# HOW MUCH TO SAVE based on EXPECTED SPENDING?



## strathglass

I enjoyed reading the thread What do you expect your yearly expense to equal?, particularly CanadaFan's input.

The next logical question after determining spending needs is translating that to a savings requirement to enable retirement to start.

So here's a scenario for you, where I want to consider a range of possible monthly spending levels, and based on the above-noted thread, lets assume these three possible spend values for a retired couple that all seem like reasonable values to cover a range of lifestyles (albeit at what I consider the higher end of the typical spending spectrum):

$5k/month
$6k/month
$7k/month
Lets make a few more assumptions to allow a complete analysis:

Age 55 for the couple that is wanting to retire now
35 year time horizon, dying at 90 with no savings left (i.e. no need for an estate)
CPP started early, at 60, and is not maxed out due to the early retirement - lets assume $14k/year for the couple.
OAS at age 67 of $10k/year for the couple (that might seem low but who knows what will happen with OAS, so lets be very slightly conservative on this one).
Lets finally assume no DB pensions, just savings - mostly RRSP and a little bit of TFSA.
SOME ADDITIONAL ASSUMPTIONS, which may help depending on how you will be solving this problem:

Assume somewhat conservative portfolio of 50-60% equities
Based on this assume a return of 3% above a 2% inflation rate (reasonable?) 
Assume no change in spending/lifestyle, to keep it simple.
Assume couple has equal retirement incomes and they are in Ontario.

*QUESTION: How do the people here who like to plan for a specific level of (after-tax) retirement spending translate this to a retirement savings target?* And specifically what three values does your methodology produce for this scenario with these three spending levels, including these variably timed income flows which makes it not-so-simple?

I am curious to see what methodologies others are using and what numbers they produce. I will share my own results later on, from a couple different approaches I've tried.


----------



## LBCfan

I think you are missing three other necessary assumptions:
1) The expected return on your investments over your (assumed) 35 year time frame.
2) The expected inflation rate over that time period.
3) The expected changes in lifestyle and therefore spending requirements over that period.


----------



## strathglass

LBCfan said:


> I think you are missing three other necessary assumptions:
> 1) The expected return on your investments over your (assumed) 35 year time frame.
> 2) The expected inflation rate over that time period.
> 3) The expected changes in lifestyle and therefore spending requirements over that period.


Yes I should have added a few more assumptions for completeness. The original post has now been updated. Thanks!


----------



## GoldStone

I do my projections in pre-tax dollars. Just to simplify the exercise. I expect that taxes are going higher in the future due to government debt. How much higher? I don't know.

So let's assume that $5K etc is before taxes.

$5K/month = $60K/year
$6K/month = $72K/year
$7K/month = $84K/year

The next key step is to set the SWR number, safe withdrawal rate. Read up on SWR if you are not familiar with it. 

I use 3% SWR in my projections. The traditional, often quoted number is 4%. However, the consensus is shifting towards 3%. Mainly because interest rates are so much lower these days. 4% number was derived from historical returns in a higher rate environment.

Portfolio value * 3% SWR = Annual budget before tax

Solve for portfolio value:

Portfolio value = Annual budget before tax * 33

So...

$60K/year * 33 = $1,980,000
$72K/year * 33 = $2,376,000
$84K/year * 33 = $2,772,000

I ignore CPP because, in my case, it will be very small. I also ignore OAS, for simplicity. It gives me an extra margin of safety.

Feel strongly about including CPP/OAS? Average your budget shortfall over your entire retirement.

Age 55 - 60: $60K
Age 60 - 67: $60K - CPP
Age 67 - 90: $60K - CPP - OAS

Average these numbers and multiply by 33 (or 25, if you feel that 4% SWR is okay).

Rate of return and rate of inflation are not necessary. SWR rate incorporates those numbers.

Above all, avoid false precision. Better to be approximately right than exactly wrong.


----------



## strathglass

Very good points GoldStone and I agree with most of them.
One reason I too like the SWR method is because, as you note, it is in theory independent of inflation and RoR for the most part.
I also think a rate closer to 3% than 4% is safer these days (especially in this case because it is a 35 year timeline instead of the nominal 30 year picture).

The one reason I was looking at alternatives is because I definitely want to factor in CPP and some OAS, but your post made me realize something:


GoldStone said:


> ...Feel strongly about including CPP/OAS? Average your budget shortfall over your entire retirement.
> ...*Average* these numbers and multiply by 33 (or 25, if you feel that 4% SWR is okay).


Since we are dealing only with today's dollars, the calculation for factoring in withdrawal reductions due to introducing CPP and OAS is a simple averaging as you noted! (I think!)

However on the other hand your calculations failed to take the tax into account! That needs to be fixed.

Applying your math here for all 3 cases, but also allowing for taxes, you get the following:
PRE-TAX Annual Withdrawal Rate:

$5k/m spend: if $70k per year in income is received by the couple, that is $35k/year each, which lets them clear $5k/m after taxes, based on the EY tax calculator.
$6k/m spend: $85k per year in income for the couple is required
$7k/m spend: $102k per year in income for the couple is required
REDUCED AVERAGE WITHDRAWALS Due to CPP and OAS:

$5k/month spending: AVERAGE pre-tax income of $51k (vs. $70k without CPP & OAS)
$6k/month spending: AVERAGE pre-tax income of $66k (vs. $85k without CPP & OAS)
$7k/month spending: AVERAGE pre-tax income of $83k (vs. $102k without CPP & OAS)
Using a 3% SWR, this gives the following required portfolio sizes to last until the couple turns 90:
*Required Portfolio Size Based on 3% SWR (33x):*

$5k/month spending: $51k*33=$1.69 million
$6k/month spending: $66k*33=$2.18 million
$7k/month spending: $83k*33=$2.74 million

Obviously it is a considerable impact on the required portfolio to go from a $5k/month spend to a $6k/month spend, and an even bigger impact to go one more k up to $7k/month spend!

