Our imaginary couple Jack and Jill want to retire at age 60 and have an average income of $6,000 per month. Let’s take a look at what it takes for Jack and Jill to retire and make this happen.
Expanding the Scenario
Jack and Jill, both 35, are staring down the barrel of middle age and dreaming of being able to retire at age 60. Their combined income of $150,000 ($85,000 + $65,000) is solid, but they’re laser-focused on achieving a $72,000 annual retirement income, or $6,000 per month. This goal seems attainable, but requires careful planning and consistent execution.
The Challenge
The crucial piece missing is the estimated Canadian Pension Plan (CPP) and Old Age Security (OAS) benefits at age 60. These benefits will form the foundation of their retirement income, and understanding their projected amounts is essential for calculating the required RRSP savings.
Let’s Estimate CPP and OAS (These are estimates and subject to change)
- CPP
- CPP benefits are based on your contributions throughout your working life. Since they are retiring at 60, they will receive a reduced amount. Let’s assume a rough estimate of $800/month each at age 60. So $1600 total.
- OAS
- OAS benefits are based on residency in Canada and are typically available at age 65. Since they want to retire at 60, they will not be receiving OAS at the start of their retirement. For the purpose of this calculation, we will ignore OAS until age 65.
Calculating the RRSP Gap
- Desired monthly income: $6,000
- Estimated monthly CPP: $1,600
- Monthly gap to cover: $4,400
- Annual gap to cover: $52,800 ($4,400 x 12)
To determine the required RRSP balance at 60, we need to consider how long they expect their retirement to last. They want to retire to age 85, so that is 25 years. We will also need to use a withdrawal rate. A common rule of thumb is the 4% rule. For simplicity we will use that rule.
- Required RRSP balance = Annual withdrawal / withdrawal rate.
- Required RRSP balance = $52,800 / 0.04
- Required RRSP balance = $1,320,000
Therefore, they need roughly $1,320,000 in their combined RRSPs at age 60.
Three Ways to Reach Their Goal (or Reassess)
1. Aggressive Savings and Investment Strategy
- Maximize RRSP Contributions: Both Jack and Jill should contribute the maximum allowable amount to their RRSPs each year.
- Investment Diversification: A well-diversified portfolio with a focus on growth is crucial. Consider a mix of stocks, bonds, and potentially real estate or other alternative investments.
- Regular Portfolio Reviews: Regularly review and rebalance their portfolio to ensure it aligns with their risk tolerance and time horizon.
- Reduce Expenses: Identify areas where they can cut back on spending to increase their savings rate.
- Consider a TFSA: Tax free savings accounts are also a great way to save money.
2. Delay Retirement or Part-Time Work
- Delay Retirement by a Few Years: Even a few extra years of work can significantly boost their retirement savings and reduce the required RRSP balance.
- Part-Time Work in Retirement: Consider working part-time during the initial years of retirement to supplement their income and allow their RRSPs to grow further.
- Phased Retirement: Gradually reduce their working hours over a few years leading up to full retirement.
3. Adjust Retirement Expectations
- Reassess Retirement Expenses: Analyze their current and projected retirement expenses to identify potential areas for reduction.
- Consider a Lower Retirement Income: A more modest retirement income might be more realistic and achievable.
- Relocation: Consider relocating to an area with a lower cost of living.
- Downsizing: Downsizing their home can free up capital and reduce ongoing expenses.
- Factor in OAS: Remember at age 65 they will begin to receive OAS which will greatly help their retirement income.
My Role as Their Advisor
- Personalized Financial Planning: I would work with Jack and Jill to create a comprehensive financial plan tailored to their specific needs and goals.
- Investment Advice: I can provide guidance on investment strategies, asset allocation, and risk management.
- Retirement Projections: I can use financial planning software to generate detailed retirement projections and stress-test their plan under various scenarios.
- Regular Reviews and Adjustments: I would conduct regular reviews of their plan and make adjustments as needed to ensure they stay on track.
- Education and Support: I would provide ongoing education and support to help them make informed financial decisions.
- CPP and OAS information: I would help them get the most accurate information available regarding their future CPP and OAS payments.
By providing clear and actionable advice, I can help Jack and Jill navigate the complexities of retirement planning and achieve their financial goals.
How to prepare for Your Retirement
Preparing for retirement isn’t all that difficult. All it requires is a structured savings plan where a portion of your income is put aside to gain interest until you need it upon retirement. There are many different ways this can be done, but the most important thing is to get started.
Even better, engage a financial planner to ensure that your savings are tax optimized so you get as much of your money as you possibly can upon retirement. This will keep you on the right side of the balance sheet allowing you to enjoy your retirement years with family and friends. It’s not that you don’t want to work during retirement, but if you do work, you want to do it for your own pleasure not out of necessity.
Contact me today at Ripple Effect Financial to get your financial plan started allowing you to live happily through your retirement years.
