodical, and can very much be personalized – that personalization is where the value of a financial planner comes in. They can help you assess these facets, and help develop a strategy that is ideal for you.
Brent Soucie, T.E. Wealth, Toronto
* I recently watched a Netflix documentary called “Living on One Dollar” where four friends travel to Guatemala and attempt to live on a dollar a day for two months.
This article was published in T.E. Wealth’s Strategies newsletter, December 2017 edition. Read the full edition here.