Retirement plan for your critique

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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strathglass
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Retirement plan for your critique

Post by strathglass »

Looking for opinions on the feasibility of the following idea for a somewhat early retirement.

Background:
  1. We are a couple, same age (52), both working and making about the same income.
  2. We've one child who's off to university in 2 years (most of the cost covered by RESP investments; rest they will pay).
  3. House in GTA is paid off and worth north of 1MM (about 1.3MM right now based on what's happening on our street)
  4. No pensions, just savings (pretty much all RRSP/LIRA and a some TFSA, no non-reg) - about 1.5MM (55%/45% Equity/FI in broad ETFs and GIC ladder).
The plan for retirement is along these lines:
  1. Retire in 3 or 4 years (around age 55 or 56): savings stop at that point
  2. We don't like the traffic and crowds in the GTA and want to downsize in retirement to a smaller community
  3. So we sell the house when we retire or thereabouts, pulling out ~ 400k in the process (balance to fund the new house).
  4. Live off of the (tax free) 400k cash for 5 or 6 years or so
  5. CPP starts at 60: the two of us should get 13k total
  6. Savings grow until age 60 or 61 when we need to start withdrawals: we are hoping they can grow to a minimum of about 2MM by then
  7. To clear a reasonably comfortable 6k per month after tax, factoring in CPP, we figure we need to withdraw 72k per year, or 3.6%.
Now we'd prefer not to have a withdrawal rate as high as 3.6%, but we figure we could get that down closer to 3% by stretching out the 400k taken from the house sale proceeds, or increasing the amount we take out of the house sale proceeds, or working a bit longer if required.

So there seems to be some flexibility, which is good. And we always wanted to retire away from the GTA anyway, so why not take advantage of all that home equity to support an early retirement?

Who know what will happen with house prices and the markets over the next 3 or 4 years or so, but I am hopeful at least on the housing side that the price differential between the GTA and our target area will continue to allow us to pull out a very healthy amount to fund this plan!

Any opinions on this plan?
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Re: Retirement plan for your critique

Post by like_to_retire »

strathglass wrote:To clear a reasonably comfortable 6k per month after tax, factoring in CPP, we figure we need to withdraw 72k per year, or 3.6%.
My first thought was - I'm wondering what the size of the RRSP/RRIF will be when you turn 72 and the 5.28% mandatory withdrawal begins. This will attract a lot of tax. Have you considered drawing down the RRSP each year when you retire at ~ age 55 while you have no other taxable income - at least an amount that keeps you in the lower tax bracket?

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Re: Retirement plan for your critique

Post by strathglass »

Thanks, and yes - we were thinking along those lines: for tax efficiency we could pull out into TFSA and non-reg, just hadn't done the math yet to figure out how much that is going to be. Effectively they remain untouched as part of our savings, we just shuffle things around for maximum effect!
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Re: Retirement plan for your critique

Post by Norbert Schlenker »

Much depends on the windfall from the house sale. Even if prices in the GTA and wherever you end up move together in a relative sense, suppose the housing bubble finally bursts and what seems to be worth $1.3MM today is worth only $900k in three years. Then your $400k pot turns into $300k, and how does that affect your calculations?

On the other hand, if you're moving someplace cheaper, then why not look further afield. If you can sell up for $1.3MM and are willing to relocate, maybe you can move far enough that $900k is a completely silly price for a house, and where $300k is plenty. Then you've got $1MM to play with out of the GTA proceeds.

like_to_retire's idea about stripping the RRSPs to some extent before CPP kicks in is a good one. With no income, there cannot possibly be any harm in pulling right to the top of the first federal bracket every year. If each of you can do that, that's about $90k a year out of the combined RRSP, say $450k out in five years. You'll have lost about $75k to the tax man, so that leaves $375-400k just sitting there. So now you have another five years worth of spending covered and you don't have to take CPP if you don't want to. Then you can strip another $450k out of the RRSP over the next five years as you get to 65. Where do you end up? You're both 65. You've got about $400k sitting outside the RRSP, maybe $1MM inside. You can each collect $9k CPP (instead of the originally estimated $6500) and $6k OAS, so now there's $30k as a base income. You need to come up with another $42k out of a $1.4MM portfolio, et la voila, there is your 3% withdrawal rate.

