Can you retire with one million dollars? Of course there are many questions to answer first. At what age? How much will you receive in government benefits? Are you single or with spouse? How much debt will your carry into retirement? What lifestyle do you want to live in retirement? Do you want to leave a meaningful estate to children, charity and others? There are so many ‘it depends’. But we can certainly look at the numbers to see how far a million dollars will get ya. We’re going to try to retire on a million dollars on the Sunday Reads.
First off let’s determine or estimate how much income we can create with a million dollar portfolio. We’ll use a very beneficial spousal situation. They can benefit from greatly increased government benefits and income splitting. Here’s the three pillars of retirement income.
In a spousal situation you can benefit from income splitting, even the ability to split CPP in certain cases, if necessary. We cannot split OAS (Old Age Security) amounts. The tax advantages are considerable.
In planning for retirement, keep in mind that we cannot split RRSP amounts before age 65. And at age 65 we need to convert amounts to a RRIF to enable income splitting.
The spousal RRSP
To avoid the need for extensive income splitting the higher income earning spouse can contribute to their spouse’s RRSP. It’s called a Spousal RRSP account.
For our evaluation the Canadian couple will retire at age 65. We’ll assume they both worked extensively in Canada and receive almost full CPP benefits. They’ll both receive the full OAS amounts of $735 monthly. The max CPP at age 65 is $1,365 monthly.
Here’s how the income assets look. I’ve used the MayRetire retirement calculator. It’s free to use and it’s very easy to use. It is a very good resource for Canadian retirees.
For a $75,000 after tax spend rate, the confidence level is 91% as per the Monte Carlo simulation on MayRetire. That is a favourable level. Also, the model above uses a very conservative total return rate of 5.5%. In recent decades balanced portfolio returns have been beyond 5.5% annual. Though past performance does not guarantee future returns.
You can boost your success rate (typically) by taking on more risk (growth). That can increase your sequence of returns risk as well.
The spending plan
The above shows the spending plan, with a couple, both taking CPP and OAS at age 65. Here’s the asset values over time. I like that the registered accounts are depleted by age 87. The strategy involves building up the TFSA and taxable accounts. Those are tax efficient for the estate. There are ample amounts should one spouse pass early. There is a very strong probability that with two 65 year old Canadians, one will live to age 85 to 87. Keep in mind any RRIF amount is not tax efficient, and will be taxed in full if not transferred to a spouse by way of a successor holder or successor annuitant beneficiary form. RRIFs are not estate efficient.
We’re spending at a 6.1% spend rate for the RRSP / RRIF amounts. The million dollar portfolio is providing about $61,000 of annual income before tax.
That’s aggressive but the time horizon for the RRSP / RRIF funds is about 21 years, not 30 years and beyond. We should remember, no one with a financial plan uses the 4% rule. Though the rule is a nice guideline for gauging the ‘very’ long term longevity of portfolio amounts.
Here’s the tell-all post that shows the success of a Canadian balanced portfolio at spend rates from 3% annual to 6% annual, inflation adjusted.
Creating retirement income from your portfolio.
And here’s the key chart courtesy of Norm Rothery and the Globe and Mail …
See the above post link for how to read that chart. It is sooooo data rich. If we go back to 2003 (22 years ago), we see that a 60/40 global balanced portfolio survived a 6% spend rate, inflation adjusted. The two major market corrections of the last 50 years would have challenged the 6% spend rate. We had the dot com correction in the early 2000’s and the financial crisis that began in 2007-2008. Those were game changers. Many retirees relying heavily on portfolio amounts with aggressive spend rates would have had to adopt a variable withdrawal strategy, spending less in the years when the markets were down considerably. But as the chart shows, it all depends on the spend rate and how close your retirement start date was to those events such as the dot com crash.
We see from the chart that a retiree with a 1995 start date was able to make it through the dot com crash. The reason for that is that the 90’s delivered one of the most robust bull markets in stock market history. The average annual return was almost 18% for U.S. stocks. Just crazy.
Successful spend rates in retirement will somewhat come down to luck and your start date. Will you start with very generous portfolio returns, or will you run into a severe bear market?
All retirees get punched in the face.
Delay CPP to age 70
We will now delay CPP for both to age 70. CPP payments increase by 42% from age 65 to 70. OAS amounts increase 36%. We lean heavier on the RRIF portfolios from age 65 to 70 as we wait for the greater CPP payments. The RRIF accounts then settle in a lower spend rate as CPP and OAS payments are doing more of the heavy lifting.
From the account balances, we see that we now have an increased TFSA account for estate purpose and the protection of a spouse after an early death. Our success rate moved up to 98% thanks to the RRSP meltdown that enabled the greater CPP payments. The RRSP meltdown offered a benefit. That also suggests that we could potentially boost the spend rate. There is an 88% confidence level for $80,000 of after tax spending.
There was an additional but modest benefit to delaying OAS to age 70 as well.
*Keep in mind this is not advice. You can use these projections as a guideline, and I encourage you to learn how to use a retirement cash flow calculator. You can tailor the cash flow plan to your personal situation and risk tolerance.
