Retire Happy features retirement advice for people of all ages and economic statuses, whether you're a student or you're on the cusp of retirement! Retire Happy will help you learn all you need to know about retirement issues such as RRSP, CPP, OAS, TFSA, RRIF, tax rates and tax optimization.
Many financial calculators spit out a number to answer the question ‘how much is enough?’ Those that know me know that I wonder whether there is really such thing as enough?
The problem is retirement is not a number. Whatever the number is, it does not really solve our problems. In fact it just leads to more questions. One of those questions is How much income will I get from my investments?
Using withdrawal rates
One of the ways to ballpark the amount of income you can take from your portfolio is to use a withdrawal rate. The debate over what is a safe withdrawal rate will continue and change but let’s use an example of 4%. If a withdrawal rate is 4%, then on $100,000 you could expect $4000 per year from the portfolio.
Obviously, this approach is a little simplistic and depends on the rate of return you can expect on the portfolio. As safe withdrawal rate assumes a retiree should be in a safe, conservative portfolio. and is meant to ‘annuitize’ the total asset. If you invested in a balanced portfolio and achieved an average return of 4%, then your $100,000 capital would be preserved. The greater the returns, the greater the potential risk in the portfolio and therefore, the greater the variability of returns. When this happens market volatility can really destroy portfolios that are paying out an income because the math works against you.
It all depends
So let’s get back to the question “How much will $100,000 pay you in retirement?” the answer is what is so often is “It depends”
The income off a portfolio depends on many different factors:
when are you going to retire and take income?
when are you going to die?
what rate of return will you get?
how much volatility is there in the portfolio?
do you want to preserve capital?
If you look at this question from a purely mathematical perspective, it really boils down to 2 things – how long will you live and what rate of return can you expect on your money.
In our retirement workshops we use a little table with these two variables to help answer the question. Here are some different outcomes for different scenarios
If you are retired and plan to live 21 years and will make 5% on your money, $100,000 will pay you $7800 per year or $650 per month
If you are 70 years old and plan to use your money over 10 years and will make 3% on your investment, that same $100,000 will pay you $11,720 per year or 977 per month
If you are 55 and plan to live 30 years but hope to make 7% on your investment, every $100,000s will pay you $8060 per year or $672 per month
If you plan to live 25 years of retirement but are optimistic about earning 10% on your investment, that same $100,000 will now pay you $11,020 per year
As you can see, the range of outcomes can vary dramatically depending on how many years you will receive income and what return you will earn on your investments. We all want a simple answer and often default to the ‘safe withdrawal rate’ but that method is overly simplistic.
Another way to figure out how much $100,000 will pay you is to use some free online financial calculators. I’ll share a couple that I use.
The Money-Zine Withdrawal Calculator is a really simple calculator. It’s a US calculator so if you put $0 for pension and social security, you just have to punch in data for 5 other boxes and you can get a sense of how much monthly income a lump sum will pay you.
The Retirement Withdrawal Calculator does much the same thing as the Money-Zine calculator but it allows you to account for inflation on your income as well as preserving a lump sum amount of your asset.
The financial calculators I use the most come from Mackenzie Financial. They are easy to use and free. There are many calculators on this page but I use the Investment and Regular Withdrawal Calculator a lot with clients.
“I get knocked down, but I get up again. They’re never going to keep me down!” – Chumbawamba
We’re less than 60 days into 2018 but the odds are that most of us will already have abandoned our new year’s resolutions. Gone is the fired up, full-throttle commitment to change that launched on January 1 and there’s a good chance that our momentum has either stalled completely or is in the process of sputtering to a halt. No doubt regular gym goers are breathing a quiet sigh of relief as the number of people competing for a spot on the treadmill returns to its pre-January levels while gym owners are happily collecting the monthly membership dues from patrons who likely won’t set foot through the door more than 6 times in the next 10 months.
However, the reality is that we’re less than 60 days into 2018. This means we have more than 300 days left in the year. That’s plenty of time to accomplish all kinds of positive, significant and potentially life-changing things so why are we so willing to write off the resolutions that had us so fired up less than two months ago just because we didn’t make the initial progress that we thought we would?
There’s plenty of research that suggests it takes at least 28 days to make a habit. There’s plenty of evidence to support the fact that very few people accomplish what they set out to on the first try. Fables and proverbs are packed with stories and sayings that encourage us to “try, try, try again”; that reminds us of the importance of learning from our experiences and reassure us that, even though it’s unlikely, the slow and steady tortoise can outrun the hare. When you look at all the evidence, it almost seems laughable that we seriously think we can make a lifelong change without any hiccups, stalls or do-overs.
Like many others, I started out the year full of enthusiasm and good intentions. I set some goals and made some changes. Some of them have stuck; others have been seriously derailed. So now, I’m faced with a choice… abandon the goals that didn’t stick, or go back and attack them a little differently? Let myself off the hook; or re-commit to making a change? If you find yourself in the same boat, then here are some tips for ‘resetting’ your resolutions and getting your 2018 back on track:
Define Your Motivator
We need something bigger than the goal itself to keep us going when things get tough and all we want to do is quit. One of the key reasons that people abandon their resolutions is that they’re not actually driven to achieve the end result. If you’re resolving to exercise more because you “should” and not because you seriously want to drop weight and get in shape, then you’re destined to fail.
You have to seriously want what you’re working for because that’s the only way you’ll motivate yourself to keep making all the tiny changes you need to, in order to cement the habits that will carry you to the end zone. Working towards something you’re not actually committed to achieving is an exercise in frustration and a waste of your time and energy.
If you’re planning on re-setting your resolutions, your first question should be ‘why do I want this?’. Find a reason that motivates you; something that resonates deep inside. If you can’t, then focus your attention on a different goal; one that does fire you up and gets you excited to make a change.
Make a Plan
Don’t be fooled by the fact this one is second on the list. It is by far the most important. The key difference between a resolution and a goal is that resolving to do something isn’t enough; you have to take action. Your best chance of taking the right action is to have a plan that clearly defines how you will get from where you are to where you want to be and how long it will take to get there.
It’s no different than a GPS: If you’re sitting in Halifax, NS and you type “Vancouver” into Google Maps, it will show you Vancouver on a map of Canada. Depending on your perception of distance, you might be able to estimate how long it will take to drive there, you might even be able to figure out which would be the fastest route. However, your best bet for actually getting there in the shortest time via the best route is to hit the ‘directions’ icon and take a look at your options.
