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Question from Kate, 58, of Quebec City. How much do I need to save to maintain my standard of living in retirement?
Mr. Gillespie specializes in how to generate tax-effective income in retirement.
Clay Gillespie is a financial adviser, portfolio manager and managing director of Rogers Group Financial in Vancouver.
As Canadians approach the ends of their career, they start to wonder how much they need to save to maintain their standard of living in retirement. This is not an easy question as many variables are unknown. The first is life expectancy.
Life expectancy is one of the most misunderstood aspects of retirement income planning – yet, it is one of the most important factors.
Most people assume that life expectancy is the same as lifespan. This is not correct. Instead, life expectancy is a median number of years – such that 50 per cent of a particular age group will die before this number of years, and the other 50 per cent will die after this period.
Kate is 58 and her life expectancy is another 30 years, but because 50 per cent of all 58-year-old women will live beyond life expectancy, we used age 95 in our analysis.
How you save for retirement is also important. What you care about in retirement is how much income you have after tax and after inflation. You want to know what lifestyle you can maintain in retirement.
If you saved for retirement only using registered retirement savings plan (RRSP), you will need a larger account balance, as every dollar that you redeem from an RRSP is fully taxable while funds withdrawn from a tax-free savings account (TFSA) are free of tax. And if you were lucky enough to save funds outside these structures (non-registered investments, real estate, bank accounts and so on), only the earnings on these funds are taxable.
Government pension entitlements are important in retirement income planning. Old Age Security (OAS) offers up to $569 a month and the Canada Pension Plan gives a maximum of $1,065 a month. The average CPP entitlement for new beneficiaries is $640 a month.
Kate is only entitled to government pensions in the amount of $450 a month, as she came to Canada in 2000. I would encourage her to see if she is entitled to a pension in the country in which she worked before she came to Canada.
Since her government pension entitlements will be so low compared to the average Canadian retiree, she needs to save a larger amount to maintain her desired net spendable income (after tax and after inflation) in retirement.
If Kate invested in a conservative fashion, I estimate she would need to have saved at least $620,000 in her RRSP to generate a net spendable income of $35,000 (after tax and after inflation) if she retired at 60. If she works to 65, I estimate she would need about $560,000 to meet her desired income total.
If someone had the full OAS entitlement and received the average CPP ($640 a month), he or she would need at least $470,000 in RRSP savings to generate a net spendable income of $35,000 if retiring at 60 and approximately $410,000 if retiring at 65.
But let’s look at this from another point of view. When you retire, one of the greatest risks that you have is running out of money. If you can maintain your lifestyle on your personal investment assets and work pension entitlements, then delaying the start of your CPP pension can be viewed as a version of longevity insurance.