Any projection is a starting point. You may decide to embrace a U-shaped spending pattern. You’ll spend more in your go-go years, move down the spending in the slow-go years and plan for the potential of increased spending in no-go, late-in-life stage due to those personal care and healthcare costs. At Retirement Club we like to call that a you-shaped retirement plan. 😉
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You will run the projections every few years. It will be shaped by your life events and the returns offered by your portfolios. Join your Cut The Crap Investing friends at Retirement Club if you want to learn how to use the retirement calculators and find more ways to boost returns, manage risk and create tax efficiency.
Personally at this level of income and with spouse, I would look to spend in the $85,000 annual range. I would (and do) take on more risk. I would use annuities for about 15% of the portfolio amount to pensionize more of the income and I would use defensive equities within the mix.
Portfolios at $250,000, $500,000 and $750,000
In this video from Parallel Wealth, financial planner Adam Bornn looks at potential spending levels from ‘modest’ portfolio values for couples and singles. They all retire at 65. They take CPP at age 70, and OAS at age 65.
Related read also featuring Adam: The RRSP meltdown strategy.
Using the Snap retirement cash flow software Adam suggests these after tax spend rates:
- $250,000 portfolio = $58,359 annual
- $500,000 portfolio = $69,107 annual
- $750,000 portfolio = $79,735 annual
In a back of the napkin guess Adam might suggest $85,000 or slightly more with a $1,000,000 portfolio. There is an increased tax bite with that million dollar portfolio.
Keep in mind that Adam is planning to age 90. I have planned to age 95. I have also created significant estate funds of several hundred thousands of dollars to protect from longevity risk and the very high retirement home and health care costs that can arrive in our latest years of life. Adam has not left an estate value. He’s looking at maximizing spending to age 90.
For a single tax filer in Canada
Using the Snap retirement cash flow software Adam suggests these after tax spend rates:
- $250,000 portfolio = $34,706 annual
- $500,000 portfolio = $45,444 annual
- $750,000 portfolio = $55,000 annual
The tax treatment for singles is certainly not fair.
The Sunday Reads
And I forgot to follow up on the travels of Fritz and his wife from The Retirement Manifesto. What a wonderful trip and that is on our bucket list.
At Booming Encore more on living your best encore with Terry DiMonte.
Findependence Hub is DIY investing really for you? For some it can have its challenges. But come on, we can own a managed globally diversified portfolio with fees in the 0.20% area. They’re called asset allocation ETFs.
Or you can build your own global ETF portfolio in Canadian dollars.
It ain’t rocket surgery. If you haven’t already, join Cut The Crap Investing. We’ll show you how, and help you through the process. We’ll answer all of your questions.
Almost no one should be in high-fee Canadian mutual funds.
When Canadians want advice, financial planning and low-fee ETF portfolios they can look to …
Justwealth – Canada’s top Robo Advisor
… you can have it all!
At Stocktrades a look at Canadian industrial stocks. They can add a nice growth boost.
Dividend Hawk looks at his portfolio and portfolio news for the week.
Bob at Tawcan offers some random thoughts on the AC strike, Japan, Taiwan and the portfolio.
The cash wedge?
I shared this video from Rational Reminder with Retirement Club this week. And we’re doing our own studies and commentary on the topic. I’m not surprised that the cash pile or cash wedge is more mental accounting than anything else. Also there is no benefit, with respect to risk and ‘the math’.
But I wholeheartedly agree with financial planner Phil Briggs …
“If they can still do that using a cash wedge strategy, and that’s going to allow them to sleep well at night, and they’re going to feel good about their financial plan overall. I’m totally fine with that. The best financial plan is one that you can stick with and actually execute on. If you feel better about doing a cash wedge, then I’m good with that.”
Phil Briggs on the Rational Reminder podcast
I’ve penned those words many a times.
And GenYMoney creator has signed up for EQ Bank. I’m a big fan of EQ Bank.
We have used EQ Bank for GICs.
And here was my first guitar playing share on Twitter. I’ll look to post one every Friday …
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Here’s Canada’s top-performing Robo Advisor, Justwealth. You can get advice, planning and low-fee ETF portfolios all at one shop. You can have it all.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
OUR SAVINGS ACCOUNTS
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account rates are at 1.75%, other savings rates up to 3.0%. You’ll find some higher rates on GICs up to 3.60%. They also offer U.S. dollar accounts at 3.0%. We use EQ Bank, they have been awesome.
OUR CASHBACK CREDIT CARD
We make between $40 to $70 every month! And that’s on everyday spending. There are no fees with …
The Tangerine Cash Back Credit Card
For July we received $43.56 in cash from everyday spending. You can select 3 categories for 2.0% cash back. The rest pays at 0.50%.
That cash went into my TFSA account to help buy some CBIL-T, CHPS-T and VDY-T.
Join us at Retirement Club
It is a series of monthly Zoom Presentations, newsletters, plus a secure and private online space where we learn, share ideas and connect with members. Here’s the Retirement Club overview page. This past week we conducted a retirement cash flow review and plan for a club member who thought she might be spending in the $60,000 annual (after taxes) area. The cash flow plan shows a safe spend rate is likely in the $90,000 to $95,000 range.
Make sure you’re doing retirement right. It’s also suitable for those who are approaching retirement. Use Contact Dale if you’d like more info, or to sign up for the next group.
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