A recent Globe & Mail article laid out a retirement and investment challenge? A couple in their mid-fifties had a combined million dollar portfolio. They wondered if they could retire at age 65, while maintaining their annual income. How much would they have to save and invest to allow for that income level in retirement? I read through the comment section of that post. It became apparent that many or most Canadians who are DIY (Do It Yourself) investors are not aware of the free tools available that will allow them to calculate their savings requirement and how to estimate their potential spend rate in retirement. Let’s take a look at how they might create $110,000 in annual income.
Here’s the link (subscription required) to the Globe & Mail article –
Is a million dollars enough for us if we maintain our current lifestyle?
Keep in mind that not many details were provided and the SunLife financial planner consulted for the article did not offer up any details on the required savings rate or how they would generate the income. This is the first reader comment you’ll see on the post …
That was the least helpful one of these types of articles that I have seen in a long time. No numbers and very little detail. “Try to save as much as you can in the most tax-efficient way now and for the future”. No mention of CPP amounts, OAS amounts, tax rates, withdrawal strategies, etc . The link to the SunLife infomercial was a low point.
That pretty much nails it. I was curious, so I thought I would take a quick run at it.
Here was the question submitted …
Is a million dollars enough for the two of us, both in our mid-50s, to retire on if we maintain our current lifestyle and work until we are 65? Our household income is currently $150,000. Is there a percentage of income you recommend as an annual savings goal until we reach that retirement age?
How do you calculate your required savings rate?
From the article, it is likely that the couple has a combined $150,000 in annual income before taxes. To make things more interesting and challenging, I’ll crunch some numbers to generate $150,000 in after tax income. I’ll use Ontario for a tax rate and tax treatment.
To estimate the required savings rate I will use testfolio and a simple savings calculator.
I will run the Retirement Cash Flow Plan using MayRetire.
Both are free-use calculators that we cover and demonstrate at Retirement Club for Canadians. Check out that link if you want to learn more, or if you’re looking to sign up. We are starting a new group, now.
While you can use a ‘full ‘and very robust retirement calculator such as Optiml or Adviice for estimating the savings needs, you can certainly find your number by way of using a basic savings calculator or investment calculator, such as Portfolio Visualizer and testfolio. I found Optiml very difficult to use.
That said, you will first need to discover the portfolio value required to generate that desired income level.
How much do you need to create $150,000 income?
Canadians will typically generate retirement around these 3 pillars.
For our scenario, we’ll assume there are no employer pensions in the mix. We will give the couple very generous Canada Pension Plan (CPP) and Old Age Security (OAS) amounts. A Canadian couple can generate over $50,000 of annual income from those government sources. And at age 65, taxes might not start to bite until after the first $54,000. That is a wonderful ‘tax free’ head start. We can call that our pensionable earnings. It is guaranteed income that is inflation-adjusted. Certainly, one can argue that OAS may be at risk due to the costs to the federal balance sheet. We might get some more clues this week when the current government delivers their first budget. That said, most of the calls are for reducing OAS benefits for “wealthy” seniors.
To maximize those government benefits Canadian retirees might look to the RRSP / RRIF meltdown strategy.
The RRSP / RRIF meltdown. A Canadian retiree’s greatest hack?
With the meltdown strategy we delay CPP and OAS to allow for the much greater payments. The strategy can also allow for greater tax efficiency, and it might allow you to manage any OAS claw back. If we make too much, we can lose all or some of those OAS payments.
Creating $150,000 in annual after-tax income
MayRetire revealed that the couple would need about $2.8 million to $3 million to create $150,000 in annual after tax income. Of course we have to account for inflation when estimating the savings rate and the spending rate in retirement. You can set your Province for tax treatment, of course.
MayRetire is very intuitive and quite easy to use. You enter your investment assets for yourself, or yourself and your spouse (if with spouse) and set your CPP and OAS amounts and start dates, enter any employer pensions, real estate income and any special income. You’ll enter your plan end date, rate of return, inflation rate and desired income. You can adjust your RRSP / RRIF meltdown rate using 5 presets. If you need to tailor your meltdown their is a custom strategy feature.
You press Calculate to run your model.
