# need help with retirement plan



## JJ56 (Jul 9, 2011)

My wife and I are both 56 and hope to retire in the next 6 months. We own our own home and have no outstanding debt. We would like to have a combined after tax income of $50,000-$55,000 if possible. My figures are as follows:
I am a civil servant in New Brunswick and have a DB pension plan (indexed) that will pay $41,000 before tax. This will be reduced to $33,000 at age 65. 
My wife has $225,000 in RRSP's
I have $30,000 in RRSP's
TFSA $30,000
Bonds $20,000
TOTAL: $305,000 
My plan would be to draw CPP at age 60. I will receive approximately $600 per month and my wife $550. OAS should give us each another $500 monthly income at age 65. 
I really have two questions here. First, is it feasible to expect an income of $50,000-$55,000 or am I being overly optimistic? I understand I will need to draw heavily out of our investments for the next 4 years but this should be reduced at age 60 and again at age 65 when CPP and OAS kick in. Secondly, if this is a workable plan, what would be the best asset mix for my investments? I am kind of at a loss here. I am not very good at calculations, so any advice would be much appreciated.


----------



## steve41 (Apr 18, 2009)

OK.... you caught me at happy hour, so make sure you check these numbers..

Mrs JJ56

Mr JJ56


----------



## cannon_fodder (Apr 3, 2009)

I was going to mention Steve41's software tool but I suspect he'll be right along to help you.

Out of curiosity, because my wife and I are near retirement, would you be willing to share at a high level what you are anticipating your retirement expenses will be? I keep seeing people posting higher and higher numbers than my personal estimate of about $40k ATI. Thus, I'm worried that perhaps I've underestimated or completely forgotten about certain items.


----------



## JJ56 (Jul 9, 2011)

steve41 said:


> OK.... you caught me at happy hour, so make sure you check these numbers..
> 
> Mrs JJ56
> 
> Mr JJ56


 Thanks Steve Sorry to disturb your happy hour but sometimes we do our best work during happy hour. At first glance the numbers look great and are very encouraging. I will need some time to figure out what they all mean(and then will likely have more questions) but it would appear I will be able to retire with my desired income. Any suggestions on the best asset mix for my investments? [


----------



## JJ56 (Jul 9, 2011)

cannon_fodder said:


> I was going to mention Steve41's software tool but I suspect he'll be right along to help you.
> 
> Out of curiosity, because my wife and I are near retirement, would you be willing to share at a high level what you are anticipating your retirement expenses will be? I keep seeing people posting higher and higher numbers than my personal estimate of about $40k ATI. Thus, I'm worried that perhaps I've underestimated or completely forgotten about certain items.


Sure, no problem. Willing to share whatever information you would like, however really we had no magic formula; I simply monitored all household expenses for the past year, included projected house and car repairs, medical expenses as well as increased property tax and came up with a yearly operating figure of around 32,000 a year. I wanted an income of approximately 55,000 a year after tax as I thought this would allow us to travel and deal with any unexpected expenditures that might come our way.


----------



## sprocket1200 (Aug 21, 2009)

using the tax calculator for BC at taxtips.ca you will need $70,000 gross, unless you can split income, then you will need about $32,000 each. more if from other provinces.

you might want to be careful drawing that cpp at 60...


----------



## steve41 (Apr 18, 2009)

OK..... I ran it again, splitting the DBP after 65. It makes a modest difference in the combined after tax income, but in my experience, unless the two spouses have very disparate assets, income splitting isn't such a huge deal....

Mr JJ56 income split
Mrs JJ56 income split


----------



## MoneyGal (Apr 24, 2009)

Steve. What is the rate of return you are estimating on the asset classes? What is the asset allocation? What is the expected volatility and the correlation? What is the probability that the rate of return will be achieved, and how do you determine that? 

I can see in the one plan I downloaded that you provide a comforting schedule of regular withdrawals to age 95. But what are you assuming about how the funds are invested, and the volatility to which those investments are subject, etc.? Did I miss this somewhere? How vulnerable are those regularly-scheduled withdrawals to market volatility and sequence of returns risk?