One issue with the above calculation is that it does not factor in any of the tax reductions you are entitled to as you get older. (Not too familiar with those!)


----------



## GoldStone

strathglass said:


> Since we are dealing only with today's dollars, the calculation for factoring in withdrawal reductions due to introducing CPP and OAS is a simple averaging as you noted! (I think!)


Yes, as long as CPP and OAS remain indexed to inflation (more or less).

I'm not sure if a simple averaging is the right methodology to factor in CPP/OAS. I think it's approximately right. As I said before, I don't think we should be striving for more precision. We are talking about 35 years of retirement, and they don't start tomorrow.

Note that SWR methodology is very rigid. It assumes constant withdrawals indexed to inflation. No sane person would do that in real life. A person planning to spend $5K-$6K/month has the flexibility to adjust spending up or down depending on portfolio performance. We are not talking about cat food scenario here... which is why being approximately right is okay.


----------



## gibor365

> So...
> $60K/year * 33 = $1,980,000
> $72K/year * 33 = $2,376,000
> $84K/year * 33 = $2,772,000


I;m a bit confused.... I checked now and I receive about 3.5-3.7% yield (dividedns + interest from GIC/HISA) and I have 45% in GIC/HISA... So without touching pronciple at all , on $1,980,000 , the income will be aboud 69K .... Why did you get much higher number?


----------



## steve41

OK.... I got

$1.036 M for $5K per month
$1.374 M for $6K per month
$1.746 M for $7K per month


----------



## My Own Advisor

Agreed Steve41.

I think with $1M in the bank, without touching the capital, you could live nicely off that to the tune of about $3,000-4,000 per month before taxes.


----------



## steve41

Forgot to mention... the capital was assumed to be RRSP and the new RRIF rules were in place.


----------



## GoldStone

gibor said:


> I;m a bit confused.... I checked now and I receive about 3.5-3.7% yield (dividedns + interest from GIC/HISA) and I have 45% in GIC/HISA... So without touching pronciple at all , on $1,980,000 , the income will be aboud 69K .... Why did you get much higher number?


Your simple calculation doesn't factor in future inflation. Can you withdraw 69K indexed to inflation each and every year?

SWR methodology assumes full indexing. For example, you retire with $1M portfolio. You set your withdrawals at 3% or $30K on the day of retirement. From there on, you withdraw $30K/year adjusted for inflation, regardless of how your portfolio performs. If you experience many years of high inflation, combined with many years of poor portfolio returns, you run the risk of grinding your portfolio to zero.


----------



## strathglass

In response to steve41/gibor/My Own Advisor, I will give more details of my calculation for the middle scenario under the assumptions in the first post.
We want $6k per month of spending power in today's dollars (indexed to inflation), starting with retirement today and lasting for 35 years until the couple turns 90 and dies. 
How big does the pot have to be today to enable this for the couple?
With this analysis, we are using GoldStone's proposed solution: use a Safe Withdrawal Rate of 3%. 

To get $6k per month, each spouse needs to clear $3k per month after taxes, or $36k per year.
The money is coming mostly from RRSPs (or CPP/OAS), so is treated as regular income.
What income yields a person $36k per year? 
In Ontario (per the assumed residence listed in the original post), it is $42,500 (per the EY tax calculator linked above).
Therefore the couple needs to receive $85k per year in income (today's dollars).
For the first 5 years (55-59), the full amount ($85k) is required to come from their RRSP savings every year.
From 60-66, due to CPP being added in ($14k total for the couple), they can reduce the portfolio withdrawal to $71k per year.
Once OAS kicks in at 67, we can further reduce by the assumed OAS income of $10k per year (for the couple), meaning a portfolio withdrawal of $61k per year.
If we average out these withdrawal amounts (which are all in today's dollars) (5x$85k+7*$71k+23*$61k), that works out to $66,429 coming out of RRSPs every year (I rounded that to $66k in my prior post).
Based on a 3% withdrawal rate, we need a portfolio of X where 0.03*X=$66429. Hence the required portfolio size is $2,214,300 (my rounding and other simplifications yielded a value $2.18 million in the prior post...close enough).

For this 3% SWR method of solving my original problem, I don't see any errors in the calculations. If you do, please advise.

A couple points:
steve41 - I did not factor in the impact of any RRIF minimum withdrawal rates (not sure if that would be significant or not).
gibor - keep in mind this SWR method does not assume you are trying to preserve your portfolio and live off dividends, it assumes a balanced portfolio of stocks and bonds which are slowly depleted as required to provide income - this would include dividend income but will also include (generally speaking) selling off equities, for example. (And just noticed GoldStone's followup post, which helps clarify.)


----------



## steve41

To be clear.... I don't use the concept of an SWR. My approach is to determine the required withdrawal amounts, based on an exact ATI. The withdrawals vary according to taxation rules, the occurence (or absence) of CPP/OAS, etc. (withdrawals would need to be higher in the early stages before entitlements kicked in.


----------



## Russ

I don't think there are many people more capable of this kind of calculation that Steve41. His model takes into account a much more realistic tax calculation that the broad-brush approach of the EY calculator. In my not-very-sophisticated opinion SWF methods are pretty blunt instruments. You would do well to pay close attention to Steve41.


----------



## GoldStone

steve41 said:


> To be clear.... I don't use the concept of an SWR. My approach is to determine the required withdrawal amounts, based on an exact ATI. The withdrawals vary according to taxation rules, the occurence (or absence) of CPP/OAS, etc. (withdrawals would need to be higher in the early stages before entitlements kicked in.