It is not that difficult to enter portfolio amounts and desired income to quickly get a sense of the portfolio level required. And be sure to click on that Simulate button that will stress test your portfolio model (Monte Carlo simulations). For example, when I tested a $2,000,000 portfolio looking to generate $150,000 of annual income. There was only a 2% success rate. We want to get into the 80% success rate and beyond. The simulations are quite ‘bearish’ according to MayRetire creator Boris Rozinov, so 80% and beyond is a good starting point.
Here’s a must read with “THE” chart on spend rates – Creating retirement income from your portfolio
I simply added greater portfolio assets (while somewhat optimizing the RRSP / RRIF meltdown strategy and CPP and OAS dates) until I reached a favourable success rate.
Of course for those new to retirement calculators it will take several hours to even get a basic feel for how the calculator works and how retirement cash flow plans take shape. But it is a wonderful and more than interesting experience. Learning how to optimize and match your cash flow plan to your life plan will take more time, indeed. But it is all more than time well spent for the DIY retiree. It is essential that we run a cash flow calculator. You might ‘find’ hundreds of thousands of dollars of additional retirement income.
At Retirement Club we’re showing members how to use MayRetire and other calculators.
Check out the Retirement Club Overview
If you’re not up for learning the retirement cash flow ropes you might consider an advice-only planner who is a retirement specialist. You’ll get conflict-free advice from planners who are not attached to any investment products. aka – they are not selling.
Let me know if you want a few names to consider.
The $150,000 retirement income plan
Here’s what the spending plan looked like. Keep in mind this is ‘back of napkin’ initial projections. The cash flow plan will match your life plan and greater financial plan that includes your estate planning. Your longevity projections will factor in. You may decide to spend heavily in the early go-go years, and then decrease spending in the slow-go years. You might need an income boost in the late-stage years. We’d call that a U-shaped spending plan, or you-shaped. You might also have special items that factor in such as a home or cottage sale, business sale, inheritance and more. You will factor that into your retirement cash flow plan. At MayRetire you can enter special items for income and spending. Those special items can be set for a period as well; 15 years for the go-go years, for example, 10 years for the no-go years.
I ran the plan to age 95. When a couple both reach age 65 there is a 30% chance that one of them will live to age 95.
The red and turquoise bars represent the couples RRSP / RRIF accounts, the purple bar is combined TFSA income creation. We see the CPP (Orange) and OAS (Blue) kick in at age 70. The tax rate is above 22%, but will drop to a very low level at age 87 when the TFSA does the heavy lifting, topping up the CPP and OAS amounts.
Here’s how the accounts will ‘spend down’ in retirement. Yes, there is a massive TFSA shown. This is the funding ‘math’ when you run returns in linear fashion without market stress. That TFSA could be greatly decreased by a considerable recession and market correction. That said, the possible spend rate could also be higher.
Call this a buffer. Remember, your spending plan will be variable due to life events and market returns.
Given the massive $3 million portfolio requirement (in inflation adjusted dollars) the required savings rate would be considerable, and likely not doable for a couple with $150,000 gross income. The savings projection was based on balanced to balanced growth portfolio returns of 6%-8%. Given that, let’s move on to creating a more modest after tax income goal – $110,000. That would be closer to what our $150,000 gross income couple takes home.
Longevity Stuff
You’ll find more on longevity in the Purpose Longevity Pension Fund post, and here’s a chart on probabilities of reaching age 90 and longer, from Fred Vettese.
Creating $110,000 retirement income after tax
MayRetire shows that a $1,500,000 portfolio, working in concert with CPP and OAS could deliver $110,000 in after tax income. The retirees each have $600,000 in an RRSP account and $150,000 in a TFSA.
The reduced tax hit (compared to $150,000 spending needs) is so helpful. Here’s what the spending plan could look like. This cash flow approach offered an 89% success rate.
And the account balances over time.
You’ll see that the plan is estate efficient. A TFSA can transfer to a surviving spouse in tax free fashion. The remaining end balance is in a TFSA account. When the surviving spouse passes, that account can be transferred to a beneficiary in tax free fashion, by way of a beneficiary designation (form). It avoids probate. Any remaining RRIF amounts are taxed in full.
In Quebec the TFSA funds will by directed by the will. Quebec only has a small probate fee.
More TFSA please
You can create a plan that is more beneficial to the last surviving spouse if we pull forward more TFSA amounts. That said, it will potentially leave the RRIF exposed to estate taxes. Your plan will balance prioritizing yourself (and spouse) and your estate needs. It also moves the cash flow plan success rate to 90%.
