What does $1.7 million do for you in retirement?
On February 7, 2023, the Bank of Montreal (BMO) released its latest survey of the Canadian public’s estimate of how much they need to retire with confidence. The survey resulted in a figure of $1.7 million.
You may think that this is quite a large figure. It may very well be. On the other hand, for those who have lived with a high household income for the last several years of their working career, that figure may feel inadequate.
Registered Retirement Savings Plan (RRSP) Data
Age of Survey Respondents
This is not stated in the press release. The online survey included responses from 1,500 adult Canadians.
Average Amounts Held in RRSPs
The press release included information that the average RRSP size across Canada is $144,613.
Average RRSP Contributions
Again, per the press release, average RRSP contributions amount to $7,058 per year.
New Retiree Profile
Let’s assume a female/male retiree couple who reached 65 at the end of 2022 and begin CPP and their Old Age Security payments in January 2023. They have also converted their RRSPs to RRIFs at the end of 2022, so they are obliged to begin drawing down their RRIFs in 2023.
BMO does not provide either an average or median age for the survey respondents. Since adulthood begins at age 18 for the calculation of Canada Pension Plan (CPP), and 65 is the standard age at which CPP begins, I will pick a mid-point age of 37 for the RRSP data BMO provided.
Using the IQPF and FP Canada Standards Council Projection Assumption Guidelines, either one of a 65-year-old female/male couple has an even chance of living to age 94. FP Canada encourages using 25% probabilities of survival for financial planning purposes, so I will project out to age 98.
The maximum monthly amount a new recipient of CPP could receive is $1,306.57 or $15,678.88 per year. However, the average monthly amount paid, as of the latest data available, is $717.15 per month or $8,605.80 per year. We will assume that each member of the couple receives this average amount.
Let’s assume that both members of our couple lived in Canada for at least 40 years before they reached age 65. That means they are eligible for an unreduced OAS amount of $687.56 per month or $8,250.72 per year.
Accumulated RRSP Balances
BMO reported average RRSP balances of the respondents at $144,613. Assuming that the average age of the respondents was 37, if they have just turned 65, 28 years have passed. Part of the calculation will include determining how much their RRSPs will have grown by the end of 2022.
Annual RRSP Contributions
The BMO survey found that the average respondent contributed $7,058 to their RRSP in a year. Given the rule of contributing no more than 18% of earned income to one’s RRSP, if this contribution were the maximum, it works out to $39,211 in earnings a year, which is toward the lower end of the income scale today but a solid middle-of-the-road income in the mid-90s.
If we fast-forward to 2022, the couple’s last full year of employment, if their income increased by 2% per year and they raised their RRSP contributions accordingly, the figure would rise from $7,058 to $12,047. This would also result in their respective RRSP holdings at the end of 2022 rising to $1,054,000, assuming a modest average long-term investment return of 4.78%. We will adjust this slightly, though, reducing it to $730,000 each.
Tax-Free Savings Accounts
The BMO survey only referred to RRSPs. No doubt it is published every year to coincide with the approaching contribution deadline of March 1 to encourage readers to contribute to their RRSPs. However, our couple has managed to accumulate $120,000 in each of their TFSAs.
We will assume that our couple is debt-free including the ownership of a home without a mortgage.
Their investment assets, excluding an emergency reserve and other liquid assets like a chequing account, are as follows:
Our retiree couple can spend, after-tax, up to 97,166 “real” dollars per year until age 98. Real amounts reflect estimates assuming 2% annual inflation throughout. That is, $97,166 in 2043 has the same purchasing power as $97,166 today. Nominal amounts reflect estimates for expenses or returns as they are experienced at that time. In an environment with a 2% annual average inflation rate, $97,166 today would have about the same purchasing power as $144,165 in 2043.
Now, let’s suppose that in retirement, spending goes down a bit, to a long-term average real figure of $89,000. The result is nominal savings of over $1 million, not including the value of the house, that can be left to their heirs.
A rule of thumb, which may not be applicable, is that a retired couple can live comfortably on 70% of their income due to decreases in spending. Typically, mortgages are fully paid off, children are independent, a two-car household can manage with only one vehicle, and setting aside money for retirement is no longer necessary because they are now in retirement. If this 70% rule were to apply, let’s assume that our couple’s after-tax spending was about $70,000 per year in real dollars. That allows them to leave to their heirs investments of over $2.8 million in nominal terms, before tax. Some adjustments to prioritize spending from their RRIFs could leave their heirs with even more as any balances remaining in a RRIF at death are fully taxable, while TFSA proceeds are inherited almost entirely tax-free.
These figures are not necessarily applicable to every retired couple. If they were high-income professionals who retired with expectations of maintaining a similar lifestyle in retirement, they might need considerably more than $1.7 million. On the other hand, a low-income single person is likely to receive not only CPP and OAS but also the Guaranteed Income Supplement (GIS). They could very well receive as much or more than they earned during their working years. And if they did save anything, hopefully, they put it all into a TFSA which has no impact on their entitlement to GIS.
I encourage readers to apply this estimate from BMO with a large helping of salt. You will do well to have a financial planner review your situation so that you can plan your retirement with a better sense of where you are trending financially and begin to make appropriate adjustments now.
This is the 184th blog post for Russ Writes, first published on 2023-02-13
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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