----------



## steve41 (Apr 18, 2009)

MoneyGal said:


> Steve. What is the rate of return you are estimating on the asset classes? What is the asset allocation? What is the expected volatility and the correlation? What is the probability that the rate of return will be achieved, and how do you determine that?
> 
> I can see in the one plan I downloaded that you provide a comforting schedule of regular withdrawals to age 95. But what are you assuming about how the funds are invested, and the volatility to which those investments are subject, etc.? Did I miss this somewhere? How vulnerable are those regularly-scheduled withdrawals to market volatility and sequence of returns risk?


These are purely deterministic projections, based on 4% returns. I leave the risk/asset allocation stuff to others wiser in the ways of investment planning. The easiest approach for addressing market volatility is to low ball and hi ball the rates over the full projection, or a portion.

RRIFmetic allows you to Montecarlo those plans, but I didn't choose to. Remember, I aggregate the investments into their tax classifications (reg/nonreg/txfree), I don't itemize individual investments for the reason that the asset allocation can change radically year to year. The program is a cash flow projection, incorporating non-investment entities.... tax, OAS, CPP, pensions, loans. It doesn't simply look at the investments in a vacuum.


----------



## steve41 (Apr 18, 2009)

After examining those plans, I realize that having each spouse draw down evenly, puts her in jeopardy of running out of capital prior to 65 if things don't go well. I re-ran the plans with her income target in the pre-65 years forced at $20K. It creates a more balanced result. Examine the plans again.... I uploaded the changed plans to the same above pdf links.


----------



## Financial Cents (Jul 22, 2010)

steve41 said:


> After examining those plans, I realize that having each spouse draw down evenly, puts her in jeopardy of running out of capital prior to 65 if things don't go well. I re-ran the plans with her income target in the pre-65 years forced at $20K. It creates a more balanced result. Examine the plans again.... I uploaded the changed plans to the same above pdf links.


Great details Steve, thanks for sharing.


----------



## Square Root (Jan 30, 2010)

I was wondering (Like MG) how planners generally deal with sequence of return risk? Most of the plans I see (say in the G&M) simply assume a constant return over time. As you know there is lots of discussion on this elsewhere. Do planners generally try to incorporate Otar's concepts or use data like you would find in Firecalc? Just wondering.


----------



## MoneyGal (Apr 24, 2009)

I use probabilistic software, based on the PrARI (Product Allocation for Retirement Income) algorithm. 

Here's the intellectual framework in layperson's terms: http://www.ifid.ca/pdf_workingpapers/WP2006OCT3.pdf

Here's the product: http://www.qwema.ca/index.php/products-services/prari/

Bill Bernstein lays out the difficulties with using deterministic methods in his great series "The Retirement Calculator From Hell:" 

http://www.efficientfrontier.com/ef/101/hell101.htm

Otar's methods use "aft-casting" which is acceptable if you think the past is actually a rich enough source of data.

Edit: I should add that Monte Carlo simulations are a statistical method of approximating variability. But they do not produce standard (reproduceable) results and there are no clear rules for "knowing" when you've completed an MC analysis "correctly" (how many simulations is "enough"?) The methods I am talking about use partial differential equations.

I could write a lot more on this topic (and have). I don't think enough people, who are managing other peoples' money (which I am not), think through these issues carefully enough.


----------



## Square Root (Jan 30, 2010)

thanks MG. i will look at the links when I have more time. i agree that planners should think more about these concepts.


----------



## steve41 (Apr 18, 2009)

I have incorporated probability into RRIFmetic, however, I am not sure it gets much use. I suspect that my users' clients prefer to see results which aren't just expressed as probabilities.... "the probability that your funds will run out by age 82 is 14%" It is hard for the subject to translate that into something meaningful like.... "if my aftertax income follows a certain trajectory, my savings will just run out on my 90th birthday"

The results of the plan show him something he can relate to: aftertax income and an investment (and de-investment) schedule. And that schedule incorporates all the non-investment entities in his life... tax, loans, pension, salary, sabatical, real estate, rental income, a future windfall... He re-visits this every year, or as the economic climate changes, and runs a new projection.

Also, the rate sequence you see in the plans I post are almost always constant. This need not be.... you can vary that rate sequence in any fashion... low in the initial years, then larger, and then finally lower in the later years.