Hitting that button takes your intention (to drive from Halifax to Vancouver), shows you what actions you need to take in order to achieve it and also gives you a realistic time frame for achieving it. You can modify the goal (adjust the route, add stops etc.) and the GPS will adjust the time frame so that it’s still realistic. Without that clearly defined plan, your chances of getting to your destination are much smaller and the chances that you’ll get off track (or never set out in the first place) are much, much greater.
After years of goal setting, the one thing I know for sure is that the person most likely to get between me and my goals is myself. While it would be easy to blame outside forces such as people or circumstances, the truth is that any of those obstacles could have been overcome if I’d just taken a step back and got out of my own way.
The human brain likes safety and its definition of ‘safe’ usually means ‘familiar and known’. When you make a change, you’re taking yourself away from where you were and into unfamiliar territory and, even though the change you’re making might be incredibly positive, that unfamiliarity translates as “danger” to your brain.
Sometimes it’s easy to recognize when our brain is uncomfortable: ‘butterflies’ in the stomach, lack of appetite, a racing pulse, sweaty palms or just a general feeling of unease are all common symptoms that most of us have experienced in a variety of situations. However, there are more subtle, subconscious ‘tricks’ that the brain uses to bring us back into the safe zone such as tempting us to abandon new habits (eat the bag of chips; stay in bed instead of going to the gym; just one beer/candy/cigarette won’t hurt etc.) or helping us talk ourselves out of them (it’s too hard; I’m not good enough; the timing’s not right; I need more training; I need to do more planning; today’s not a good day etc.).
If you know that achieving your goals will take you to a better place in life than you are right now then you owe it to yourself to dig deep and push through your brain’s initial resistance to the plan. Knowing what your brain is doing reduces the risk that you’ll interpret all those reasons “why not” as justification for stopping and increases the chances that you’ll see them as a sign that you’re making progress towards your goal.
When you get nervous about moving into a new place, try challenging your brain to consider “what if I don’t?” instead of just “what if?”. If you can make your brain uncomfortable with your current situation, it’s more likely to work with you instead of against you when it comes to moving forward. For example: instead of entertaining your brain’s ‘what if I go for this promotion and I don’t get it?’ perspective, try countering with ‘what if I don’t go for this promotion and 5 years from now I’m still stuck in the same role I am now?’. Or, instead of ‘I can’t take on an extra part-time job so I can get my debt paid off faster because I’d have no time for my friends/family/hobbies’ try countering with ‘what if I keep carrying this debt and this time next year I’m worse off than I am now”.
Highlight the negatives, not so that you’re overwhelmed by despair, but in order to spark your brain into action. As Anais Nin said, change comes when the “risk to remain tight in a bud was more painful than the risk it took to blossom”. Being able to overcome your brain’s resistance to growth (and anticipating how that might show up) is critical to achieving your intended goal.
So, here we are. Less than 60 days into 2018. With more than 300 days left in the year. If you started out the year with a resolution that somehow got lost over the past few weeks then you still have plenty of time to reset and restart. Figure out your motivator, set out a plan and anticipate how you might sabotage yourself. Then get out of your own way and start moving… and if you fall, just get up and keep going!
How much money you need to save to retire is in part a function of how much money you will spend – and for how long.
Let’s try to identify some parameters for determining your retirement budget.
According to Statistics Canada, the average Canadian household spent $62,183 in 2016, an increase of 2.8% from 2015. Statistics Canada updates its Survey of Household Spending annually and maintains historical records.
Nobody really lives in an “average” Canadian household and retirees have unique spending differences from the general population. Perhaps a better glimpse into spending occurs if you focus in on the Statistics Canada data for couples without children or one-person households, both of which may be more relatable to retirees.
Average household spending for these two groups was $87,459 and $45,725 respectively, although spending net of income tax, insurance and pension contributions was only $65,086 and $36,339. These latter figures may be a better gauge of average spending on goods and services for retired couples and single seniors, although even then, couples and singles of all ages are included in these survey results.
I would suggest on that basis that average spending on goods and services for a retired couple of $65,086 and for a single retiree of $36,339 are likely on the high side. It’s no doubt though that many Canadian retirees will be well above or below these averages.
Sun Life did a study in 2016 called the Sun Life Retirement Now Report. They spoke to a good sample size of 2,006 Canadian retirees to determine how much less they were living on in retirement and most importantly, if they were happy. They also compared the retirees to 2,004 working Canadians.
They found that working Canadians spent, on average, $41,172 on food, housing, healthcare and taxes, compared to retirees who were only spending $31,332. These figures were a consolidation of both married and single respondents. As a result, the averages may be on the high side for single retirees and on the low side for married retirees.
This survey finding suggests a 24% decline in spending in spending in retirement, though because these figures include income tax, I find it can be a bit deceiving. If we back out income tax, the decline in spending on good and services was only 16%. I think even the 16% decline may be a bit overstated, given working Canadians often have children who drive up their cost of living.
You’ll note that the annual spending figures are significantly less than the Statistics Canada household spending figures above, mainly because the Sun Life housing costs only include utilities and property taxes, but not mortgage payments, condo fees, insurance, rent, renovations, repairs, etc. that are more extraordinary and personalized in nature. As a result, the Sun Life survey may provide a good starting point for retirees, but don’t forget to add home ownership costs beyond utilities and property tax to these figures to get a truer representation of retirement spending.
It’s also worth noting that the study found that 90% of married retirees surveyed felt positively about life in retirement, compared to 85% of divorced, separated or widowed retirees and 84% of single retirees. This may suggest that the retirement spending data obtained is indicative of a “happy” retirement for most retirees surveyed.
Trends During Retirement
David Blanchett of Morningstar Investment Management wrote an article in the Journal of Financing Planning in 2014 called Exploring the Retirement Consumption Puzzle. In it, he notes the existence of what he calls the “retirement spending smile”, whereby spending tends to decline in the first half of retirement before rising in the second half (on an inflation-adjusted basis). As a result, the spending pattern may resemble the shape of a “U” or a smile.
The increased spending in the later years tends to arise, not surprisingly, from increased medical expenses, but also transportation costs, help around the house and other outlays that are directly related to aging.