If you don't use SWR... how do you handle investment RoR? Inflation? Sequence of returns risk?


----------



## GoldStone

Russ said:


> In my not-very-sophisticated opinion SWF methods are pretty blunt instruments.


Sure. No argument here.

As I said before, I'd rather be approximately right than exactly wrong. Yes, SWR method is pretty blunt. It's also very conservative... and therefore safe. The biggest risk of using 3% SWR: it will probably overestimate the required size of the nest egg. I can live with that. I'd rather over-save than run out of money at 80.


----------



## steve41

GoldStone said:


> If you don't use SWR... how do you handle investment RoR? Inflation? Sequence of returns risk?


These are parameters you specify, either as a constant ROR, or a varying ROR over time, or for the truly anal.... these can be montecarloed. Inflation is assumed constant. If there is a nonreg component to the savings, you can specify a mix of divs, capgains and interest. The strength of the program is its tax accuracy and 'needs-based' (recursive) methodology.


----------



## GoldStone

steve41 said:


> These are parameters you specify, either as a constant ROR, or a varying ROR over time, or for the truly anal.... these can be montecarloed.


Running Monte Carlo is not anal. It's the right thing to do. Sequence of returns risk is a major factor when you retire early. Poor returns in the first decade of retirement can be very damaging.

SWR methodology does use Monte Carlo to arrive at a rate that is deemed safe with a high degree of confidence.

Quote from:
Safe withdrawal rate: Is 3 percent the new 4 percent?



> While historical returns can provide insights, it's critical that investors not make the mistake of simply projecting the past into the future -- current valuation metrics must be used. In addition, *we also have to address the issues of our very limited ability to estimate future returns and the fact that the order of returns matters a great deal*. The way to do that is to use what is called a Monte Carlo Simulator (MCS).
> 
> Monte Carlo simulations require a set of assumptions regarding time horizon, initial investment, asset allocation, withdrawals, rate of inflation and, very importantly, the distribution of annual returns for the different asset classes. In Monte Carlo simulation programs, the expected final wealth distributions are determined by two numbers: 1) the average annual return (which should be based on current valuations/yields, not historic ones); 2) the standard deviation of the average annual return. The Monte Carlo simulator will randomly select a return for each year and calculate the wealth values over the expected retirement period. This process is repeated thousands of times in order to calculate the likelihood of possible outcomes.
> 
> MCS is an important tool as it helps investors determine both the right asset allocation and the right safe withdrawal rate. In fact, except for all but the wealthiest investors for whom any reasonable asset allocation and SWR will likely work, I don't know how you can make a prudent decision on these important issues without running an MCS.


----------



## gibor365

> Your simple calculation doesn't factor in future inflation. Can you withdraw 69K indexed to inflation each and every year?


 why not?! Yes, I'll stop DRIPping, but many of my stocks will annualy increase dividends, even HISA/GIC may give higher rates if inflation is up


----------



## GoldStone

Okay, let's go back to this message:



gibor said:


> So...
> $60K/year * 33 = $1,980,000
> $72K/year * 33 = $2,376,000
> $84K/year * 33 = $2,772,000
> 
> 
> 
> I;m a bit confused.... I checked now and I receive about 3.5-3.7% yield (dividedns + interest from GIC/HISA) and I have 45% in GIC/HISA... So without touching pronciple at all , on $1,980,000 , the income will be aboud 69K .... Why did you get much higher number?
Click to expand...

I used 3% SWR. A factor of 100 / 3 = 33

You used 3.5% yield. A factor of 100 / 3.5 = 28.5

This is why I got the higher number. What is confusing about that?


----------



## strathglass

What about other methods to solve the problem?
It is interesting to compare the results of the above SWR method (3%) to FIRECALC.
Has anyone used the FIRECALC website? I think it is US return data only, and it is only historical data (albeit a lot of it!).
If I use FIRECALC I get results as shown below.
Here is the data I modified from the defaults in FIRECALC:

35 year period
"Spending": 70k, 85k, and 102k (to get the desired after-tax money [as explained above ]; FIRECALC calls this "spending" but it is really the nominal withdrawal rate)
(Starting) Portfolio size: this is the result we are looking for, I adjusted the value upwards in steps of 50k until I just achieved 100% success (the value achieving 100% success is given below)
Other Income: 14k per year added in 5 years (CPP), and a further 10k in 12 years (OAS)
Portfolio: using the default Total Market portfolio, but set the equity level to 55%.

Results (compared to both 3% SWR and, for curiousity, to 4% SWR also):

*Required Portfolio Size Based on FIRECALC (100% success) (compared to 3% SWR) {and compared to 4% SWR}:*

$5k/month spending: FIRECALC: $1.55 million (vs. 3% SWR value of $1.69 million) {vs. 4% SWR value of $1.28 million}
$6k/month spending: FIRECALC: $1.95 million (vs. 3% SWR value of $2.18 million) {vs. 4% SWR value of $1.65 million}
$7k/month spending: FIRECALC: $2.45 million (vs. 3% SWR value of $2.74 million) {vs. 4% SWR value of $2.08 million}
Notice the FIRECALC results are right in between the 3% and 4% SWR values. Interesting!


----------



## GoldStone

gibor said:


> Your simple calculation doesn't factor in future inflation. Can you withdraw 69K indexed to inflation each and every year?
> 
> 
> 
> why not?! Yes, I'll stop DRIPping, but many of my stocks will annualy increase dividends, even HISA/GIC may give higher rates if inflation is up
Click to expand...

1. GICs are not indexed to inflation. Once you buy them, their payouts are fixed.

2. Dividend increases are far from the sure thing, never mind dividend increases that keep up with inflation each and every year.

