And finally, this post continues, and ends, the theme I started three days ago about the basic tools and practices to reduce or even eliminate financial stress in retirement.
Retirement is about a lot of things. The most predominant for most people is the end of working for an income (from an employer or self owned business). So income from employment stops, do you have any worries about that?
Every year or so, regardless of your current age it makes sense to do a quick estimate of your post retirement income. I say quick, because there are ton’s of variables and the goal of this exercise is to get a ballpark idea of what your post employment income streams will be. This gives you the chance to make changes as desired. Basically you end up with informed decisions and associated actions. – i.e., do nothing or do something.
Remember if you can’t control it – don’t worry about it and if you can control it, then go ahead and do something – again no worries cause you got it in hand. Simply put, there are only two categories of things – those you can’t control, no point in worrying about them and those you can control and do so, no worries there. In the end, you have no worries.
How does this Quick Estimate Work?
The first year takes the longest and then it is quick. Even the first time should not take more than 30 minutes. All you do is list your income sources and the amount you estimate each will provide. Some people will have income from all these sources and in some cases multiple incomes within a single source type (e.g., you might have worked for 3 companies and have 3 defined benefit pensions coming when you declare retirement)
Based on my blogs over the last 3 days here is the list of the potential sources with instruction how to determine how much you get from each. I am going to use acronyms where they apply and I am not explaining these sources as that is what the previous blogs did.
OAS/GIS/Allowance – The amount depends on the number of years as a legal Canadian resident and when you start to receive it. Get amount estimate from Government of Canada Web Site
CPP – This depends on your contributions to the plan. Get amount estimate from your Service Canada Account You will need to register if you have not done so already.
Company Pension (Defined Benefit) – The company has to provide you your estimated income at retirement age by law annually. You can get this amount from that statement. (Because it’s defined benefit no estimation needed)
Company Pension (Defined Contribution) – This requires an estimate of the amount saved in the plan on retirement. Use this estimate to determine how much of a life annuity you could purchase (you might choose a RIF or LRIF but estimating based on an annuity is easiest to do and the most conservative so for estimation makes best sense. If you go with a RIF or LRIF ultimately you may get more income from this plan). Use the estimated savings to determine income based on current annuity rates from Canada Trustco annuity comparison website
Estimate Savings Use the amount saved so far (you get a statement on this each year) plus what you contribute each year (that’s on the statement) times the number of years to retirement, plus use an estimate of annual rate of investment return times the number of years to retirement and the amount in the plan (the statement tells you the historic rate and I usually just use that). This calculation is best done with a formula, just use google search to find one if you don’t have it on hand or use the calculator Service Canada provides – it’s really easy to use.
Note: if you had a defined contribution plan from a company you have left and chose a LIRA (rather than lump sum) use the amount in the LIRA, adjusted for investment income estimated to retirement date.
Income from RRSP – This requires an estimate of the amount saved in the plan on retirement. Use this estimate to determine how much of a life annuity you could purchase (you might choose a RIF or LRIF but estimating based on an annuity is easiest to do and the most conservative so for estimation makes best sense. (If you go with a RIF ultimately you may get more income from this plan). Use the estimated savings to determine income based on current annuity rates from Canada Trustco annuity comparison website
Estimate Savings Use the amount saved so far (you should get regular statement(s) from the institutions where your RRSP(s) are held) plus what you plan to contribute contribute up to retirement, plus use an estimate of annual rate of investment return times the number of years to retirement and the amount in the plan (There are simple formula’s you can access through a google search on the internet to do the investment return calculation).
Income from Investments – Estimate how much savings of after tax money (non-registered or TFSA) you will have at retirement. Estimate your annual return and this is the amount of income you could withdraw from these savings without deprecating the capital. For example you will have $750,000 saved and believe you can reasonably investing it with a 5% return so this would be an income of $37,500.
Note: If part of the amount earned is from a TFSA (if any) this portion would be tax free so you you might want to calculate that separately.
And finally
Calculate the tax on this income as that will probably be the largest expense. That just the marginal tax rate times the annual income, and your actual amount of income to spend is determined. For example if your total adds to $75,000 deduct 19% (the marginal tax rate on this amount today) so you spendable amount would be $60,750.
If your estimated living costs in retirement (food, heat, light, entertainment, housing, etc) are less than $60,750 you are good to go. If not, don’t worry cause you are in control and can make changes as needed.
