How Much Is Enough

The toughest part of early retirement is knowing when you have enough saved to retire comfortably without running out of money. Working longer prevents this problem. The big question is how much is enough? Early retirement opens up a lot of opportunities, but obviously the longer you work and save the higher your net worth is.

If you live in Canada the average life expectancy for a male is 79 years and a female 83 years. For partners, one of the couple can be expected to live well into his/her 90s or longer.  Statistic Canada

How To Find Your Retirement Number

Each retirees circumstance is different and one number does not fit all. But most important you need to do an honest evaluation and estimate your expenditures to find out your income needs.

Their is a general consensus in the financial community when it comes to safe withdrawal rates of your portfolio, the 4% rule or the 25 times your annual expenses rule.

So if you need $40,000 a year in retirement income your portfolio needs to be $1 million.

The 4% Rule uses a 50/50 bond equity asset mix adjusted for inflation which should last 30 years of retirement.

Bill Bengen was the creator of the 4% Rule, his research is based on data going back to 1926. He tests the withdrawal rates for retirement dates beginning with January 1, 1926. The average safe withdrawal rate is 5%.
However, if you experience a major bear market early in retirement, as in 1937, 1968 or 2000, or add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%.
If you retired in 1968, you went thru two bear markets early on and the inflation of the 1970’s. Those who experienced big bear markets early in retirement, appear to be doing okay with 4.5% withdrawal rate. But if we were to have decades of high inflation, like the 1970’s then things could change. Inflation and a bear market are the retiree’s worst enemy.

Bill’s quote is “that if you plan to live forever, 4% should do it.”

Don’t be discouraged

Before you get discouraged about how much you need to save for retirement, remember in Canada we have OAS, CPP, along with company pensions or any other source of income you might have to compliment your income.

Old Age Security

The Old Age Security (OAS) program is the biggest component in Canada’s Social Security system. It is a monthly sum of funds that helps provide a minimum quality of life for elderly Canadians.
The amount of your Old Age Security (OAS) pension will be determined by how long you have lived in Canada after the age of 18.
To qualify for a full OAS pension, you must have lived in Canada for at least 40 years after age 18. The maximum as of March 2018 is $586.66 per month.
You will receive a partial pension benefit if you haven’t resided in Canada for the full 40 years.

Canadian Pension Plan

Canadian Pension Plan (CPP) is a deferred income retirement plan that was introduced in 1965 as a complement to Old Age Security (OAS). All individuals over the age of 18 who work inside of Canada are eligible to contribute toward and receive benefits from the Canadian Pension Plan (CPP).

The CPP pays a monthly amount, which is designed to replace about 25% of the contributor’s earnings on which initial contributions were based, and is indexed to the Consumer Price Index (CPI).
The average annual CPP pension received by a retiring 65-year-old person at the end of 2016 was $7,728 – versus a possible maximum of $13,368.

Conclusion

The specific amount that you will need will completely depend on you.
If you plan to jet set around the world after you retire, you may need to save more for retirement.  But if you plan to retire to a beach and spend time with the family in a low cost area, you may need less. (Captain Obvious here!)

When calculating your retirement number, estimate what you need in income to live your retirement lifestyle. Minus any government programs, pensions other income and use the 4% rule or 25 times your annual expenses to calculate how much you will need to save for retirement.

Remember if you are retiring early the government programs/pensions have an age restriction before you are eligible to collect.

Don’t wait for retirement to enjoy life !!

What is an RRIF ?

Source: Wikipedia
Registered Retirement Income Fund (RRIF) is a tax deferred retirement plan registered under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan (RRSP). I have written about RRSP Contribution Rules.

As with an RRSP, an RRIF is registered with the Canada Revenue Agency (CRA). RRIF income is completely tax sheltered inside your RRIF account, but all withdrawals are taxable.

Canadians have a few options with their RRSP before an individual reaches the end of their 71st year (or spouses age if younger). It is mandatory to either withdraw all funds from a RRSP plan, convert the RRSP to a RRIF or purchase a life annuity.

RRIF Withdrawal Rules

There are two primary differences between a RRSP and a RRIF. The first is that no further contributions can be made and second there is a minimum RRIF withdrawal.
The minimum RRIF withdrawal each year is determined by a percentage that is calculated by the account holder’s age and the total value of the plan on January 1 each year. There’s no limit to the maximum amount that can be withdrawn from a RRIF or an RRSP.

The table below shows the RRIF minimum payout percentages for different ages. As you can see, the annual percentage payouts gradually increase to age 95.

Age At Start Of Year.

65                       4.00%
66                       4.17%
67                       4.35%
68                       4.55%
69                       4.76%
70                       5.00%
71                       5.28%
72                       5.40%
73                       5.53%
74                       5.67%
75                       5.82%
76                       5.98%
77                       6.17%
78                       6.36%
79                       6.58%
80                       6.82%
Age At Start Of Year
RRIFs Set Up After The End Of 1992
81                      7.08%
82                      7.38%
83                      7.71%
84                      8.08%
85                      8.51%
86                      8.99%
87                      9.55%
88                     10.21%
89                     10.99%
90                     11.92%
91                     13.06%
92                     14.49%
93                     16.34%
94                     18.79%
95 and older     20.00%

RRIF are flexible

In your RRIF you can hold the same investments that are eligible for an RRSP, stocks, ETF, bonds, mortgages, GICs, options, warrants, rights, mutual funds etc. You can also hold foreign investments in your RRIF.
When you die you can leave your remaining RRIF assets to your designated beneficiary or estate.

Conclusion

There are a lot of issues to deal with when it comes to planning your retirement income. RRIF with pensions and annuities are an important part of the retirement process. Take the time to plan wisely. There is two good articles if you are interested that explain RRIF. Smartest things you can do with your RRSP at age 71/Jason Heath and Understanding RRIFs/Savvy New Canadian

Don’t wait for retirement to enjoy life !!