Finally, if you're willing to move, consider where you're going. A quick look at http://www.taxtips.ca/calculators/canad ... ulator.htm suggests e.g. you'll save $400/year each if you're stripping $45k from an RRSP in BC instead of Ontario.
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Re: Retirement plan for your critique

Post by kcowan »

You seem to be in good shape. In addition to the RRSP meltdown, you should reassess the needs for 3.6%. You will find many budget items go away once retired. And costs will drop if you get outside the GTA net. But you have to budget for travels with all your free time. Salt Spring Island has some great deals compared to Vancouver. Parksville is also nice for retirees. All this uncertainty will get clearer is 4 years.

Banks are paying north of 4% in dividends so you can easily cover your nut if you don't worry about a balanced portfolio. We have found people get used to one car, for example. And fewer credit cards. Lots of levers to pull.
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Re: Retirement plan for your critique

Post by strathglass »

Norbert Schlenker wrote:Much depends on the windfall from the house sale. Even if prices in the GTA and wherever you end up move together in a relative sense, suppose the housing bubble finally bursts and what seems to be worth $1.3MM today is worth only $900k in three years. Then your $400k pot turns into $300k, and how does that affect your calculations?
The good thing is, before we actually retire we get to assess the housing market and if required, we re-plan to live on less or work longer to accommodate any adverse (housing) market moves!
On the other hand, if you're moving someplace cheaper, then why not look further afield. If you can sell up for $1.3MM and are willing to relocate, maybe you can move far enough that $900k is a completely silly price for a house, and where $300k is plenty. Then you've got $1MM to play with out of the GTA proceeds.
Definitely we are thinking about this. And factoring in costs (selling/moving/land transfer taxes)...we were thinking at a rough level to just take off $100k, so in this example we only actually assume $800k to spend on the new house, if we are pulling out $400k and allowing for $100k expenses.
like_to_retire's idea about stripping the RRSPs to some extent before CPP kicks in is a good one. With no income, there cannot possibly be any harm in pulling right to the top of the first federal bracket every year. If each of you can do that, that's about $90k a year out of the combined RRSP, say $450k out in five years. You'll have lost about $75k to the tax man, so that leaves $375-400k just sitting there. So now you have another five years worth of spending covered and you don't have to take CPP if you don't want to. Then you can strip another $450k out of the RRSP over the next five years as you get to 65. Where do you end up? You're both 65. You've got about $400k sitting outside the RRSP, maybe $1MM inside. You can each collect $9k CPP (instead of the originally estimated $6500) and $6k OAS, so now there's $30k as a base income. You need to come up with another $42k out of a $1.4MM portfolio, et la voila, there is your 3% withdrawal rate.
I agree that LTR's idea is a wise tax move, and were indeed thinking about it. But I hadn't considered your strategy to increase CPP as you've described. Sounds like it might work, I will have to play with the numbers some more. Thanks for the idea!
Finally, if you're willing to move, consider where you're going. A quick look at http://www.taxtips.ca/calculators/canad ... ulator.htm suggests e.g. you'll save $400/year each if you're stripping $45k from an RRSP in BC instead of Ontario.
Due to family reasons we'd not want to head west, but your numbers are interesting...I have been ballparking numbers using the E&Y tax calculator. The E&Y site indicates for $45k income you clear about $21 more a year in Ontario! I tried the taxtips calculator and the number for BC is the same as the E&Y tool (37966 take home), but for some reason the Ontario take home number is lower with the taxtips calculator as you noted (37536 vs E&Y's 37987). I wonder why the discrepancy?
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Re: Retirement plan for your critique

Post by zeno »

The wildcard in this may be your child's post secondary career. You plan to retire just before or about the time he or she graduates. Best case is a smooth passage through an undergraduate degree and the end of your financial support, but changes of program, second degrees, inhospitable job markets can delay launch of a young person's financial independence. You may want to think about your preparedness to continue or to stop financially supporting your child. It's rarely a full stop. Whatever your plan, make it clear to your child, so he or she isn't surprised when parental subsidy ends.
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Re: Retirement plan for your critique

