Posted By
By Mark Seed
Special to the Financial Independence Hub
Retirement plans come in all shapes and sizes but retirement on a lower income is possible.
Not every Canadian has a house in Toronto or Vancouver they can cash-in on.
Gold-plated pension plans are dwindling.
There are people living in multi-family dwellings striving to make retirement ends meet.
Not every person is in a relationship.
Retirement on a lower income is (and is going to be) a reality for many Canadians.
Here is a case study to find out if this reader might have enough to retire on a lower income.
(Note: information below has been adapted for this post; assumptions below made for illustrative purposes.)
Hi Mark,
I enjoy reading your path to financial independence and it has inspired me to invest better. I’ve ditched my high cost mutual funds and I’m now invested in lower costs ETFs inside my RRSP. I think that should help my retirement plan.
So, do you think I’m ready to retire at 60?
Here is a bit about me:
- Single, live in Nova Scotia. No children.
- Own my home, no debt. I paid off my house by myself about 10 years ago. No plans to move. It might be worth $300,000 or so.
- 1 car is paid for, a 2014 Hyundai SUV. Not sure what that is worth but I don’t plan on buying a new car anytime soon.
- I have close to $50,000 saved inside my TFSA, all cash, I use that as my emergency fund.
- I have about $250,000 saved inside my RRSP, invested in 3-4 ETFs now.
- I have some pension-like income coming to me thanks to my time with a former employer. A LIRA is worth about $140,000 now. I keep all of that invested in low-cost ETF VCN – one of the low-cost funds in your list here (so thanks for your help!)
I’m thinking of stopping work later this summer, taking Canada Pension Plan (CPP) soon and I will start Old Age Security (OAS) as soon as I can at age 65.
I plan to spend about $3,000 to $4,000 per month (after tax) including travel to Florida, maybe once or twice per year to stay with friends who have a condo there for a week or so at a time.
So …. do you think I’m ready to retire at 60? Any insights are appreciated. Thanks for your time.
Steven G.
Thanks for your email Steven G. It seems like you’ve done well with the emergency fund, killing debt, and investing in lower-cost products to help build your wealth.
Whether you can retire soon (I think you can with some adjustments by the way … see below) will require a host of assumptions to be made in addition to your details above. This is because all plans, including any for retirement, are looking to make decisions about our future that is always unknown.
To help me make some educated decisions if you can retire on your own with a lower income, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca.
Owen has provided some professional insight to other My Own Advisor readers in these posts here:
What is a LIRA, how should you invest in a LIRA?
My mother is in her early 90s, she just sold her home, now what to do with the money?
This couple wants to spend $50,000 per year in retirement, did they save enough?
Can we join the early retirement FIRE club now, at age 52?
Owen, thoughts?
Owen Winkelmolen analysis
Mark, I echo what you wrote above. When it comes to retirement planning there are a few important considerations that we always want to review. You’ll see those assumptions for Steven below. There are also tax considerations. Taxes will be one of the largest expenses for many retirees and Steven’s case is no different. In fact, living in Nova Scotia unfortunately means that Steven will be paying the highest tax rate in the country for his income level. Let’s look at some assumptions first so we can run some math:
- Assume income (today) of $60,000 per year (pre-tax).
- OAS: Assume full OAS at age 65 $7,217/year.
- CPP: Assume 35 years of full CPP contributions (ages 25-60) and a few years with partial contributions
- CPP at age 60 = $8,580/year.
- CPP at age 65 = $13,967/year (assumes future contributions in line with $60,000 income and includes new enhanced CPP benefits as of 2019).
- Assume ETF portfolio with average fees 0.16%. Good job on VCN Steven!
- Assume $85,000 in available RRSP contribution room.
- Assume $13,500 in available TFSA contribution room.
- Assume birthdate Aug 1, 1959.
- Assume assertive risk investor profile.
Based on Steven’s current employment income, I’ve gone ahead and estimated that he will be paying around $14,000 in income tax each year (give or take depending on tax credits, etc.) At this income level Steven is paying the highest tax rate out of any province in Canada. Ouch … but reality.
Income taxes on $60,000 income
Owen’s Source: https://www.thomsonreuters.ca/en/dtprofessionalsuite/support/taxratecalculator.html
Needless to say, income taxes are an important factor during Steven’s working years but also in retirement.
Steven will also need to consider other expenses in retirement. Some other assumptions for our case study:
- Hyundai SUV vehicle upgrade: $269/month (1 vehicle, purchase price $30,000, trade-in $10,000, every 7-years).
- Vehicle repairs/license: $49/month (1 vehicle, $90 license, and 10,000 km per year at $0.05/km).
- Home repairs: $146/month ($175,000 structure value, age of home 30-60 years, 1% per year).
- Electronics upgrades: $83/month ($1,000 per year for computers/TV/newer cell phones, etc.).
Total Estimated Expenses: $3,547/month or $42,564/year.
Retirement planning 101 – figure out what you’ll spend first
Assuming Steven will need and want to spend $42,564 each year, we will need to withdraw approximately $55,000 from Steven’s retirement assets to generate that income. With a total of $390,000 invested inside his RRSP and LIRA, that $55,000 annual pre-tax withdrawal represents 14% of his registered assets. This withdrawal rate is far too high for a solid retirement plan.