3. Under SWR assumptions, your annual budget is indexed to inflation. What happens if dividend/interest payments fail to keep up with inflation? You have two options:

a. reduce consumption to preserve the portfolio.
b. sell investments to meet your inflation-adjusted budget.

Most of us would choose option (a).

SWR methodology chooses (b). That's just part of the rules. That's one of the reasons why SWR methodology comes up with a low number like 3%.


----------



## GoldStone

strathglass said:


> Notice the FIRECALC results are right in between the 3% and 4% SWR values. Interesting!


I think it all boils down to your investment return assumptions.

3% and 4% SWRs are based on different return assumptions.


----------



## fraser

You could also do a quick calculation like this (which would be somewhat conservative given the interest rates today....simply check out the annuity tables of several financial institutions (try hughes) based on age you desire to commence payments and form of payment (single, joint, guarantee period). This might give you a general idea of how much you will need. Then you need a model that says how much to save to reach that goal at the desired age.


----------



## gibor365

> Dividend increases are far from the sure thing, never mind dividend increases that keep up with inflation each and every year.


Nothing is a sure thing  , but if your core equity portion of portfolio consists of dividend champions like JNJ, PG, KMB, ABT/ABBV, MO, T, FTS, SU etc... and it's 50% of you total assest, you easily get 5% dividend increase annually, that will compensate 2.5% current inflation...
GIC is fixed, but if you have ladder, and inflation goes up, likely that new GIC you gonna buy will higher interest...
Yes, if in specific year your total yield inctrease less than inflation, you may chose one of below


> a. reduce consumption to preserve the portfolio.
> b. sell investments to meet your inflation-adjusted budget.


----------



## GoldStone

gibor said:


> Nothing is a sure thing  , but if your core equity portion of portfolio consists of dividend champions like JNJ, PG, KMB, ABT/ABBV, MO, T, FTS, SU etc... and it's 50% of you total assest, you easily get 5% dividend increase annually, that will compensate 2.5% current inflation...
> GIC is fixed, but if you have ladder, and inflation goes up, likely that new GIC you gonna buy will higher interest...


We are splitting hairs. If you are wealthy enough to live strictly off your portfolio yield, SWR discussion is irrelevant. You are unlikely to run out of money.


----------



## GoldStone

fraser said:


> You could also do a quick calculation like this (which would be somewhat conservative given the interest rates today....simply check out the annuity tables of several financial institutions (try hughes) based on age you desire to commence payments and form of payment (single, joint, guarantee period). This might give you a general idea of how much you will need.


You say it's somewhat conservative.... I'm not sure about that. Annuities pool longevity risk. 100K annuity can afford to pay more than a 100K individual portfolio.


----------



## cainvest

GoldStone said:


> What happens if dividend/interest payments fail to keep up with inflation? You have two options:
> 
> a. reduce consumption to preserve the portfolio.
> b. sell investments to meet your inflation-adjusted budget.


c. Get another source of income (i.e. work)


----------



## GoldStone

cainvest said:


> c. Get another source of income (i.e. work)


Are you trolling? Get another source of income at what age? 75? 80? 85? 90?


----------



## cainvest

GoldStone said:


> Are you trolling? Get another source of income at what age? 75? 80? 85? 90?


Trolling ... ha ha ... not amused.

What, you've never heard of someone older than 55 (yes, that's when the OP said retirement starts) working after being retired? I've worked with a number of previously retired people that returned to part-time work for a while between the ages of 60 and 70, I'm sure I'm not the only one.


----------



## GoldStone

cainvest said:


> What, you've never heard of someone older than 55 (yes, that's when the OP said retirement starts) working after being retired? I've worked with a number of previously retired people that returned to part-time work for a while between the ages of 60 and 70, I'm sure I'm not the only one.


Sure, but that's off-topic.

This whole thread is about figuring out portfolio size required to fund a long retirement. Retirement means... not having to go back to work. OP didn't mention it... but I think it's an obvious, unstated assumption.

If you assume that you can go back to work any time you want, up to a certain age, this entire thread is a waste of time.


----------



## gibor365

GoldStone said:


> We are splitting hairs. If you are wealthy enough to live strictly off your portfolio yield, SWR discussion is irrelevant. You are unlikely to run out of money.


Don't get your point  . you're saying that for modest income of $60K/year , you need $1,980,000....
For simplicity lets take 2M, so if you invest 50% (1M) into GIS ladder/HISA, you gonna have (at current rates... for example 2.4% (when you can buy 2y GIC at 2.45% and higher for longer terms and with constant HISA promotions you can achieve maybe 2.3%) , so you get 24K interests. 
Another 50% (1M), you invest in dividend champions (like I listed above) , so you can have 4% yield and very likely all those companies gonna raise dividends every year (inflation adjustment), so from dividends you get another 40K...
Thus you get 64K annual income without even touching principal...
Agree that I assume that dividend champions continue raising dividends with rate twice higher than inflation, but it's very possible, on the other hand 3% SWR is also not guaranteed... 
and I'm talking about pretty conservative portfolio with 50% Cash and 50% blue0chips
P.S just to be clear... I don't argue with your approach, I 'd like you to point what is wrond with mine... as genarally, I pay more attention on increasing annual income, than on value of portfolio....during last recession portfolios dropped 30-40%, but majority of people who invested in dividend champions continue getting increased income every year.


----------



## GoldStone

gibor said:


> P.S just to be clear... I don't argue with your approach, I 'd like you to point what is wrond with mine...


Nothing wrong. After all is said and done, you used a higher rate of return compared to my approach.

2.4% interest * 50% + 4% dividend yield * 50% = *3.2%* portfolio yield

$2M * 3.2% = 64K

I used *3%* SWR.

