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Wednesday, March 29, 2017

Retirement Calculations – Assumptions

Posted by Tim Stobbs on December 5, 2006

Well it appears I inspired the Canadian Capitalist to dig out his pencil and do some calculations on his early retirement. He came up needing $1.36 million to leave the working world at age 55. Which to me proves assumptions are everything when it comes to retirement calculations. So for full disclosure on my previous posts (Part I, Part II and Part III) here is what I assumed.

1) That I will collect CPP at age 60 and that I will generate no more CPP contributions after I turn 45.
2) That OAS will exist in some form or another program will take it place to ensure I don’t starve to death as a senior when I turn 65.
3) That all my calculations were done in today’s dollars.
4) Which is why you will notice my assumed rate of return was around 5% for most of my calculations. To date my RRSP has been around 8% interest, so I cut out 2% for inflation and left 1% as a buffer for things to go wrong, except for my wife’s investment account, since it is structured as being more aggressive.
5) I only used a 4% safe withdrawal rate on my work pension calculation. The reason is that the 4% rate is intended to be used for those who want to preserve most of their capital. For my early retirement, I intend to use up almost all of my capital. So for my RRSP’s I assumed a 5% withdrawal rate.

Those are all technical assumptions, which can very from person to person depending on your comfort level with the government and your investments.

The single biggest factor in determining all those numbers is: what do you want to have for an income? For me I chose a very low number compared to a lot of people’s comfort level ($25,000/year for two people). Yet that number is perfect for me. My current lifestyle is very cheap for the most part. I like to garden (which reduces food costs), cook(again reduce food costs), read books (free from the library), write (ok there is some power cost to run the computer) and watch movies (again mostly from the library, but also borrow from friends). My low number offers me something that can’t be bought otherwise: time.

So if you plan a retirement with golf every day and trips around the world every three months you will need a lot of money, but if your looking just for more time with friends, family and to develop new hobbies or revisit old ones you might want to have a look again at the high income number.

I know that if I retire at 45 that I will be taking a risk, that the markets could crash or the government cuts my benefits. Yet, the reward for that risk is another 10 years of good health to do what I want is worth it to me.

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