The other day I started discussing how I plan to fund my retirement with government benefits. With CPP and OAS I determined my wife and I can fund about 88% of my retirement goal of $25,000/year after I turn 65. Today I’m going to look at other sources of funding my retirement so I can leave work at 45.
1) Company Pension
When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.
I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.
If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.
Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.
So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.
I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.
As I previously mentioned, I have determined that I need about 40% of my current income in retirement which would mean I need about $25,000/year net income in retirement for my wife and I (in today’s dollars). Now how I’m going to obtain that money from age 45 onwards is a long process, so I’m going to divide it into parts. Today is Part I – Government benefits.
The good news is getting a $25,000/year income is easier than you think. The government is going to give me a lot of money through various programs, especially if I’m in a low income bracket. Here are some of the details.
1) Canada Pension Plan
You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to have it all back over a long period of time. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.
I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. In my case I got $7094 for me and $3897 for my wife. I know that doesn’t look like a lot but combined, the $10991/year is 44% of my net income for retirement. The added tax benefit of a CPP pension is income splitting is allowed.
2) Old Age Security
I know that some ‘experts’ don’t suggest depending on OAS for your retirement calculations. I disagree. I believe that any government that tries to remove this program will be voted out so fast that it will make their heads spin, after all seniors tend to have a high voter turnout and lots of time to be interested in politics. Based on the current rates, I expect my wife and I will collect an additional $5558/year each after I we turn 65.
So that would take me up to $22,107/year combined income or 88% of my goal. Not bad for not including any RRSP or company pensions. Tomorrow I’ll cover the rest of the plan.
Most of the retirement planning people provide advice like:
-You need 70% of your pre-retirement income in retirement to keep the same standard of living
-You are going to live longer, so plan to live to 100 years old.
-You can’t count on government pensions
All of the above is bullsh!t.
If you are following my previous post guideline of the 30-30-40 budget, you need exactly 40% of your pre-retirement net income to keep the same standard of living. After all your house should be paid for so you don’t need 30% and if you are not saving for retirement you don’t need another 30% of your net income.
Check out the government’s average life expectancy (~75 for males and ~81 females) and you will be a bit overly optimistic to assume that you medical science will keep you alive for another 20 to 25 years.
The entire myth about the CPP running out of money is a bit of carry over myth from the US where social security is on rocky ground. We have been assured that the CPP fund has enough money to keep going.
So remember to take any ‘advice’ from someone selling you a mutual fund or other product with a grain of salt. After all they are just trying to earn a living by making you work longer than you need.