2M * 3% = 60K


----------



## livewell

Well as someone who pretty much fits the description of the OP scenario (I am 55 an recently retired with no pensions etc.) FWIW I think 3% is ultra conservative number for a baseline SWR. The original Bergen data actually fitted to 4.5% and survived through multiple scenarios of poor sequence of returns it was a worst case projection. Yes interest rates are low now, who knows where they will be in 10 or 20 years (Are they going to be much lower then!). For a retiree today who is a DIY investor i.e they are not paying 1-2% away in MERS then 4% is still IMO a perfectly good starting point for judging how much is enough. I think the numbers that Steve41 produced with RRIFmetic are probably much more realistic, and similar to what I produce using a spreadsheet model. These are going to be a best case as they are not Montecarlo'ing or back-testing through different annual returns sequence but they are still valuable to me. 

We are currently running with a 6% withdrawal rate, that will drop to ~4% when the CPP/OAS kick-in I am increasingly feeling more comfortable with this. In the end you need to avoid a poor sequence of returns hurting you in the first 10 years of retirement, my strategy to do this, is to keep a 3-5 year cash wedge (In HISA) as part of my asset allocation so that I am not selling equities during a bear cycle. This is augmented by the equities being dividend paying that is also going to offset my cash and further avoid the need to sell equities at a loss. Failing that my second fallback is as was suggested to return to work, I still have 12 years before I collect OAS etc. The 3rd and final fallback is the equity in my house, (When considering SWR I have only factored in portfolio value, not net worth).


----------



## strathglass

steve41 said:


> OK.... I got
> 
> $1.036 M for $5K per month
> $1.374 M for $6K per month
> $1.746 M for $7K per month


Hi steve41
I didn't realize you are the RRIFmetic guy! 
Can you tell me how you calculated your numbers and is it based on using RRIFmetic?


----------



## strathglass

livewell said:


> Well as someone who pretty much fits the description of the OP scenario (I am 55 an recently retired with no pensions etc.) FWIW I think 3% is ultra conservative number for a baseline SWR. The original Bergen data actually fitted to 4.5% and survived through multiple scenarios of poor sequence of returns it was a worst case projection. Yes interest rates are low now, who knows where they will be in 10 or 20 years (Are they going to be much lower then!). For a retiree today who is a DIY investor i.e they are not paying 1-2% away in MERS then 4% is still IMO a perfectly good starting point for judging how much is enough. I think the numbers that Steve41 produced with RRIFmetic are probably much more realistic, and similar to what I produce using a spreadsheet model. These are going to be a best case as they are not Montecarlo'ing or back-testing through different annual returns sequence but they are still valuable to me.
> 
> We are currently running with a 6% withdrawal rate, that will drop to ~4% when the CPP/OAS kick-in I am increasingly feeling more comfortable with this. In the end you need to avoid a poor sequence of returns hurting you in the first 10 years of retirement, my strategy to do this, is to keep a 3-5 year cash wedge (In HISA) as part of my asset allocation so that I am not selling equities during a bear cycle. This is augmented by the equities being dividend paying that is also going to offset my cash and further avoid the need to sell equities at a loss. Failing that my second fallback is as was suggested to return to work, I still have 12 years before I collect OAS etc. The 3rd and final fallback is the equity in my house, (When considering SWR I have only factored in portfolio value, not net worth).


Thanks for responding livewell. I was setting up this scenario based on retiring today at 55, yes - but actually I have about three years to get there, and was thinking I still may have to work an extra year or three beyond that to be safe.
If I could really run at a 4% SWR then that would definitely be more appealing, although I haven't (in my very limited reading) seen any of the experts who are saying that 4% is too high these days qualify that with "..._but if you are a low fee self-directed investor then_..."!
I would be interested in knowing if your cash wedge is considered as part of your total portfolio (or not counted as part of it).
In other words, is your 6% (future 4%) withdrawal rate applyied to a sum that excludes your cushion?
Also, is your cushion in RRSP or non-reg?


----------



## steve41

strathglass said:


> Hi steve41
> I didn't realize you are the RRIFmetic guy!
> Can you tell me how you calculated your numbers and is it based on using RRIFmetic?


Yes I used RRIFmetic. Two spouses, split assets 50-50, living in Ont, amortized to 90, reduced CPP as requested. All assets assumed RRSP-type. That's about it.


----------



## livewell

strathglass said:


> Thanks for responding livewell. I was setting up this scenario based on retiring today at 55, yes - but actually I have about three years to get there, and was thinking I still may have to work an extra year or three beyond that to be safe.
> If I could really run at a 4% SWR then that would definitely be more appealing, although I haven't (in my very limited reading) seen any of the experts who are saying that 4% is too high these days qualify that with "..._but if you are a low fee self-directed investor then_..."!
> I would be interested in knowing if your cash wedge is considered as part of your total portfolio (or not counted as part of it).
> In other words, is your 6% (future 4%) withdrawal rate applyied to a sum that excludes your cushion?
> Also, is your cushion in RRSP or non-reg?


The cash is considered part of my portfolio allocation. I am currently allocated 65% Equity, 10% FI, 25% Cash (My target allocation is 65% Equity, 20% FI, 15% cash, but I am really struggling/procrastinating buying FI at today's rates, but I am currently moving over a chunk by buying a 5yr GIC ladder, every 3 months.) The cash is distributed throughout the RRSP and non-reg accounts. Our RRSPs are ~70% of total portfolio, so we are withdrawing from them each year in a tax efficient manner. (I coming up to my 3rd year of retirement BTW I didn't plan to retire quite so early but found not working to be rather enjoyable when it was forced upon me )


----------



## strathglass

steve41 said:


> Yes I used RRIFmetic. Two spouses, split assets 50-50, living in Ont, amortized to 90, reduced CPP as requested. All assets assumed RRSP-type. That's about it.


