Retirement Planning-Savings and Income
In Canada we get asked these retirement savings questions a lot: How much money do you really need to retire ? How much do you need to save? How much do I need to retire?
The 3 most asked retirement income questions are: How much income do I need? When can I retire? Can I retire early?
Seven factors that determine HOW MUCH YOU NEED TO SAVE and HOW MUCH INCOME YOU NEED TO RETIRE:
- - depends on your goals,
- - what age you plan to retire and your health,
- - your feelings about saving and investment risk and
- - how long your oldest family members live
- - whether your income comes from RRSP/RRIF's, and or pensions or from your TFSA and non-registered accounts
- - how well your interest or investment accounts perform
- - tax bands and marginal tax rates for your income mix
If you don't have any pension income outside of CPP, OAS, and GIS you need savings of $500,000 to $1,000,000 to produce an additional income of $25,000 to $60,000 depending on your capital draw down rate and rate of return and if you want to leave and money to your family. If you have limited savings your withdrawal rates are going to be greater than 4% (known as the 4% guideline). As a minimum you should consider saving to achieve a minimum income of at least $43,000 for couple or single person with no debts or mortgage.
SAVING to TOP up your pension income
Some websites claim you need $750,000 in capital others $1,000,000. The reality is that you need to cover your monthly fixed costs and lifestyle for up to 40 years in some cases
As a minimum consider saving $100 to $200 per month. Depending on your age when you actually start saving may require you to double or triple this to $300 to $600 per month or even more. If you're an aggressive investor that regularly generates rates of return greater than 10% or 12% you will have higher income when you retire.
A few examples of retirement savings per month and rates or return. Assume monthly contributions for 35 years with a 6% rate of return
$100 PM @ 6% = $151,306
$200 PM @ 6% = $294,490
$400 PM @ 6% = $580,857
$600 PM @ 6% = $867,223
When You Retire Assume you'll live to AGE 100. I know sounds crazy. We work with 85 year old clients that lead active outgoing life styles. We regularly talk about how to make their savings last longer and if its wise to increase risk in their investments. Assume you'll live for another 15 to to 50 years after you retire depending on how old you are when you retire.
You can retire at age 50, 60 or 65 when your income and savings are enough to pay for your living costs of $3,600 per month to $10,000 per month without working
To retire at 60 you need an additional $150,000 to $200,000 savings to cover 40 or more years of living costs
To retire at 55 you need an additional $300,000 to $400,000 savings to cover 45 or more years of living costs
To retire at 50 you need an additional $600,000 to $800,000 savings to cover 50 or more years of living costs
You should make a budget and income spreadsheet as you are likely to be retired to 85 or 95 if your still healthy after age 65. Our oldest client is 99 as of 2018
If you are living off Savings and Investments you maybe faced with an uncomfortable retirement investment decision; increase your investment risks or face a declining lifestyle
A good retirement is having enough resources and not outliving your money.
You can retire when you have an income ranging from $3,600 per month to $10,000 per month without working
Before you can retire you need to know your fixed and variable regular expenses and major costs
As a single person and depending on where you live, and if you have debts and a mortgage, or not you could live on as little as $2500 per month
Average retirement expenses are at least $2000 per month without debts or rent. You could retire on this amount if you live in a low cost area or share living space
According to the latest figures from the Household Spending Survey by Statistics Canada a retired couple currently spends an average of $58,121 per year based on 2016 total Canada Statistics for average expenditure per household. In 2012 this was $49,736 representing an increase of 16.9% or 4.2% per year over 4 years 1
Based on real observations from retirees the average annual retirement income is about $43,200 to $76,000 gross income before taxes
Real Inflation is greater than 4% guideline. Taking real inflation and taxes into account you may need to increase your spending by at least 6% each year to keep up with an average 4% inflation and tax increases of 2% per year. If your savings are in GIC's you purchasing power is declining every year. Unless you have a Million or 2 in savings you`ll likely run out of savings
1 Statistics Canada Table 11-10-0227-01 Formerly CANSIM 203-0026 - Survey of household spending (SHS) household spending, by age of reference person, annual dollars for 65.
How much working Income should you replace?
Traditional ways to calculate retirement income needs are based on replacing 50% to 60% of your income. For those of us lucky enough to have one, a final salary pension plan replaces 60% to 70% of your income. It really is unique to each person. Some of us will need 50% or 70% while others need 100% income replacement.
There is a new way to look at how much you really do need? Called the Living Standard Replacement Ratio developed by actuaries (we call it the Life Style Replacement Ratio ©) or LSRR takes into account how much money (income and capital) you really need to save to generate the income you need on top of your pension income.
You should base this on all costs, starting top down including lifestyle rather than a fixed percentage. This is also good for assessing the level of retirement readiness.OR calculating iyou really really really have enough to retire yet?