Real estate is a huge consideration when it comes to retirement spending planning. There are a couple of reasons.
If you own an older home, obviously part of your budgeting needs to include ongoing repairs and possibly renovations. Whether you like it or not, large capital costs will factor into your retirement spending particularly when you own an older home.
If you own a vacation property like a cottage or a place down south, hopefully retirement means you can spend more time enjoying these properties – if you so choose. But if you spend less time, either because the cottage is tougher to get to or maintain or you’re travelling instead of wintering in Florida, a point comes where the financial cost of maintaining a valuable, though mostly empty piece of real estate needs to be weighed against the usage. Renting a cottage or vacation home may be better financially, although capital gains tax implications and family attachment to a secondary home need to be considered before selling.
Obviously, a home downsize or a sale of a second property can also inject capital into your retirement assets and potentially allow you to scale up retirement spending.
And if you rent instead of owning your home, that makes a big difference in terms of your long-term retirement spending. Owning a home can create a safety net for funding expensive long-term care costs in your 80s and 90s that doesn’t exist if you’re a renter.
We often hear about the average Canadian life expectancy, currently 79 for men and 83 for women in Canada as of 2017 according to Statistics Canada. But these ages are simply representative of the average age at death across the Canadian population. This means Canadians who die at a younger age skew life expectancy downwards as compared to the age to which a retiree is expected to live.
For perspective, a retiree husband and wife, both aged 65, have a 50% chance that at least one of the two will live to age 94 and a 25% chance that at least one will live to age 97. The life expectancy of a 65-year old man is 89 and of a 65-year old woman is 91.
It’s not only how much you’re going to spend in retirement that matters for retirement planning purposes, but also, for how long. An earlier retirement or a longer life expectancy will both increase how much money you need to retire and be financially independent.
Nobody is average, but everyone is looking for some perspective. Take the above with a grain of salt.
Statistics Canada data suggests that spending on goods and services was $65,086 for couples without children and $36,339 for one-person households in 2016, but this includes Canadians across all age groups. Sun Life’s study suggests average retirees in 2016 spent $31,332 per year on good and services, though this excludes any housing costs beyond utilities and property taxes. It’s also a consolidation of married and single retirees, suggesting the figures should be higher for couples and lower for singles, while adjusted by both to reflect additional home ownership costs or rent.
The Sun Life study found a 16% reduction in spending as workers moved into retirement, but other global studies have been found to show more modest declines in spending.
Spending may decrease in the early years of retirement, but those who live a long life may not only have more years of retirement to fund, but are also exposed to the risk of incurring long-term care costs as they age.
Retirement planning is more art than science, but at least with some reasonable sense of what to expect with your retirement spending, you can develop a long-term retirement plan. I feel it’s prudent to budget to replace 100% of your pre-retirement basic living expenses, but some people will spend more or less depending on their personalized retirement and financial goals.
John and Jennifer (Jen) are 62 and want to retire comfortably soon. Can they retire now? They want to know how to set up their retirement income to give them the maximum income that will be reliable for the rest of their life.
They have been investing for years and have $1 million in retirement investments. Is that enough?
They make an income of $100,000 per year and are scared to stop working and give it up.
They went to see a financial advisor and received this advice:
70% Replacement ratio: They will need $70,000 per year income in retirement. Based on the “replacement ratio” rule of thumb, they will need 70% of their pre-retirement income.
4% Rule: They can withdraw $40,000 per year and increase it every year by inflation from their $1 million in investments, based on the “4% Rule”. Add roughly $30,000 from CPP and OAS to give them the $70,000 per year they need, so they have enough.
Age rule: They are getting older so they should invest more conservatively based on the “Age Rule”. The should invest 100 minus their age in stocks. Since they are age 62, they should have 38% in stocks and 62% in bonds.
Sequence of returns: They should invest conservatively because they can’t afford to take a loss. They could run out of money because of the “sequence of returns”. If they would have investment losses early in their retirement, their investments would not recover.
Delay CPP to age 65: They were told this is a “guaranteed return of 7.2% per year”, because they will get 7.2% more for each year they wait.
Cash buffer: They should keep cash on hand equal to 2 years of their income from their investments to draw on when their investments are down. Since they could withdraw $40,000 per year from their investments, they should keep $80,000 of their investments in cash.
John & Jen came to see me because they were still hesitant to quit their jobs. They said this advice is from rules of thumb and not specifically for them.
They asked me, “Is this good advice for us? Can we really retire now?”
I told them, “I see this type of canned advice a lot. These rules of thumb have been handed down from one generation of financial advisors to the next. The rules appear to be common sense and are usually accepted without question. Here are the first 3 things you need to know:
You need a personalized Retirement Plan. Don’t base your future on rules of thumb.
Maximum reliable retirement income. I can show you what really works to give you the maximum reliable retirement income – both how to set up your portfolio, manage your income and minimize your tax.”
We went through the Retirement Plan process in detail together. Here is what we decided:
Desired retirement lifestyle
John & Jen want a relatively comfortable retirement. They enjoy dining out and golf, want 2 reliable cars, and $10,000 per year for vacations. After we worked out their desired lifestyle in detail, they were surprised to find that they actually need $80,000 per year ($40,000 each before tax) to live the lifestyle they want.
I told them the 70% replacement ratio rule of thumb might be a reasonable average, but everyone is different. I have prepared Retirement Plans with as low as 45% and as high as 150% of preretirement income.
Decide on the life you want to live. Don’t settle for the income you get.
John and Jen’s investments now are two equity funds and two balanced funds. They have 75% in equities and 25% in bonds. I asked how they felt about this mix. They said they had owned them for years and are comfortable with this risk level. They owned them in the crash in 2008 and did not sell.
However, they asked, “But should we invest more conservatively when we retire. Our time horizon is shorter and we can’t afford to take a loss, right?”
I told them they have a long-term time horizon and history does not support a safer retirement from investing more conservatively. They should invest based on their risk tolerance, not based on how they think they should invest.
Their time horizon is long. They are 62. In 50% of Canadian couples in their 60s, at least one of them makes it to age 94. Planning for their money to last until age 94 would be a 50% chance of running out of money. It would be better for them to plan for no more than a 25% chance of outliving their money. There is a 25% chance that one of them will live to age 98.
That means John and Jen have a 36-year time horizon, which is definitely long-term.