That rate sequence can be randomly generated as well. For instance, you can generate a random rate vector, pick a constant ATI/lifestyle, or a certain ATI trajectory, and determine when the funds will run out. This is a simpler computation.... rather than telling the user his funds will run out at 85 or 107 under a particular aftertax forcing, the more common RRIFmetic calculation allows the user to specify an actual target at a set age and determine what ATI he can hope to enjoy over time. The target can be either zero (the 'die-broke' paradigm), or a set estate value ("I want my estate to net exactly $200K").

People can relate to ATI.... (bags of groceries/cases of beer) much more readily than the "your funds will run out at age 87" metric. The major departure from a true investment analysis is that I aggregate the capital into just a few categories based on their taxation status.... registered, nonregistered and nontaxable. I don't examine the discrete investments within those categories. 

My montecarlo option runs the 'die-broke' calculation a number of times (10, 50, 100) each separate 'die-broke' run generating a different ATI. The display simply reports those individual ATIs in standard statistical form..... hi/low/average/median as well as a frequency distribution.

Another tweak takes a user-generated rate history sequence, say the performance of the TSX back 30 or 40 years and substitutes that rate sequence in the rate vector, each time starting the base rate of the TSX at a different year for each sucessive run. Again, I am not certain that my users do this on a regular basis. In fact, years ago I had a user who had been in the FP industry for many years. His comment to me was that interest in montecarlo-type planning only came in vogue when the markets were down. When things were on the upswing, planners and their clients weren't interested.


----------



## Square Root (Jan 30, 2010)

That 's very interesting Steve. For those that have already retired and know how much their nest egg is, the obvious question is how much they can spend without running out of money. Seems like your program could do that any number of ways.


----------



## steve41 (Apr 18, 2009)

Square Root said:


> That 's very interesting Steve. For those that have already retired and know how much their nest egg is, the obvious question is how much they can spend without running out of money. Seems like your program could do that any number of ways.


 Yes, it is kind of open-ended.... do I draw down my registered first (RRIF meltdown), or attack my nonreg first, ditto tfsa. Then there is the issue of the estate... if I attack my nonreg first and die early, will my estate be better off than if I attack/melt my RRSP first? The effect of tax on these determinations is quite complicated.


----------



## cannon_fodder (Apr 3, 2009)

steve41 said:


> Yes, it is kind of open-ended.... do I draw down my registered first (RRIF meltdown), or attack my nonreg first, ditto tfsa. Then there is the issue of the estate... if I attack my nonreg first and die early, will my estate be better off than if I attack/melt my RRSP first? The effect of tax on these determinations is quite complicated.


Steve,

With your unique perspective and years of experience, are there any generalizations you'd feel comfortable disclosing? My specific circumstances (and I haven't run it through your wonderful software) suggest that I'd be better off withdrawing from the RRSP first so that when it becomes a RRIF, we won't be forced to withdraw more than we need. And, we'd be able to have a lot more freedom with our TFSAs and non-registered portfolio. I'm not asking you to comment on my situation, but rather with the thousands of scenarios you've run, if there are some general observations.

I just may download your software to see if it supports conclusions based on my own calculations.


----------



## steve41 (Apr 18, 2009)

cannon_fodder said:


> Steve,
> 
> With your unique perspective and years of experience, are there any generalizations you'd feel comfortable disclosing? My specific circumstances (and I haven't run it through your wonderful software) suggest that I'd be better off withdrawing from the RRSP first so that when it becomes a RRIF, we won't be forced to withdraw more than we need. And, we'd be able to have a lot more freedom with our TFSAs and non-registered portfolio. I'm not asking you to comment on my situation, but rather with the thousands of scenarios you've run, if there are some general observations.
> 
> I just may download your software to see if it supports conclusions based on my own calculations.


 The simplest observation I can make is this... if you can draw enough from your RRSP and still keep below the minimum threshold ($10.5K) then do it. Otherwise, shelter. This applies irrespective of estate considerations. If your estate is important to you however, AND you don't feel your health is going to take you out to a ripe old age (i.e. you may die prematurely), then you should bring down (melt) your RRSP more aggressively.


----------