Post by strathglass »

kcowan wrote:You seem to be in good shape. In addition to the RRSP meltdown, you should reassess the needs for 3.6%. You will find many budget items go away once retired.
Yes, this is SOOOO crucial! Without knowing what you need to spend, you cannot really plan properly.
Playing with the numbers shows how sensitive everything is to your spending level.
We have only a decent idea today, but have started use an app to track everything we spend, so once we have a couple years data we will feel more confident!! :D
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Re: Retirement plan for your critique

Post by strathglass »

zeno wrote:The wildcard in this may be your child's post secondary career. You plan to retire just before or about the time he or she graduates. Best case is a smooth passage through an undergraduate degree and the end of your financial support, but changes of program, second degrees, inhospitable job markets can delay launch of a young person's financial independence. You may want to think about your preparedness to continue or to stop financially supporting your child. It's rarely a full stop. Whatever your plan, make it clear to your child, so he or she isn't surprised when parental subsidy ends.
Agreed this is definitely something to consider! Might lead us to work one or two years longer to have a bigger cushion!
Might even delay the house sale to know where the child will settle upon graduation. But that would really be quite a different plan!
Thanks.
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Re: Retirement plan for your critique

Post by 2 yen »

If you retire in your fifties, you will likely be able to spend quite a lot. Sit down and be really honest about what you intend to do. Travel, for example, will eat up a lot of cash. We have retired on 90k post tax and have no problem spending all of it. We will have some CPP and OAS and a bit of RRSP income later in our mid sixties, but as mid fifties retirees, we are spending more on hedonistic adventures than we could have imagined.

There is a big difference between what you need and what you are capable of spending.

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Re: Retirement plan for your critique

Post by strathglass »

2 yen wrote:If you retire in your fifties, you will likely be able to spend quite a lot. Sit down and be really honest about what you intend to do. Travel, for example, will eat up a lot of cash. We have retired on 90k post tax and have no problem spending all of it. We will have some CPP and OAS and a bit of RRSP income later in our mid sixties, but as mid fifties retirees, we are spending more on hedonistic adventures than we could have imagined.
There is a big difference between what you need and what you are capable of spending.
2 yen
It is a trade off of course: to be able to spend extravagantly we'd have to work longer to save more, but who wants that? :shock: We don't!
We figure we can stick it out 3 or 4 more years OK: to be able to stop then would be rather nice, to put it mildly! So that is the plan, but we intend to be careful about the next house and as Norbert is suggesting we really would like to pull out more than the (somewhat conservative) plan, so this extra buffer could in part allow for a few years of extravagence! :D
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Re: Retirement plan for your critique

Post by 2 yen »

strathglass wrote:
2 yen wrote:If you retire in your fifties, you will likely be able to spend quite a lot. Sit down and be really honest about what you intend to do. Travel, for example, will eat up a lot of cash. We have retired on 90k post tax and have no problem spending all of it. We will have some CPP and OAS and a bit of RRSP income later in our mid sixties, but as mid fifties retirees, we are spending more on hedonistic adventures than we could have imagined.
There is a big difference between what you need and what you are capable of spending.
2 yen
It is a trade off of course: to be able to spend extravagantly we'd have to work longer to save more, but who wants that? :shock: We don't!
We figure we can stick it out 3 or 4 more years OK: to be able to stop then would be rather nice, to put it mildly! So that is the plan, but we intend to be careful about the next house and as Norbert is suggesting we really would like to pull out more than the (somewhat conservative) plan, so this extra buffer could in part allow for a few years of extravagence! :D
Yes, Norbert's suggestion has great merit, I feel. Best of luck with this decision.

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Re: Retirement plan for your critique

Post by gaspr »

IF you are both in reasonably good health, and IF you have no strong bequest motive, you might want to consider deferring both CPP and OAS to the max. Should result in around a combined 45k (in today's dollars) that is not only indexed to inflation, this is an income stream that you can't outlive! That gives you even longer to continue to melt down the RRSPs. And all the while you are melting the RRSP, you should both plan to max out your TFSA contributions. Should leave you and your estate in a tax efficient position.