We had a detailed discussion of their risk tolerance. They confirmed they are comfortable with their existing investment risk. They would stay invested even in a large market decline. We decided to keep their investments at 75% in stocks and 25% in bonds.
Target withdrawal rate and the Age Rule
A target withdrawal rate can be an effective way to manage your retirement income after you retire, but 4% is not reliable for most seniors.
John & Jen asked me, “If we withdraw $40,000 per year (4%) from our $1 million in investments each year and increase it by inflation, is that reliable for the rest of our life?”
I told them that, based on history, the “4% Rule” was safe for equity-focused investors, but not for most seniors. In the image below, the blue line is the “4% Rule”, showing how often in the last 146 years a 4% withdrawal plus inflation provided a reliable income for 30 years with different portfolio allocations.
I explained that the “4% Rule” worked only if you invest with a minimum of 50% in stocks. Even safer is 70-100% in stocks. It is best to avoid a success rate below 95% or 97%. They mean a 1 in 20 or 1 in 30 chance of running out of money during your retirement.
I asked John and Jen how they felt about a 1 in 20 chance (95% success rate) of running out of money. They said a 1 in 30 chance felt better.
Most seniors invest more conservatively and the 4% Rule failed miserably for them. A “3% Rule” has been reliable in history (green line), but means you only get $30,000 per year plus inflation from a $1 million portfolio, instead of $40,000 per year.
Based on the “Age Rule” of thumb, John and Jen had been advised to invest 62% in bonds and increasing that by 1% every year. In a 36-year retirement from age 62 to 98, they would average 80% in bonds.
John and Jen were shocked to find that their chance of a successful retirement would only be 69% if they used the “Age Rule”. (Note the blue line for a 20/80 portfolio allocation.)
Since we had decided on 75% in stocks and 25% in bonds, the 4% Rule is reliable for them. It has worked 97% of the time in history.
John & Jen found this counter-intuitive. They asked, “The more you invest in stocks, the safer your retirement income would have been in history?”
Yes. To understand this, it is important to understand that stocks are risky short-term, but reliable long-term. Bonds are reliable short-term, but can be risky long-term. Why? Bonds get killed by inflation or rising interest rates. If either happens during your retirement, you can easily run out of money with bonds.
The next chart illustrates this clearly. It shows the standard deviation (measure of risk) of stocks, bonds and cash over various time periods in the last 200 years. Note that stocks are much riskier short-term, but actually lower risk for periods of time longer than 20 years.
After seeing the history, John & Jen finally felt comfortable with a 4% target withdrawal rate for them, since they plan to maintain their 75% allocation to stocks.
Sequence of returns
John and Jen asked, “What about the ‘sequence of returns’? What happens if we have some bad investment years early in our retirement?”
I told them the “sequence of returns” is not supported at all by history. Retirement is long and stocks have almost always recovered any loss throughout history – even when you continue to withdraw your retirement income from them.
I showed them the charts below, based on US market history data since 1871 from Standard & Poors, Barclays and Bureau of Labour Statistics, which show actual history of the 4% Rule with 3 different investment allocations. Each line is a 30-year retirement. To see how successful retirement would have been, note how often the lines go below $0.
With 100% in equities, the success rate was 97%. There are 118 retirements of 30 years on this graph. Investing 100% in stocks, you would have run out of money only 5 times – 4 because of very high inflation and one because of a market crash.
Notice that there was a market recovery within a few years of almost all market declines, even though you continued with the same retirement income and increased it every year by inflation. There were quite a few market crashes in the last 146 years, but only once would you have run out of money because of a market crash (retiring in 1929).
In other words, the sequence of returns was an issue only once in the last 146 years.
Actual retirement success history: 100% equities with 4% withdrawal + inflation
Most seniors invest more conservatively, such as with 70% bonds and 30% stocks. Their success rate was 86%. The data below shows that they would have run out of money 17 times.
Actual retirement success history: 70% bonds / 30% equities with 4% withdrawal + inflation
Because of the “sequence of returns”, the typical advice is to invest more conservatively with more bonds. This is not safer! The risk of running out of money with 70% in bonds is 3 ½ times higher than with 25% in bonds.
Then there's the 4% Rule with 100% in bonds. There are 118 retirements of 30 years on this graph. Investing 100% in bonds meant you would have run out of money in 63 of them – more than half the time! If you retired almost any year between 1890 and 1980, you would have run out of money with 100% in bonds. Note how many of these lines drop below $0:
Actual retirement success history: 100% bonds with 4% withdrawal + inflation
I told John and Jen, “Don’t worry about sequence of returns. As long as you follow your plan, invest within your risk tolerance and stay invested, your investments can recover from almost any market decline.”
Start CPP at retirement
I explained to John and Jen that delaying CPP is not a “guaranteed rate of return of 7.2%”. They get 7.2% more CPP during their life and then their spouse gets 60% of that if the spouse outlives them. The rate of return depends on each specific situation but is closer to 5%.
Whether to take CPP early or delay it depends on many factors. I showed them my studies of “Should I start my CPP early?” and “Should I Delay CPP & OAS Until Age 70?“. They showed that how you invest is one of the main factors. In general, equity investors should take CPP earlier, while balanced and bond investors should delay it.
Now that I know their situation, I recommended to John and Jen to start their CPP at retirement.
John and Jen asked whether they should hold cash equal to 2 years’ withdrawals to draw on when your investments are down. Then they could live off the cash and not touch their investments after a big down year, giving them some time to recover.
I told them that this sounds logical, but was not supported by the 146-year study. For example, assuming 100% in equities and various cash holdings, here are the success rates for a 30-year retirement with 3 different withdrawal rates:
In every case, holding cash either had no effect or increased the risk of running out of money. I could not find a single example of a retiring year or withdrawal amount when holding any amount of cash provided a higher success rate than holding no cash.
The study showed that holding cash does not protect you. In fact, it often increases your risk of running out of money. The drag on your returns from holding cash sometimes caused you to run out of money, but holding cash never protected you from running out of money.
This might be counter-intuitive. The reason is that retirement is long – say 30 years. Stocks usually recover from declines. Holding cash for 30 years means you lose out on a lot of income, plus the loss of purchasing power due to inflation.
In addition, if you hold cash, you will almost definitely die with a significantly smaller estate to pass on to your loved ones.
I told John and Jen, “It is safer not to hold cash.”