I definitely have to try out the demo version of RRIFmetic! (Won't be free to do so until the summer.)
How are you figuring out how big the portfolio has to be? Are you assuming a certain return rate or...?


----------



## strathglass

livewell said:


> The cash is considered part of my portfolio allocation. I am currently allocated 65% Equity, 10% FI, 25% Cash (My target allocation is 65% Equity, 20% FI, 15% cash, but I am really struggling/procrastinating buying FI at today's rates, but I am currently moving over a chunk by buying a 5yr GIC ladder, every 3 months.) The cash is distributed throughout the RRSP and non-reg accounts. Our RRSPs are ~70% of total portfolio, so we are withdrawing from them each year in a tax efficient manner. (I coming up to my 3rd year of retirement BTW I didn't plan to retire quite so early but found not working to be rather enjoyable when it was forced upon me )


Interesting. So you are running a 6% WR from your portfolio (to be reduced to 4% once CPP starts [at age 60 in 5 years?]), and that portfolio includes a big chunk of cash as your cushion, so you can leave the equity in bad years.
Is your equity specifically dividend oriented? Mine is not - total market.

I agree that retiring early would be "rather enjoyable"! I had a friend who did that about 8 years ago at 51 with around 1 million, but he is very very frugal.
I am wondering if you are also living on the frugal side since that has an impact in that you benefit from very low taxes.


----------



## livewell

strathglass said:


> Is your equity specifically dividend oriented? Mine is not - total market.


Yes it is all dividend (And primarily dividend growth orientated) I am not stretching for yield, my equity portfolio yields 3%, but it is important (To me) that it is a regular source of income, I do not have to think about which equities to sell or when to generate cash flow to maintain the asset allocation. 

I don't think I would be considered to be living on the frugal side by many - I fit within your 3 spending scenarios (Without giving away all my financial details


----------



## steve41

strathglass said:


> I definitely have to try out the demo version of RRIFmetic! (Won't be free to do so until the summer.)
> How are you figuring out how big the portfolio has to be? Are you assuming a certain return rate or...?


It is a RRIFmetic fudge..... I set the example up with a large ($1 M say) RRSP, then I force the ATI to the target value starting at the 2nd year all the way to 90. Amortize. That's it. Three seconds to calculate.


----------



## strathglass

steve41 said:


> It is a RRIFmetic fudge..... I set the example up with a large ($1 M say) RRSP, then I force the ATI to the target value starting at the 2nd year all the way to 90. Amortize. That's it. Three seconds to calculate.


steve41 - Sorry, but what is "ATI"?
EDIT - Sorry, ATI=After Tax Income, I guess?


----------



## strathglass

livewell said:


> Yes it is all dividend (And primarily dividend growth orientated) I am not stretching for yield, my equity portfolio yields 3%, but it is important (To me) that it is a regular source of income, I do not have to think about which equities to sell or when to generate cash flow to maintain the asset allocation.
> 
> I don't think I would be considered to be living on the frugal side by many - I fit within your 3 spending scenarios (Without giving away all my financial details


So it sounds like you have it good! 

My approach was to plan to pull out some equity from the house since we want to move out of the city (GTA) when we retire (or within a couple years of retiring), and the crazy rise in GTA house prices will comfortably let us pull out (after-costs) about 200-400k:
I think 300k is VERY achievable.
Assuming no market downturn in the next four years (which is certainly not guaranteed!), I figure we should be able to hit the calculated portfolio size to support a 3% SWR for our desired income.
If there is a downturn before then we could work a little longer (or maybe just pull out more house equity!!).

Still looking for more ways of solving this puzzle ... the more that I have that all say "OK", the more comfortable I will be pulling the plug!


----------



## steve41

strathglass said:


> steve41 - Sorry, but what is "ATI"?
> EDIT - Sorry, ATI=After Tax Income, I guess?


Correct.


----------



## gibor365

> My approach was to plan to pull out some equity from the house since we want to move out of the city (GTA) when we retire (or within a couple years of retiring), and the crazy rise in GTA house prices will comfortably let us pull out (after-costs) about 200-400k:
> I think 300k is VERY achievable.


We were also thinking about it .... but maybe sell house and buy condo , not in Toronto, but in Peel or Halton Hills.... Don't want to live far from kids and airport 
Curious where are you planning to move?


----------



## strathglass

gibor said:


> We were also thinking about it .... but maybe sell house and buy condo , not in Toronto, but in Peel or Halton Hills.... Don't want to live far from kids and airport
> Curious where are you planning to move?


We have one child who will be off to university in two years, so even if we retire in 3 or 4 years, we may not move for 7 more years (one year after their graduation), to know where the child settles.
But that may not be required - we are expecting them to be somewhere in southern Ontario and we are looking all over Southern Ontario too, so whatever happens we would never be too far away.
Areas we are looking at - anywhere from Windsor/Leamington to Waterloo area to Niagara to Port Hope/Coburg to Kingston to (near) Ottawa.
We are wanting to be either rural or in a smaller town.
We want to be reasonably close to a decent size city with a Costco/Walmart/Home Depot, good grocery stores, etc ... lots of criteria to be met!
One thing I am factoring in is that Pickering Airport may be up and running by 2027 (construction was slated to start in 2017). Worst case this goes ahead: I don't want to be too near it. Too bad because I am not far from that area now and some place near Uxbridge might have been nice, but not now! (I even created a google map with rough runway information.)