Once again, keep in mind that in practice, the plan will change due to what life throws at us and the market returns. And we will not spend in a linear fashion such as above. We will evaluate the plan every few years. We might run scenarios for that You-Shaped retirement cash flow plan.
Required savings rate
Given that the couple already has $1,000,000 in assets they are not far away from reaching that $1,500,000 portfolio target (in inflation adjusted dollars). They have 10 years to ‘get there’.
Be sure to check out – Can I retire on a million dollars?
Simple savings calculators
You could start with a simple investment calculator.
Simply deduct the inflation amount from your total return and you’ll have a real, inflation-adjusted return. For example a balanced portfolio return of 6% – 2% for inflation gives us a 4% return, to input. And yes you might notice a difference in investment portfolio returns vs an interest calculator return projection. The bumpy returns with investment portfolios (portfolio visualizer and testfolio) can affect your returns over a shorter period such as a few years up to 10 years. Meaning a 4% simple return might not match a 4% average annual balanced portfolio return.
Calculator.net does adjust for inflation. Here’s an example that shows a 4% annual real return would be enough, and then some.
That calculator also has a feature that will show you the required savings rate. Click on “Return Rate”.
You might run simple calculators and real investment returns at your chosen risk level (stock to bond ratio) to get a good idea of the required savings rate.
The low rate of return requirement is good news. If they are holding a balanced or balanced growth portfolio, they are likely to blow past their savings goals.
They might earn 6-8% if markets continue to cooperate.
Comparing required returns at testfolio
You can also use testfolio to test portfolios in accumulation and decumulation (retirement funding) going back several decades. For decumulation simply put a (subtraction) input (-) before the cash flow amount.
For example -$4000, monthly frequency.
Some 10 year periods will deliver greater returns compared to the last 10 years, some periods will deliver less.
Here’s a conservative portfolio over the last 10 years, starting with $1,000,000 and investing $1,500 monthly. Don’t forget to (click) adjust for inflation.
At testfolio you can use simulated inputs that allow you to go back several decades. SPYSIM is the S&P 500 while IEFSIM is 10-year treasuries. You can create simple balanced portfolio models. You can certainly enter a global portfolio model if you choose. You’d use VTSIM for global equities.
The annual returns average just over 4.0% taking us above that $1.5 million target. They match the $1.7 million offered by the simple savings calculator.
And for interest sake, here’s the most challenging period for that conservative portfolio model, during the stagflation era.
That’s why I continually beat the drum for gold and other inflation-fighting assets within a balanced portfolio. It’s not advice of course, but gold certainly makes the balanced portfolio better. I like the idea of some modest inflation protection for retirement portfolios. Stock markets don’t due the trick in the heat of the moment, during high and unexpected inflation.
Match the portfolio to the task
If you’re required savings rate is quite low, you might choose to use a conservative portfolio, or cash and GICs. If you need greater returns in the 4%, 5%, 6%, 7%, 8%, 9%, 10% area – you’ll need to take on greater risk and greater growth potential. (more equities). Of course, we must always invest within our risk tolerance level.
Check out the GIC rates at EQ Bank
For more on matching portfolio risk to time horizon check out …
The Canadian Asset Allocation ETFs page
You’ll find a table within that post. Please feel free to reach out (hit that Contact Dale button) if you need clarification or guidance.
The Do-It-Yourself Retiree has the tools
As a DIY investor you can access the tools necessary to discover your required savings rate and required investment returns. And then in retirement you can use a calculator to build an optimized retirement cash flow plan. Once again, it is crucial that we run the software – only the software knows.
While it may seem daunting at first when you navigate a retirement calculator such as MayRetire, I can assure you that it is not that difficult if you put in the hours. And we’re learning together at Retirement Club. We put forth the well-known strategies offered by retirement experts and financial planners.
Retirement Calculator Zoom Presentation Invite
This Thursday at 2pm EST we are having a Retirement Club bonus Zoom Presentation where we’ll go through some of the MayRetire basics and how to optimize the cash flow plan.
As a Cut The Crap Investing subscriber, you’re welcome to join us.
Use the Contact Dale form on at the top of this page and I will send you the details.
I hope you’ll join us.
Retirement Club members, you have already received your invite. Check your inbox. π
Have a wonderful day.
Dale
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