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Friday, November 21, 2014

2012 Retirement Calculations – Part III

Posted by Tim Stobbs on November 28, 2012

Now some important consideration to my plan is having a mortgage free house.  After all when those pesky mortgage payments are gone you don’t need any where near the same amount of cash flow to live. Now a question I’ve previously been asked “am I depending on downsizing my home to retire early?”  The answer is no. Using any equity in the house would be used as a backup plan in case the main plan ran into problems and I’m would also considering downsizing houses and taking some that equity into upgrading the smaller house to reduce my utility bills.  Either case that won’t be to primarily fund the retirement plan so other than noting this I’m not going to include any equity in these calculations.

So what happens now with the taxable account?  Well the reason this account is still in the plan is I literally won’t have enough contribution room in our RRSP’s or TFSA’s to shelter all the money.  Actually so far in these calculations I’ve left a some contribution room out of the calculations to keep things simple.  We’ve got about $24,000 in TFSA contribution room that I haven’t accounted for yet.  So the idea is to keep dividend paying stocks in the taxable account as much as possible to keep the tax liability low, but towards the end I might also have to accept paying some tax in my plan.  I’m again combining my wife’s account and mine to make this simple.

Starting at $19,500
Adding $1667/month at 5%
In 8 years I will have:$225,339

Tomorrow I will get into the specific math of estimating do I have enough to retire at 42, but for now we need to review two other sources of income that will come up when I hit the more ‘traditional’ retirement age of my 60′s.

First up is the Old Age Security (OAS) Pension, which my wife and I should both qualify for the full amount see here for details.  The current payment rate is $544.98/month per person.  So in total that is $6,539/year per person ( and it is indexed for inflation).  Now this program is out of general government revenue so there is the risk it could be cut or reduced.  So depending on your personal feelings on the idea you might want to reduce the benefit in your own calculations.  I like to hedge my bets and assume we only get half.  That way we can handle either a pension cut or the sudden death of one of us and the other one should be fine.  Also keep in mind I’m covered by the new rules for OAS and I won’t be collecting it until 67 (see here for more information).

Next is the Canada Pension Plan (CPP), which is paid for with our contributions and is held in an arm’s length fund from the government (see here for more info).  So it doesn’t face the same risk as OAS, there is more than enough money in that fund to cover pensions until I’m likely dead.  Now your CPP benefit is calculated in a complex manner so if possible request an estimate of your pension.  It at least gives you a baseline to work with.  Something to keep in mind if you retire early is you are going to reduce your CPP pension by doing it.  You see when they calculate your benefit they drop out 16% of your lowest earning years from 18 till 65 (plus drop out years if you were raising young kids).  Keep in mind you also can take CPP early at 60, but doing so reduces your pension by 0.6% per month permanently (check out the changes to CPP that kick in from 2011 onwards).

So what does this all mean to me?  Well I’m expecting a low pension amount.  You see there are 42 years between 18 and 60, and I’m going to have zero incomes for 18 years (age 42 to 60) when that 16% drop out will only cover 6.7 of those.   Then I could get a 36% reduction for taking the pension at 60, to offset this a little I will take it at 62 instead.  In the end I’ll have a low number.  So the best way to get an estimate of your pension is to plug your data into this calculator and adjust your income level down later on to simulate your early retirement.  It takes some work but it does give you a number (see this post for detailed instructions). I plugged in all of my values and get an estimate of $5556/year for me and $1200/year for my wife.

Therefore in grand total I expect these two programs, OAS and CPP, will provide $13,295 of income after age 65.

Tomorrow I will pull together all this income and savings estimates to figure out if I have enough to retire at 42.

Comments

5 Responses to “2012 Retirement Calculations – Part III”
  1. deegee says:

    Wow, you have two government programs which pay retirement benefits? We have only 1 here in the USA (Social Security). Not sure which one is closer to our SS program.

    But you still need to be able to get from your planned ER age (42) to age 60, when you can begin tapping into your massive reinforcements.

  2. funkright says:

    just wondering where you are getting the 5% return rate….?

    “Starting at $19,500
    Adding $1667/month at 5%
    In 8 years I will have:$225,339″

  3. Lorain says:

    Please send in a request for a proper pension estimate.
    They make it hard to find on their site but here is the link
    http://www.servicecanada.gc.ca/cgi-bin/search/eforms/index.cgi?app=prfl&frm=isp1003&ln=en
    Hubby and I have both done this and have our estimates in hand.
    Tim…I would want more money than you plan to have to feel safe and secure…but then again I want to see the world!!
    Wish you the best….we will go into retirement soon, just need to get totally fed up at work and that has not happened quite yet,and maybe it’s because we have a month in Mexico coming up!!! Gotta love Christmas on the beach

  4. Simon Pickard says:

    5%?! You’re joking aren’t you?
    Where do you hope to get this (after tax) return on your savings?
    Would love to know!

  5. Tim Stobbs says:

    @deegee – OAS is likely the most similar to SS in the US, but in all honestly they don’t entirely compare well as there is some little differences.

    @funkright – See the early posts in the series, I outline why I use 5% there. Yet the short answer is because that is the rough real return I’ve personally been getting.

    @Lorain – Thanks for the link. I should have posted that. This plan has always been about providing a baseline of living. I plan to work a little bit for the extras in life.

    @Simon – I’m currently getting a real return of 5% (or 7% with inflation) for a while now. Most of my accounts exceed that. What I invest in: I’ve got a good pension plan at work with low fees and some index funds again with low fees for the RRSP. Taxable accounts are mainly dividend paying stocks, I pick them up as things do a little drop at 5 to 6% yields, they typically keep rising payouts roughly to inflation overall. It can be done, it isn’t easy, but possible.

    Hope that helps,
    Tim

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