----------



## gibor365

> We have one child who will be off to university in two years, so even if we retire in 3 or 4 years, we may not move for 7 more years (one year after their graduation), to know where the child settles.


 we have kinda similar situation ... our son 3rd year University now and because he studing business/math double degree , if he stays in Canada (and one of his options to move to Europe or US) , Toronto is practically the only option for him ...
Our daughter will be off to university in 4 years and we still have no idea what she wants to study... the only thing she said that she is not moving out (our son moved to Waterloo), so it's difficult to say....


----------



## strathglass

gibor said:


> Our daughter will be off to university in 4 years and we still have no idea what she wants to study... the only thing she said that she is not moving out (our son moved to Waterloo), so it's difficult to say....


Funny because our child definitely WILL move out for university - they're looking forward to that independence, and that actually opens up more options for us, since we could sell earlier and maybe rent for a few years before we finalize a new location!


----------



## avrex

One of the things that I really like :encouragement:about this thread is that it discusses the calculations of an *earlier than normal retirement age*. In this case *age 55*. 

Most media articles only discuss the standard 'retire at 65' scenario. 
It's nice to see these calculations for those of us who are striving for *early retirement.*

Thanks to everyone that have provided their calculations and commentary thus far.

***************
Some notes from myself....

*1. Safe Withdrawl Rate*


GoldStone said:


> I'd rather be approximately right than exactly wrong. Yes, SWR method is pretty blunt. It's also very conservative... and therefore safe.


Agreed. A good calculation of this method is given above by @GoldStone.


*2. RRIFMetic*


Russ said:


> I don't think there are many people more capable of this kind of calculation that Steve41. His model takes into account a much more realistic tax calculation that the broad-brush approach of the EY calculator. You would do well to pay close attention to Steve41.


Agreed. From the samples I've seen, I really like @Steve41's model and how he provides a more accurate calculation.
(ex. the taxation of non-registered vs registered, the recursive methodology, etc.)


*3. cFIREsim *
I also like to use the The Crowdsourced FIRE Simulator. 
The user inputs on this webpage are much more detailed than the simple FIRECALC webpage.
There are several options (including Monte Carlo) to show probabilities of success.


*4. Your own Personal Spreadsheet/Calculation*



livewell said:


> I think the numbers that Steve41 produced with RRIFmetic are probably much more realistic, and similar to what I produce using a spreadsheet model. These are going to be a best case as they are not Montecarlo'ing or back-testing through different annual returns sequence but they are still valuable to me.


Similar to @livewell, I've also maintained a personal spreadsheet projecting (guessing) how my account balances will change after each year until death. I've compared it to some of the methods above to make sure that I'm at least in the right ballpark.
And also similar to @livewell, my calculations always seem to end up closer to steve's number versus the other methods.


@strathglass, you have also performed your own calculations for the 6k/month scenario. 
For the 6k/month scenario, you have determined that you need, 2.2 million.
The SWR of 3% (excluding CPP and OAS) shows that you need 2.4 million.
FireCalc shows that you need 1.95 million for 100% success success rate.
RRIFmetic shows that you need 1.4 million.
It's interesting to see the differences between each method, isn't it. 



*Summary*
I would say, review the details of as many of the above methods as you can.
This will provide you with more confidence in your decision on when to "pull the plug".


----------



## GoldStone

avrex said:


> @strathglass, you have also performed your own calculations for the 6k/month scenario.
> For the 6k/month scenario, you have determined that you need, 2.2 million.
> The SWR of 3% (excluding CPP and OAS) shows that you need 2.4 million.
> FireCalc shows that you need 1.95 million for 100% success success rate.
> RRIFmetic shows that you need 1.4 million.
> It's interesting to see the differences between each method, isn't it.


Always check under the hood! What assumptions did each of these methods make?

Assumed rate of return is the main factor that impacts the estimate.

The SWR of 4% (excluding CPP and OAS) drops the estimate to 1.8 million. Include CPP and OAS... and the estimate drops even further... close to RRIFmetic number.


----------



## GoldStone

#1



steve41 said:


> OK.... I got
> 
> $1.036 M for $5K per month
> $1.374 M for $6K per month
> $1.746 M for $7K per month


#2



steve41 said:


> GoldStone said:
> 
> 
> 
> If you don't use SWR... how do you handle investment RoR? Inflation? Sequence of returns risk?
> 
> 
> 
> These are parameters you specify, either as a constant ROR, or a varying ROR over time, or for the truly anal.... these can be montecarloed. Inflation is assumed constant. If there is a nonreg component to the savings, you can specify a mix of divs, capgains and interest. The strength of the program is its tax accuracy and 'needs-based' (recursive) methodology.
Click to expand...

#3



steve41 said:


> Yes I used RRIFmetic. Two spouses, split assets 50-50, living in Ont, amortized to 90, reduced CPP as requested. All assets assumed RRSP-type. That's about it.


#4



steve41 said:


> It is a RRIFmetic fudge..... I set the example up with a large ($1 M say) RRSP, then I force the ATI to the target value starting at the 2nd year all the way to 90. Amortize. That's it. Three seconds to calculate.


=======

*Steve*:

You said that RoR and Inflation are parameters that you specify in RRIFmetic. Can you post the parameters that you used to generate your estimate?

You shared most of your assumptions, but not RoR & inflation (unless I missed them).


----------



## RBull

Great thread. I am in a retired situation within the parameters of this example and appreciate all the input so far to help me with testing the robustness of our plan. 

Goldstone, perhaps Steve used the original assumptions per below. 




> SOME ADDITIONAL ASSUMPTIONS, which may help depending on how you will be solving this problem:
> 
> Assume somewhat conservative portfolio of 50-60% equities
> Based on this assume a return of 3% above a 2% inflation rate (reasonable?)
> Assume no change in spending/lifestyle, to keep it simple.
> Assume couple has equal retirement incomes and they are in Ontario.


----------



## steve41

Yes, 5% RoR and 2% inflation.


