Many Canadians start asking themselves this question once they turn 50 years old (or about 10 years before they wish to retire). They wonder if they have enough assets, how long they have to keep working or simply if they are saving enough so they won't run out of funds in retirement.
Often they want to know when they should take their government benefits: CPP and OAS.
Should I take my CPP early, start at 65 or delay until 70 to maximize my pension? How do I avoid OAS Clawback?
Others are curious how much they can afford to spend in retirement so their assets last long enough or which of their assets should they spend first so they de-accumulate their capital in the most tax-efficient way.
Financial and retirement planning can help address these questions. It can give you useful insights into your retirement and helps you make the right decisions so you pay less tax and maximize your retirement lifestyle.
As a starting point, it is useful to determine your current sustainable spending. You can factor in your current income, assets and debt to create a set of financial projections to obtain your maximum spending in retirement. Here's an example.
We are going to develop retirement projections for a 57 years old couple, Jane and Brian, who live in Ontario and have around $1,300,000 in assets: $600,000 in their primary residence and the remaining $700,000 in their savings and investments.
After running a retirement simulation, we obtained $87,352 as their maximum annual spending now and in retirement (approximately $7,279 per month).
Assuming they are going to spend that amount leaving the equity in their house untouched, they will end up with an estate of $1,338,368 at 95 years old.
Their sources of income in retirement will be as follows:
It is worthwhile to point out that we optimized their retirement projections by making more optimal contribution and withdrawal decisions, starting their RRIF at 65 and applying income splitting between the spouses. If we hadn’t done that, their estate would have been only $1,092,295, which is substantially lower than $1,338,368 (the difference of approximately $208,000 or 19%).
There are further changes or optimizations possible. One of the opportunities available to retirees to maximize their estate is to delay their CPP and OAS benefits until 70 years old.
Delaying their government benefits in this example would produce an estate of $1,637,731. This is roughly $545,436 more than in the unoptimized scenario (approximately 50% difference).
This is by no means a recommendation that all Canadians should delay their government benefits. A decision to do that is always context specific and depends on your individual circumstances.
However, it is important to know that optimizing your retirement projections instead of making arbitrary choices and making certain decisions as you approach retirement have such a profound impact on your finances.
Here’s a summary of these three scenarios:
If you would like this type of detail customized for you as you move forward please let us know and we can set up this type of a plan for you. Please note the above is an example only and each individual situation is completely different. Any financial modeling and/or planning we would do would be specific to your personal situation.
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