Tuesday, February 15, 2011

The Retirement Goal

OK, time for the far into the distant biggest goal... retirement. It is easy to say I don't want to take a pay cut when I retire, but how much is that going to cost me now. After some number crunching, the news seems better than I expected.

I've gone back and forth over the RRSP vs TFSA and while still struggling with the concept, I've decided at least for now to continue to contribute to RRSPs. I'm using the TFSA for other investments and savings so if I used it for retirement as well I'd quickly run out of room and be taxed on my savings interest (mind you not a lot). Also, with my current tax bracket vs predicted future bracket calculations I've done, the taxes will end up being pretty much the same whether I pay them now or later. I may change my mind yet, but that is where my head is at currently.

Rather than trying to figure out what I need and working back from there, I decided to start with what I can afford. At first, I came up with $400/month. Given that I'm using an RRSP vehicle though, I have the advantage of getting a tax break now. After crunching the numbers for a bit, I found I could drop $200/month from my savings and replace it with the tax return. That was the perfect number and any more than that and I ended up increasing my expenses. So time to see what $600/month does to get me to my retirement goal.

Anyone that has ever tried to do retirement planning knows that it is full of assumptions, so here are mine:
  • I'm going to retire at age 65. I could aim for earlier, but I'd rather just get a job I love to do.
  • I want the funds to last at least until I'm 85. More about this below.
  • I'll receive 10% on average on my funds up until retirement. The funds I've selected are so far on track with this.
  • I'll receive 8% on average on my funds after this. Actually I expect to continue to earn 10% on much of the funds while earning much less on the funds needed immediately. No calculator I've found accounts for this though.
  • Inflation will increase on average about 2% per year and my contributions will increase with inflation.
  • Income required using today's numbers is $60,000. I don't actually know what my income at retirement will be and maybe I should be using a higher number, but my contributions will also increase as my income increases. So for now I think this is a fair assumption.

According to the Service Canada site I should have $13,017/year in my OAS and CPP income. Assuming I don't have additional income above my RRSPs (which I hope is a bad assumption). I'll use that number for now though and I'm already almost a quater of the way to my goal.

That site also tells you the income from the RRSPs, but it presumes I'm going to die at 78 and won't need any funds after that point. With that assumption, I'd have over 95,000/year. Assuming I do have additional income and I'm less mobile at 78 I probably could use their number, but I'd hate to be at 78 with increased medical costs and be forced to lower my income. I'd rather error on the high side and leave money to my family though than to out live my funds. I realize I could do an annuity, but I'd hate to give my money to an insurance company if I die early.

Using Mackenzie Financial's calculator I see that with my assumptions my funds will actually last until I'm 100 (more than enough!) with me drawing out $60,000/year (in today's dollars). So I could probably give myself a raise and still be OK. I'll discuss this more as the day approaches, but my best bet may be to use a combination of an annuity and a RRIF. That way I can draw more from my RRIF expecting it to last until I'm 85 and if I live longer I'll have the annuity to fall back on, and if I die sooner I won't give all my money to an insurance company.

Not bad considering it was just a first pass with only what I can afford now. There is a little room to play with too in case some of my assumptions go sideways.

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