John and Jen still have their original question, “Can we safely retire now?”
We created a proper retirement plan. Instead of using rules of thumb to estimate how much they might need, we used retirement planning software. I showed John & Jen that they need $1.15 million in retirement investments to have the retirement they want. They are 15% short.
Their retirement plan allows them to plan their life with 3 choices:
Retire now at age 62 on $73,000. We discussed what lifestyle expenses they would cut $7,000/year. They could buy $20,000 cars instead of $30,000 cars and cut their travel from $10,000 to $6,000 per year.
Work 1 ½ years and retire at 63 ½ on their desired $80,000 per year.
Retire now on $80,000 with an advance retirement income strategy. There are many ways to manage your retirement income. My study found methods that had 100% success in history with withdrawal rates of 5% and even 6% of your investments if you manage your withdrawals effectively and can take a small decrease in some circumstances. You should be careful with these higher methods. They require carefully managing your income.
John and Jen prefer option B, to retire on their desired lifestyle. They realized from this process that they are not fully ready to retire today. They now have confidence they can retire in about 1 ½ years.
Jen said, “The retirement plan is very helpful for us to plan our life.”
Summary and tested advice on retirement income
What is the best way to set up your retirement income to give you the maximum income with the lowest risk of running out of money?
Get your Retirement Plan.Plan your desired retirement. Work it out in detail so you are confident. Don’t use an “income replacement ratio”. Decide on the life you want to live. Don’t settle for the income you get.
Equities are safer. Don’t assume you need to invest more conservatively just because you are retired. Retirement is for 30+ years. Consider keeping the same allocation you had before retiring. Equities are also taxed at much lower rates than bonds and GICs.
You need cash flow, not income. Invest for long-term total return and then withdraw the cash flow you need. Don’t focus on income, like interest or dividends, if they would reduce your long-term total return. Systematic withdrawals (or “self-made dividends“) give you control and are the lowest taxed investment income.
Equity investors can safely use the 4% Rule, as long as you invest at least 50-70% in equities.
The “Age Rule” works with a “3% Rule”. There is nothing wrong with investing conservatively with the Age Rule, but then reduce your retirement income to withdraw only 3% of your investments each year. Fixed income is lower income. The more conservatively you invest, the lower your retirement income should be.
Don’t worry about the “sequence of returns”. Worrying about it can lead you to hold more in bonds, which actually increases your risk of running out of money. Retirement is long and stocks have reliably bounced back in history.
Be smart about your risk tolerance. Invest with the highest amount in stocks that is within your risk tolerance. That means you cannot make the “Big Mistake” – sell or invest more conservatively because of a market decline. The more conservatively you invest, the more likely you will run out of money (at any withdrawal amount). Get educated on stock and bond market history, so you have an accurate picture of risks and returns.
Inflation is huge. Inflation typically makes the cost of living triple during your retirement. You need a rising income, not a fixed income. Inflation kills bonds, but not stocks.
It is safer NOT to hold cash. Holding cash does not protect you and may increase your risk of running out of money. It almost definitely means you die with a smaller estate.
Higher income is possible with effective management. You can have a higher income by withdrawing 5% or even 6% of your investments if you can manage your income effectively or are working with a financial planner who knows how to manage it effectively.
As baby boomers begin to retire, many are choosing to live their golden years outside of Canada. There are a whole host of reasons that Canadians are moving abroad to retire. Two of the big ones are a reduced cost of living and the desire to live in a better climate.
There are many places where your retirement dollars will go a lot further than they will in Canada and that is very appealing, especially to those with limited retirement assets.
Currently, approximately 9.8 million Canadian baby boomers are approaching retirement. By 2020, the number of Canadians retiring each year will be 425,000.
The Broadbent Institute released a study in 2016 that showed that only a small minority (roughly 15 to 20%) of middle-income Canadians retiring without an employer pension plan have saved enough for retirement. The majority of these families with annual incomes of $50,000 or more will be hard pressed to save enough in their remaining period to retirement (less than 10 years) to avoid a significant fall in income at retirement. Additionally, for single people over 65 without pension income, their median income is under $20,000.
Many places around the world offer a cost of living of under $2,000 per month for a couple, and in many cases, a warmer climate to enjoy. Retirees are flocking to these destinations in order to live a better quality of life than they would be able to afford here in Canada. It’s not only those with low incomes that are retiring abroad, as many other retirees are simply seeking a higher standard of living for fewer dollars.
If you decide to leave Canada, it will be important to understand departure tax. When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value, and to have immediately reacquired them for the same amount. This is called a “deemed disposition,” and you may have to report a capital gain on your Canadian tax return.
Exceptions to Departure Tax
Canadian real property (real estate) that was exclusively a principal residence will not give rise to tax as any gains will be offset by the principal residence exemption.
However, if you decide to keep your principal residence and rent it out upon leaving Canada, “change of use” rules will cause capital gains and tax to accrue thereafter.
Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada.
Your registered accounts will not be subject to departure tax. This would include RRSPs, TFSAs, employer pension plans, etc. (see complete list).
The other exception is for short term residents, whereby no departure tax is payable on property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada. This applies if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated.
Assets Eligible for Departure Tax
The departure tax will apply to the following assets upon departure from Canada:
Real estate outside Canada
Unincorporated businesses outside of Canada
Private or public company shares in Canada or outside Canada
Mutual funds units in Canada or outside Canada
Interests in non-resident inter vivos trusts
Other portfolio investments
Personal use property as well as listed personal property (such as works of art, jewelry, stamps, coins, and rare manuscripts)
Departure tax could potentially pose a challenge for an individual, where there is a deemed sale but no actual sale proceeds in connection with the assets subject to departure tax. You are able to elect to defer the payment of tax by providing security that is acceptable to the CRA, to defer payment of departure tax until the property is actually disposed of.
Departure tax is one of so many things to take into consideration when moving abroad. It is important to understand your personal tax implications when you leave Canada. In addition, it is prudent to consult an expert to help you to put a plan in place, to ensure that you are managing your assets in the most tax efficient manner possible, and understand the tax implications of your move. Departure tax is just one tax implication of leaving Canada permanently and other Canadian and international taxes need to be considered.
The federal and provincial Ministers of Finance recently announced that they had reached agreement on some changes to the enhanced CPP, along with some other changes to the basic CPP.
