Wednesday, 12 October 2016

Retirement Analysis

Below is a quick analysis based on my best guess on how much one should planned to save in order to retire reasonably comfortably in Canada.  As always, start saving early, maximize your RRSP and TFSA contributions and most importantly, take advantage of your workplace RSP/DC matching programmes because they are really’free money.’  Make sure you have a good and lasting insurance policy for estate planning and other contingency purposes as benefits are tax-free.

Things are not as bad as one think. Don’t be misled by shrewd financial advisors that tell you that you should have million of dollars saved in order to retire! Once your mortgage and higher education obligations for your children have been taken care of, you should not require as much income to live a comfortable lifestyle.

Summary
Income from Government-CPP and OAS: $30,000
Income from other sources:                        $20,000
Total pre tax income                                   $50,000
 Less: Taxes                                                (  5,000)
Net Income                                                 $45,000

Major Assumptions for a retired couple. I used Ufile 2015 tax return software to calculate the taxes
Retirement age : 65 (for men), 60 (for women)
Life Expectancy: To 90 years of age  (25 and 30 years of retirement for men and women, respectively)
Annual pre-tax income required for 2: $50,000 at 2016 level (No mortgage or children expenses,1 major vacation per year plus 2 mini trips during the year. Do your own budgeting to verify my number)
Inflation rate: 2%
Return on investment, net of 1% fee: 4%
Tax rate: approximately 10 % per person or $5,000 in total assuming all exemptions and credits are taken. Actual taxes calculated were $3,500 or 7%, but I wanted to make the math easier to understand, so I used 10% instead.

Annual Income Analysis
CPP:   $9,832 (for men at 100% at age 65 X 75% assuming less than 40 years of work after age 18)
             6,293  (for women at 64% at age 60 X 75% assuming less than 40 years of work after age 18)
GIS:            -   (do not qualify) 
OAS:  13,885 ($6,942.36 maximum per person, no clawback)
Total:  $30,000  (rounded)

Additional amount required: $50,000 - $30,000 = $20,000 [note that this is the Annual Pre-tax income required less all the government benefits CPP and OAS). I also split the $20,000 equally between the couple.

Assuming one does not have any defined benefit pension plan, required savings from RRSP or defined contribution pension plan should equal  $312,000 at retirement .  This will enable one to withdraw $20,000 per year for 25 years until the amount is fully depleted at age 90. Or total savings need to be $346,000 if the amount is required for 30 years to age 95.

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