When you retire depends on having enough resources for retirement to pay for your personal situation in terms of health, expenses and lifestyle. Both of which vary from basic lifestyle to a minimum level of luxury. Depending on what you like to do and you really enjoy doing.
If you like sailing you may not be able to afford to own and operate a sailboat on a $3000 per month income. But if you have resources in the six or seven figures you have the resources to do so.
Before you ask yourself how much do you need to save before you retire? Ask yourself ; What are my expenses? And how much fixed income will I have when I do choose to retire?
How to Maximize Your Retirement Savings and Income
Understand how your retirement income, savings and investment income are taxed:
You may find that retirement is a different reality altogether. Inflation and taxation are significantly higher for retired folks. I was shocked when I did the calculations.You will find retired income tax rates are much higher when government claw backs add another 15% tax on top of the marginal tax rate.
Add to high income taxes another 5 to 10% % inflation for heath care, travel costs, food prices and the elderly are hit pretty hard. Much harder than the rest of the working population. If you pass away before your retirement plans are used up your estate may have to give half to the government taking yet another large bite out of your wealth.
Maximize Government Pensions:
An important component of retirement income planning are government pensions. Old Age Security (OAS) offers up to $585.49 a month. The Canada Pension Plan gives a maximum of $1,114.27 a month. The average CPP entitlement for new beneficiaries is $653.27 a month. Updated July 2017 and valid until Dec 2017. CPP and OAS are taxed at the regular income tax rates.
Maximize Employer Pensions (for those of us lucky to have one)
Using a teachers final 5 years salary + the maximum qualifying rate, retired teachers are likely to retire with a $51,000 income or $4,250 gross taxable income + $589.49 OAS Old Age Security + 55% of their CPP Canada Pension Plan income after adjustments. Pension incomes are taxed at the regular income tax rates.
Maximize savings to TFSA's, Tax Free Savings Accounts:
Income, interest dividends, capital gains taken out of a Tax Free Savings Accounts are not taxed. You can re contribute the following year the amount you take out + the new contribution room. NO TAXES
Maximize contributions to Savings and Investment Accounts;
Open or non-registered savings and investment accounts are taxed at the type of investment tax rates. Interest on money borrowed to invest is tax deductible. Interest is taxed at the regular income tax rates. Dividends receive a dividend tax credit that drops the regular taxation rate to 12% to 20% or so. Half your capital gains are taxed at your regular income tax rate (the other 50% of your capital gains are TAX FREE)
Contribute to an RRSP, Registered Retirement Savings if you have any savings left over;
Rsp`s are good in that they generate a tax refund and provide tax deferred growth and income from investments held in a registered account. When you convert to a mandatory RIF at 71 you have to withdraw a minimum amount. As of Jan 1 2015 the new minimum withdrawal amount is 5.28%, previously the amount was 7.38% up to Dec 31 2014. However you may end up paying half of your RSP as tax to the government when you pass away. Withdrawals are fully taxable at regular income tax rates.
Re-examine how you feel about Investment Risk
Imagine retiring at 65 then being active to 90 so you need more income? Imagine real price increases of 5 to 10% each year. Imagine only getting a 3-6% return on your savings and investments. Unless you have millions you need much better rates of return in the range of 8 to 12%. Or your purchasing power of your money will erode.
Re-examine if you can afford Investment Risk
How you feel and what you can afford to loose might be different. We have this discussion every week with retired folks.
Understand how income layering can reduce your taxable income
Depending on your starting point and your current positioning you may be able to save 10% to 20% on income taxes when you retire. Ask about our retirement income plan?
Retirement Planning Challenges
Learn how to have a good retirement and how to turn your dream into reality.
Learn about the challenges to a good retirement and ways to manage them:
4. Income withdrawal sequence and rate
5. Investment Asset Allocation and Positioning
7. Outliving your money
EASY RETIREMENT CALCULATOR - Amount Needed to Retire at 60 OR 65
Try our Agile quickie Retirement Calculator, Your needs are based on expenses, debts and lifestyle.
One of these 3 ways to calculate your income needs will work for you:
1. Add your expenses then multiply by 2 to calculate your net income that you will need
2. Add your debts, expenses then multiply by 3 to calculate your net income that you will need
3. Add your debts, expenses, lifestyle then multiply by 4 to calculate your net income you may need or want
4. Add the tax you need to pay to the net income to calculate your gross income - that's what you need
5. Multiply that gross income amount by 7 to 12 then you'll have the capital $ amount you need to sustain withdrawals at 4%
Calculate your resources such as capital, investments, pensions and other sources
Calculate your costs, such as food, clothing, property tax, insurance, healthcare and home maintenance
Plan to take 4% income to protect your capital
If you need $40,000 of gross income you will need at least $1,000,000 growing at 4% to 6% each and every year.
DO YOU HAVE ENOUGH TO RETIRE YET?
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