While the legislation to implement these changes has not yet been finalized, it is important to understand what these changes could mean to your CPP benefits.
Probably the most important and most misunderstood change is the announcement of a new child-rearing “drop-in” provision.
In the past week, I’ve received several enquiries from people who are very concerned that this provision replaces the current child-rearing dropout provision (CRDO or CRP). This is not true!
The current CRDO provision will still apply fully to any periods of child-rearing before 2019, and it will still apply to child-rearing periods after 2018 for the “Base CPP retirement pension” calculation, which replaces the first 25% of average lifetime earnings up to the Year’s Maximum Pensionable Earnings (YMPE) level.
The new child-rearing “drop-in” provision (CRDI) will apply only to child-rearing periods after 2018, and only to the “enhanced CPP” calculations. The enhanced CPP is calculated as 8.33% of average earnings since 2019 and up to the YMPE level, plus 33.33% of the average earnings above the YMPE and below the future Year’s Additional Maximum Pensionable Earnings (YAMPE), which begins in 2024.
As to how the CRDI is intended to work, eligible parents will get credit for earnings based on their average earnings for the five-year period immediately prior to the child-rearing period, if their actual earnings while child-rearing are lower than that average.
Another change is the introduction of a disability drop-in provision. As with the CRDI, this provision does not replace the current disability dropout provision and it only applies to the enhanced CPP calculations.
The disability drop-in provision will presumably apply to anyone who is receiving a CPP disability pension in 2019 or subsequent years. When they subsequently become eligible for a CPP retirement pension, they will be credited with earnings during the period that they received a disability pension, based on 70% of their average earnings during the six-year period immediately prior to becoming disabled.
NOTE: While it's definitely true that this provision will only apply to someone who is receiving a CPP disability in 2019 or later, it may further be restricted only to CPP disability pensions that begin in 2019 or later. This is because you may have to make “enhanced contributions” on earnings in 2019 or later in order to benefit from this provision. Once the legislation is passed (presumably sometime later in 2018), I will be able to clarify and quantify this change.
Currently, CPP survivor’s pensions are paid at a reduced rate for someone who is under age 45 unless they are disabled or have dependent children. CPP survivor’s pensions are not payable at all if someone is under age 35 and doesn’t meet either of those same two conditions.
Under the proposed change, these restrictions will be eliminated. Anyone who is currently receiving a reduced under-age-45 survivor’s pension will automatically have their survivor’s pension increased in 2019, and anyone who was denied a survivor’s pension because they were under age 35 when their spouse died can reapply for a survivor’s pension to start effective in 2019.
Currently, if you become disabled before age 65 but after you started receiving your CPP retirement pension, you are not eligible for a CPP disability pension.
Under the proposed change, people in this situation will “receive an additional payment.” No further details have been provided as to how this change will be implemented, except that it is again scheduled for implementation in 2019.
Currently, the amount of a CPP death benefit is six times the amount of a contributor’s “calculated retirement pension,” up to a maximum of $2,500.
Under the proposed change, anyone who qualifies for a death benefit in 2019 or later will receive the same flat-rate payment of $2,500.
Income splitting is not an easy strategy to accomplish in Canada. We live in a tax system where every individual must report their personal income and pay tax individually.
Income splitting is a strategy where couples try to move income from a spouse in a higher tax bracket to a spouse that is in a lower tax bracket. The government has been tough on income splitting because it would mean much lower tax revenues to them. For example, an individual who makes $70,000 per year would pay considerably more tax than a couple that earned $35,000 each.
Although couples are not allowed to pool their income and report it in a split fashion, there are some income splitting strategies for Canadians. In this article, I will share with you three income splitting opportunities for retirement.
As of January 1, 2007 individuals who are 65 years of age or older can allocate for tax purposes up to a maximum of 50% of the annual income received from a lifetime annuity, registered pension plan, RRSP annuity, registered retirement income fund (RRIF) or deferred profit sharing plan annuity to a spouse (or common-law partner or same-sex partner). Although the actual income is still received by the individual, the splitting for tax purposes is done via the tax return. The receiving spouse is not required to be 65 years of age or older to receive an allocation, and the amount allocated can be changed each year for the benefit of the couple. This is great news for senior couples.
For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan. RRIF income cannot be split under age 65.
With the new changes to pension splitting, spousal RRSPs are not as beneficial for those over the age of 65. However, they still make sense for income splitting under the age of 65. Spousal RRSPs simply allow a spouse that is in a higher marginal tax rate to contribute to a spousal RRSP in the name of the lower income spouse. For example, my spouse Liz is in a lower tax bracket than me so conventional thinking is I should contribute to Liz's spousal RRSP instead of my personal RRSP. That way, when she withdraws the money, she pays the tax instead of me (as long as she we follow the 3 year attribution rules).
The key to benefiting from spousal RRSPs is planning ahead and looking down the road to retirement. A 60 year old cannot arbitrarily assign some of his or her RRSPs to a spousal RRSP. It has to be done at the time of contribution. Don't wait to plan when it might be too late. Start early.
Canada Pension Plan splitting
Similar to pension splitting, couples can split their CPP retirement benefits. The only reason you would do this is if the spouse with the higher CPP is in a higher tax bracket than the lower CPP earner. Unlike pension splitting, both spouses must be over the age of 60 and both must be collecting CPP. Also, the split between spouses must be 50-50 and no other fashion. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).
“Expect the best. Prepare for the worst. Capitalize on what comes.” – Zig Ziglar
When we talk about money management, we talk in terms of action: earning; saving; giving; spending; paying down debt. We focus on the ‘doing’ but we don’t often consider what drives those actions. I’ve written several posts over the past few years on the psychology of money: the idea that our ability to earn, hold and grow money is inextricably linked to everything we’ve ever heard, seen and experienced in relation to money, wealth and rich people. T. Harv Eker, author of Secrets of the Millionaire Mind, once stated that “a lack of money is never a problem; it’s a symptom of a problem” and this is something that I’ve seen played out many times, both in my own financial journey and in my roles of financial advisor and financial educator.
Usually I focus on the ways that our psychology can be used as a tool to create positive consequences; how we can “re-program” our beliefs to help prevent self-sabotage, inspire action and overcome obstacles. However, I’ve been thinking a lot recently about the opposite side of the coin; the fact that our psychology can generate negative consequences. These “money demons” tend to show up as dark thoughts and feelings of apathy and helplessness and they not only prevent us from moving forward but, if we’re not careful, they can also suck us into a downward financial spiral that can be hard to escape from.