Best wishes!
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Re: Retirement plan for your critique

Post by strathglass »

gaspr wrote:IF you are both in reasonably good health, and IF you have no strong bequest motive, you might want to consider deferring both CPP and
Not sure about OAS but I believe CPP break even point was close to 77 (and is supposed to be neutral from an actuarial viewpoint).
Health is not bad but not a significant history of long lived relatives, so I am not sure about this.
I think the reality is we will spend less than planned so WILL be able to defer at least CPP somewhat.
HOWEVER one has to do the calculations because for early retirees, you can actually DECREASE your benefit by delaying CPP. I will get onto that before age 60! :D
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Re: Retirement plan for your critique

Post by blonde »

Study the SYSTEM.

Do not be surprised to learn that your most important asset is your HEALTH, Strength, and unfortunately your YOUTH.

Do not sell any of these things cheaply, waiting, working as a slave to the future (your Retirement).

LIVE today.

For those who have the rite questions and are seeking the answer should check out...

www.bumfuzzle.com

OTOH, those who HAVE the answers before they hear the question...BUZZ-OFF.
Sometimes the questions are complicated and the answers are simple...Dr Seuss

Be who you are and say what you feel because those who mind don't matter and those who matter don't mind...Dr Seuss
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Re: Retirement plan for your critique

Post by Flaccidsteele »

blonde wrote:Study the SYSTEM.

Do not be surprised to learn that your most important asset is your HEALTH, Strength, and unfortunately your YOUTH.

Do not sell any of these things cheaply, waiting, working as a slave to the future (your Retirement).

LIVE today.

For those who have the rite questions and are seeking the answer should check out...

http://www.bumfuzzle.com

OTOH, those who HAVE the answers before they hear the question...BUZZ-OFF.
That's a cool website. What an amazing family!
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Re: Retirement plan for your critique

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blonde wrote:Study the SYSTEM.

Do not be surprised to learn that your most important asset is your HEALTH, Strength, and unfortunately your YOUTH.

Do not sell any of these things cheaply, waiting, working as a slave to the future (your Retirement).

LIVE today.

For those who have the rite questions and are seeking the answer should check out...

http://www.bumfuzzle.com

OTOH, those who HAVE the answers before they hear the question...BUZZ-OFF.
I love these posts by blonde. I would encourage the OP to really 'hear' what blonde is saying about living now. This may influence some decisions about retirement.

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Re: Retirement plan for your critique

Post by Flaccidsteele »

blonde wrote:Study the SYSTEM.

Do not be surprised to learn that your most important asset is your HEALTH, Strength, and unfortunately your YOUTH.

Do not sell any of these things cheaply, waiting, working as a slave to the future (your Retirement).

LIVE today.
2 yen wrote:I love these posts by blonde. I would encourage the OP to really 'hear' what blonde is saying about living now. This may influence some decisions about retirement.
Great advice. :thumbsup:

One easy way to learn how to live, is to examine the advice by your elders. Personally I read the top 10 regrets of the dying and every day I make sure I avoid these regrets.

Good luck to the OP and all the best!
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[UPDATE!!] Re: Retirement plan for your critique

Post by strathglass »

Well, time for an update: we've completed the sale of our house and the purchase of new place.
Closing 5 days apart in late summer, so no need for bridge financing (our existing place closes first, but we can rent it for a while as required). So the only risk at this point is if our buyers renege, but we have a 10% deposit.

Ended up buying 3 year old house in rural Ottawa, which works well because our one child is going to University there (addresses zeno's point). I will need to get a job there because I don't feel ready to stop working for a few years at least! (Wife has retired since I started this thread.)

Well, as far as what we will clear, we ended up splitting the difference between what I originally guessed and what Norbert suggested we reach for. That means we'll have 700K non-registered to invest at closing.


So I am familiar with some of the general concepts about what is the most tax-efficient way to invest non-registered assets, but really would like some good, detailed reading material on best ways to allocate our assets given the good chunk (almost 30%) of non-registered assets we will have (the rest being maxed out TFSA accounts and the balance in RRSP+LIRA accounts). Any primers anyone wants to point me to? (No, I have to admit that I haven't searched the finiki yet.)
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Re: Retirement plan for your critique

Post by gsp_ »

Congrats on the windfall! :thumbsup:

Tickstock's thread seeking advice addressed tax efficient unregistered investing, probably worth a read. Justin Bender and CCP tend to have lots of good posts on tax efficiency if you are inclined to dig through them.

Some of us well in the 90s would kill for just 30% unregistered. :wink:
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