Even if we start CPP right away, his withdrawals are going to be far above the typical 4% safe withdrawal rate. Sometimes retirees can get away with a withdrawal rate above 4% in early retirement, as shown in this case study here, but that isn’t an option for Steven.
As you can see in the chart below, based on the spending plans, Steven will quickly deplete his retirement assets, so we have to look at alternatives.
Net Worth – Retire at 60
*In 2019 dollars.
Option #1 – delay retirement by a few years
One of the first alternatives we’re going to consider for Steven is delaying his retirement by just a few years. By extending work from age 60 to age 65 we’ll see a number of benefits:
- Delayed withdrawals – more time for assets to grow.
- Increased CPP benefits – higher monthly payments mean lower withdrawals from personal portfolio in the future.
- Possibility of additional savings/contributions for retirement during final working years.
- Shorter retirement period – fewer portfolio withdrawal years.
Assuming Steven can and still wants to work is a big assumption but it’s important to consider this option when the retirement nest egg is modest.
Along with extending his working years we’re also going to recommend that Steven consider decreasing the size of his emergency fund. The $50,000 in cash represents more than a year’s worth of his spending. That is a lot of cash to be holding among all other assets. I believe because he has no debt, he could consider a 3-month cash fund.
By lowering his emergency fund to $10,500, Steven is encouraged to keep his emergency fund but then shift the remaining $39,500 inside the TFSA for growth.
We’re also going to recommend that Steven put any annual savings going forward into his TFSA instead of the RRSP. With his income level at $60,000, his marginal tax rate is around 36%; this is essentially the same marginal tax rate Steven will have in retirement. This makes the tax deferral benefit of the RRSP less attractive – something I know Mark is very much aware of and has written about on his site.
Even with these changes, Steven will face some challenges. While his situation is much better than trying to retire at age 60, we need to consider the variability that stock returns, bond returns, and inflation rates could put his plan at risk.
When we put Steven’s revised age 65 plan through historical scenarios of stock, bond and inflation rates we see that the “success rate” is still rather low. (The “success rate” represents the percentage of historical scenarios where Steven would reach age 100 with at least $1 in his investment account.) The good news is that in these scenarios Steven still has his house equity to fall back on. Still, I would like to see a plan that has a much higher success rate.
Net Worth – Retire at age 65 spending $42,564 per year
*In 2019 dollars.
Income Sources – Retire at age 65
*In future dollars.
Success Rate – Retire at age 65 spending $42,564 per year
*In 2019 dollars.
The best option – option #2 – delay retirement by a few years PLUS reduce spending
Many aspiring retirees will not want to hear you should consider working longer or spending less, or both,to meet your retirement needs but I think this is wise for Steven to dramatically increase his success rate.
To help Steven see the benefits, we’re going to assume Steven can cut back on some spending by $5,000 per year to $37,564.
We could also look at extending our target retirement age past 65 but this isn’t an option we’d prefer – we’ve assumed from his email to Mark he wants to retire sooner than later. Besides, if Steven is forced to retire, either due to health or due to other factors, we wouldn’t want to count on this income.
As a planner who sees and delivers many plans for retirees, it will be important to revisit this plan at least 1-2 years before retirement to get a better sense of how spending changes, investment returns, income taxes, etc. might play out.
By reducing spending to $37,564 per year we see a much better outlook for Steven’s retirement plan.
Net Worth – Retire at age 65 spending $37,564 per year
*In 2019 dollars.
Income Sources – Retire at age 65
*In future dollars.
Success Rate – Retire at age 65 spending $37,564 per year
*In 2019 dollars.
Consider what you spend for your retirement “number”
It seems amazing what a relatively small change in spending can do. This is why it’s critical to have a solid estimate of annual spending for your retirement plan. I believe it’s the foundation by which all plans are based upon. Even a small change up or down can make a large difference. Making good, educated assumptions about what you’ll spend in retirement could mean retiring much earlier, or it could mean running out of money in retirement, depending on which way it goes.
Consider what you spend to determine your “enough number”.
Although we’re reducing Steven’s spending by $5,000 per year, this actually reduces pre-tax withdrawals by approximately $7,812 (based on Steven’s 36% marginal tax rate in retirement). That means we need approximately $195,000 LESS in registered assets for retirement than we otherwise would have needed (based on a historical 4% safe withdrawal rate).
My summary for retiring on a lower income
Mark, based on my analysis, I believe overall Steven is on track for a healthy retirement. In fact, by switching to a low-cost ETF portfolio he’s already made a big improvement to his long-term financial outlook.
I would advise your reader Steven to consider working a few additional years, focus on shifting his TFSA to more growth-oriented assets (versus cash), and getting a more detailed account to what he really needs to spend in retirement in the coming years. By making these few adjustments, I believe Steven will have a very healthy retirement plan even on a lower income.
Mark Seed thanks Owen Winkelmolen (no affiliation) for this analysis. Owen is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. He works with individuals and young families in their 30’s, 40’s and 50’s to create comprehensive financial plans from today to age 100.
Disclosure: My Own Advisor, and Owen, have provided this information for illustrative purposes. This is not direct investing advice nor should it be taken as such. Assumptions above are for case study purposes only. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.
Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on Mark’s site on June 25, 2019 and is republished on the Hub with his permission.