These “money demons” come in many forms and their impact on our perspective and our finances is often so subtle that we may not even realize there’s something wrong. Here are three common negative thought patterns and some suggestions on how to vanquish them.
1. Feeling Overwhelmed
When you look for synonyms of ‘overwhelmed’ in the thesaurus, the suggestions include: beaten, conquered, crushed and overcome. As anyone who’s ever felt this way will tell you, the stress of dealing with any unrelenting issue wears you down physically, mentally and emotionally simply because there’s no escaping it. You might not always be thinking about it, you might adjust to its presence in your life but on some level you’re aware of it from the moment you wake up to the moment you fall asleep (and often at random moments through the night as well) and that can be exhausting. Feeling constantly tired often means you have no desire to start new projects, learn new information or associate with high-energy people. It can also take away your drive to exercise and lead you to crave ‘comfort’ foods. In fact, it discourages you from engaging in every behaviour that’s known to boost energy and enhance mental wellbeing, which inevitably leads to an increased feeling of being overwhelmed.
Action Step: Be kind to yourself but don’t allow yourself to make excuses. Beating yourself up about your situation won’t help you get away from it but sometimes we can get a little too comfortable with our discomfort and the thought of moving through it to something different can be scary. It’s ok to feel tired and run down; you’re under stress but you’re not doing yourself any favours by letting yourself stay in a stressful situation. If you’re feeling overwhelmed by your finances (or anything else), the first step is to identify why: Is your debt out of control? Do you have bills you can’t pay? Has your income dropped? Did you lose your job? Are you struggling with money management? Are you worried about the future? Is money negatively affecting your relationship? Are you keeping money secrets?
Once you’ve named the source(s) of your stress, ask yourself the following question: What one thing could I do to help make this situation better? The power of this particular money demon lies in making us feel powerless; giving us no option but to turn in circles waiting for the next curveball to hit. By finding a way to take action, we regain a little control. By stepping forward and taking action, we regain a little more. Your action step might be something as simple as asking for help: there’s no rule that says “you have to do this alone”. There is strength in numbers and, while there’s no escaping the fact that you’re going to be doing most of the hard work (and taking most of the credit for your success as a result), you’re going to find it an awful lot easier if you have the support and mentorship of good people.
Frustration shows up in many ways. It can drive people to feel a wide range of negative emotions, including anger, sadness, self-pity and jealousy. We can be frustrated with ourselves, our partners, our friends, co-workers, family members as well as a wide variety of circumstances and situations. Money is a highly emotional topic and, consequently, people become frustrated with finances for many reasons.
Anyone who’s ever watched a child have a meltdown over math homework (or hearing the word “No!”) has witnessed the destructive power of frustration. While, as adults, we’re unlikely to channel our frustrations into a full-on temper tantrum, it can be argued that frustration is the most destructive of the money demons. This is because the two most common reactions to frustration are to quit before we start or to deliberately “check out” of our financial life.
Someone once told me that there are two times that people quit: right before they start and right before they succeed. People tend to quit before they start because they’re afraid and they tend to quit before they succeed because they’re frustrated: perhaps because they don’t actually want to make the journey; or because it’s not as easy as they thought; or because it’s just not “fair” that they have to work for something that someone else found easy/had given to them/doesn’t have to work for.
Action Step: Frustration tends to have its roots in something negative and often it boils down to either anger or jealousy. If you’re frustrated by your finances, then you have to be willing to ask yourself some dark questions in order to get over the frustration and move on. While asking yourself ‘why’ might not lead you to the answer there’s a good chance that asking yourself ‘who’ will. (Note that this isn’t the blame game. You’re not looking to assign responsibility to someone for your situation; giving up control by identifying as the victim won’t help you move forward.) Chances are, if you ask yourself ‘who’ you’ll discover that the person you’re mad at is yourself. That anger might stem from something you did, something you didn’t do, or perhaps a mistaken belief about your own intelligence or your own abilities (yes you are smart enough/brave enough/responsible enough to manage money). When I look back on my own money journey, it would be very easy for me to beat myself up about choices I’ve made and dwell on all the actions I did and didn’t take and to compare my situation to people who have been far more successful in a myriad of ways than I have. It would be easy for me to allow all of that to frustrate me but I choose not to because it won’t help me get where I want to go. We can’t change the past but we can learn from it and it’s those lessons that can help us build a better financial future for ourselves.
People are afraid for many reasons. Sometimes we’re aware of what scares us, sometimes we have no idea. Fear is a primal instinct; it’s the brain’s response to anything it perceives as a threat (real or imagined) and, as far as the brain is concerned, anything familiar is safe and anything unfamiliar is potentially unsafe. This is a good thing when the unfamiliar thing is an angry water buffalo but not so helpful when it’s a great job opportunity in a new city! When it comes to money, there are plenty of unfamiliar things to scare our primal brain and the potential for lots of negative consequences if we make mistakes. Fear is the reason so many of us don’t take steps to correct our financial mistakes or step up to manage our finances because we’re afraid to stray too far from what’s familiar (even if it’s obviously not working!) in case we make things worse.
Action Step: Happily, fear can be one of the easiest money demons to conquer because it can usually be neutralized by information. The more we know about something the fewer unknowns exist to scare our brain. Doing a little research, setting a clear goal and formulating an action plan will go a long way towards calming your fears. Finding examples of people who have succeeded at what you’re attempting rather than examples of people who have failed horribly will also help boost your confidence in your goals and your ability to achieve them and will reduce your fears even further.
At the end of the day, there will always be reasons why not to do something. There will always be people who never got their financial house in order, lived perfectly happy lives and survived their retirement years without having to rely on cat food. There will always be people living in nice houses, driving new cars and happily juggling large amounts of debt and there will always be people earning nothing more than the average wage who are perfectly happy with the size of their paycheque. There’s nothing wrong with that. However, the key word in each of those examples is “happy”.
If you’re happy with your choices and happy with the life you’re living, then I’m not about to suggest you need to do anything differently (unless you want to). If you’re not happy; if thinking about your financial situation makes you feel overwhelmed, frustrated or fearful then that’s a clear sign that something needs to change. If that’s the case, then identifying and tackling your money demons and learning a little about your money psychology might go a long way towards creating the changes necessary for you to build a financial future that makes you happy.
