At age 62, Prem is getting ready to retire in three years. He wants to create a plan for his life after retirement. For income, he knows he will get approximately:
- $9,000 a year from the Canada Pension Plan (CPP)
- $5,500 from Old Age Security (OAS)
Plus, he will have about $250,000 saved in his pension plan by age 65. When he retires, Prem will put the money in a Life Income Fund (LIF) and take out some money each year for extra income.
Prem’s top concern is how to preserve wealth and make his savings last. He is in good health, so he assumes he will live at least 25 years after retiring. He thinks he will earn 5% a year on his savings. At that rate, how much can he afford to spend each year from his LIF?
Prem looks at two options:
- Take out just the minimum he has to, based on the LIF rules.
- Take out the maximum he can each year.
Either way, the rules in his province say that he will have to close his LIF at age 80 and buy an annuity. Also, Prem will have to pay taxes on all his income. This chart compares his options:
Average yearly income*
Amount left to buy an annuity at age 80
* Based on withdrawal rules for LIFs set by his province in 2005
Prem decides: After careful thought, Prem decides to try to follow the minimum LIF withdrawals as best he can. His income will be tight, but he feels surer that he can make his savings last to age 90. Also, he knows he can always take out extra money from time to time if he runs into unexpected costs.
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