Retirement readiness is not really tangible. If you think about it, we use dates, ages. rules and money to make our target retirement date more tangible. For example:
In the pension world, people will say, I'm ready to retire because I have a full pension or I have reached my 85 factor
We sometimes use the rules around Canada Pension Plan and Old Ages security to define retirement like moving the age of eligibility from 65 to 67
And in the financial world, we talk about how much money do we need in order to retire.
After being in the retirement planning field for over 25 years, I believe true readiness is not always tangible. I've seen people with good pensions and people who have saved a lot of money but are not really ready to retire. Sometimes it's because they love their jobs. Other's hate their jobs but don't have a life to retire to. Some people are on the fence. They are ready to retire but worry about being bored or missing their friends from work
Sometimes readiness has more to do with instinct, feelings and lifestyle than it has to do with money.
Alberta Primetime - When are you ready for retirement - YouTube
Don't get me wrong, money is clearly important to retirement readiness but it's important to understand the difference between retiring FROM something and retiring TO something. Often the people that are MOST ready have planned a life to RETIRE TO!!
Could the economy have people thinking early retirement and what might that mean, factors around retiring a bit sooner than you might have thought?
Absolutely. Every retirement plan includes things you can control and things you can't control. In our retirement planning workshops we call these things curveballs. You can have a retirement plan all worked out and then a curve ball is thrown at you and your plan.
The economy now is a good current example. How many people here in Alberta were forced to retire sooner than they wanted or though because of the change in the economy here? Some people were planning to work part time in retirement but with unemployment at a record high, there may be fewer opportunities.
And how about the stock market? How many people do you know that were planing to retire and then the stock market took a 15% to 20% drop? And how many of these people decided to delay their retirement as a result?
People are living longer, what might you caution people to really look at when it comes to savings to make sure they are on firm footing?
It's really about the assumptions in a retirement plan. If you think about there retirement planning calculators, you INPUT a bunch of number and magically you get the RESULTS. for example, “You need 2.8 million dollars in order to retire.” When it comes to these calculators, it's important to understand, the OUTPUT is only as good as the INPUT. And a lot of the INPUT is a set of ASSUMPTIONS (otherwise known as GUESSES). If you don't like the output then you need to revisit the INPUT.
I tell people all the time “When it comes to understanding your retirement plan, spend more time understanding the assumptions than the results. Its the assumptions that determine the results. In terms of key assumptions, it's important to look at things like:
Is there a middle ground around part-time work, scaling back or returning in a few years which people might now consider?
This is probably one of the biggest trends I see in retirement. Retirement is no longer about NOT WORKING. More and more people are wanting to work in retirement, planning to work in retirement and being pulled into work in retirement. There was more opportunities than ever to work in retirement. In fact the new terminology that is not so new anymore is the idea of planning a PHASED RETIREMENT or a TRANSITIONAL RETIREMENT. Personally, I think it's great and I think a lot of people are finding success with this idea in their retirements.
At a certain point you do have to draw on your RRSP so how does that factor in?
The rules are that you must start drawing income from your RRSPs by December 31 in the year in which you turn 71. you can draw it sooner but not later. My suggesting has always been to start a withdrawal strategy as soon as you retire. I've seen too many people wait to convert their RRSPs to income at 71 usually for 2 reasons: They did not need the money or they did not want to pay the tax. For a lot of people, waiting till 71 to use your RRSPs for income defeats the purpose of the RRSP and that's to make your retirement the golden years. Sometimes the withdrawal strategy is because of lifestyle but sometimes it based soley on a tax strategy.
What would you advise boomers thinking about retirement to consider?
Have a plan. A plan that includes both lifestyle issues and money issues. Too often the retirement plan focuses on the financial issues. remember that retirement is about more than just money. You can have all the money in the world but if you don't know how to spend it or have good people around you or you don't have your health, what good is the money? Remember the point of money is to buy you a life and that retirement is really about living the golden years.
Should folks in or nearing retirement buy an annuity? If so, what’s the best time to pull the trigger on that purchase?
Generally, I'm not a big fan of annuities, especially when interest rates are low as they are now. There are usually better ways to provide a retirement income. Annuities are risk-free but risk-free comes at a price.
What is an Annuity?
An annuity is a product purchased from an insurance company. You pay a lump sum and the insurer promises to pay you an income for life. Because the income never stops, you can do well if you live a very long time. However, rates are determined by prevailing interest rates so they pay better if purchased when rates are high.
An annuity can be useful for creating a secure source of retirement income. You lose some upside potential but an annuity allows you to eliminate major investment risks and it provides income that you cannot outlive – no matter how long you live. Risk-averse people really like that and don’t mind missing on those large gains in order to protect on the downside.
There are a few situations when annuitizing might not be your best option. A traditional investment portfolio is better for maximizing your estate for your beneficiaries, although an annuity can also provide estate value if it’s properly structured. An annuity may not be your best choice if your life expectancy is short (perhaps due to family factors). If you’re comfortable investing or if you have an advisor then you’ll probably better off with an investment portfolio.
It can make sense to move the fixed-income portion of your investments such as GICs (guaranteed investment certificates) into an annuity. Vettese says that you should convert at least $100,000 for it to be worthwhile. You might consider using annuitizing for the income you need to provide your basic expenses and investing the rest of your money for growth and flexibility.
One often overlooked benefit of annuitizing that Vettese discusses is that it takes money out of your hands, eliminating the risk of spending your savings too quickly or of making bad investments. Think of this as insurance against bad decisions.
Rarely should you use an annuity for all of your savings. This eliminates the flexibility to make large expenditures or to give cash gifts to children, for example.
It’s helpful to understand how insurance companies value annuities. Insurers will sometimes price them more aggressively – sort of like a sale for annuities. This can occur when companies haven’t done as much annuity business as they require or when an insurer has access to favorable private fixed-income money, savings that can be passed along to the consumer.
However, don’t try to time the annuity market. Make decisions based on your need for guaranteed income and prevailing interest rates and don’t think too much about the other factors that could affect prices months down the road.
Talk to your financial advisor to determine if you’re a good candidate for an annuity or if one of the other products might be more appropriate for your needs.