----------



## gibor365

> One of the things that I really like about this thread is that it discusses the calculations of an earlier than normal retirement age. In this case age 55.


 True! Even estimated CPP calcs start ar 60... Have no idea how to estimate if I retire 55 or earlier (and start getting CPP at 60)



> Agreed. From the samples I've seen, I really like @Steve41's model


 Me too, as we need much less money to retire :biggrin:

One more thing to consider (at least for us ), when couple retired and one of the sposes below 55 and has LIRA , dividends (or principal) cannot be withdrawn and other accounts should be use to cover...


----------



## livewell

gibor said:


> True! Even estimated CPP calcs start ar 60... Have no idea how to estimate if I retire 55 or earlier (and start getting CPP at 60)


I agree with Avrex that it is good to discuss retirement before CPP/OAS age, it is a big weakness in many of the calculators out there. If you ignore government pensions that for a couple will be ~$15k-$30k per year it is a fairly sizeable base unless you are in the $120k/ year spending region. Ignoring them and using conservative projections for SWR and returns etc. will almost certainly leave you with a very large bequest on your death (Assuming of course you do not adjust spending which of course you will do.) And perhaps more importantly it will postpone your retirement to later than needed. I think it is practical that you will withdraw at a greater percentage in the years before the government pensions kick-in.

One way I tried to validate the withdrawal rate I am using, in one of my spreadsheets I calculated our predicted values of CPP/OAS (Given our work history and ages) and then calculated a net present value in NPV Excel (Actually in Googlesheets to be pedantic). When added to actual portfolio value it bought my WR down to ~4% which I am comfortable with.

Another way is to consider the portfolio as two pieces, one piece being what is needed to retire at 65/67 (Full OAS/CPP) age at your chosen WR, the remainder being the amount you need to bridge the age gap. This gives a floor value that maybe re-assuring i.e.. if I consume all of the bridge amount prior to reaching "full retirement age" (Due to market crash etc.) then I will go back to work P/T, F/T or as Walmart greeter.


----------



## gibor365

> one piece being what is needed to retire at 65/67 (Full OAS/CPP)


 but if you retire at 55 , you won't get Full OAS/CPP ... OK, OAS I can estimate , it will be around 5,500 - 5,700 (unless government will cut it or increase age again ), but with CPP , I can just estimate how much I gonna get at age 60 when I continue to contribute until age 60.....


----------



## livewell

Sorry I didn't mean full to be maximum CPP/OAS - I mean't CPP + OAS You need to estimate the amounts you are going to get based on your work history and age (And for OAS residence in Canada)


----------



## GoldStone

gibor said:


> Have no idea how to estimate if I retire 55 or earlier (and start getting CPP at 60)


Use Dogger's rule of thumb. You get ~$25/month for each year of max contributions.

20 years of max contributions = ~$500/month CPP


----------



## GoldStone

steve41 said:


> Yes, 5% RoR and 2% inflation.


Thanks. Is that a constant 5%?

If that's a Yes, that probably explains why RRIFmetic estimate is so low compared to SWR. Constant average return doesn't account for sequence of returns risk. Market returns are anything but constant.


----------



## gibor365

> 20 years of max contributions = ~$500/month CPP


 So little! Even with 20 years of max contribution , it`s only 6K per year?!


----------



## janus10

GoldStone said:


> Use Dogger's rule of thumb. You get ~$25/month for each year of max contributions.
> 
> 20 years of max contributions = ~$500/month CPP


That's assuming you take it at 65, right?


----------



## janus10

gibor said:


> So little! Even with 20 years of max contribution , it`s only 6K per year?!


How much do you think is the total of 20 years of max contribution?


----------



## GoldStone

janus10 said:


> That's assuming you take it at 65, right?


Yes. See Dogger's response to my question.


----------



## livewell

GoldStone said:


> Thanks. Is that a constant 5%?
> 
> If that's a Yes, that probably explains why RRIFmetic estimate is so low compared to SWR. Constant average return doesn't account for sequence of returns risk. Market returns are anything but constant.


Yes that is the reason. In reality backtesting with historic data or using monte carlo techniques to simulate for sequence of returns risk does not account for it either as you have to set a probability of success. Even if you set 100% who knows whether the future sequence of returns is going to be worse for you than any previous sequence (OR simulated sequence with Monte Carlo)

A 3% real return is pretty conservative estimate (5% nominal 2% inflation). The historic values over any 20 year period have been a least 1% higher than this. I think RRIFmetic type estimates using the values the OP selected are realistic to base a withdrawal plan around, particularly if you have a strategy around coping with sequence of returns risk (aka. Bear markets during your early years of retirement.)


----------



## steve41

I could have started with 5% and then pared it back at some later age to simulate the OP getting more risk averse in old age, but I kept it at 5%.


----------



## gibor365

GoldStone said:


> Yes. See Dogger's response to my question.


So if in your example (20 years full contrib, retire at 55) ands start CPP at 60, what you gonna get? $25/month - 23.5% = $19/months = $4560/year?


----------



## Eclectic12

gibor said:


> GoldStone said:
> 
> 
> 
> Use Dogger's rule of thumb. You get ~$25/month for each year of max contributions.
> 
> 20 years of max contributions = ~$500/month CPP
> 
> 
> 
> So little!
> Even with 20 years of max contribution , it`s only 6K per year?!
Click to expand...

Max benefit for 2015 is $1065/month or $12,780.

The articles I've read say that one need 39 years of contributions, where all those years are at YMPE (2015 YMPE = $52K+).
http://retirehappy.ca/how-much-will-you-get-from-canada/


So anyone thinking they are going to collect the max CPP needs to be sure they were a big earner early in life with few hiccups in their career. :biggrin:


Cheers


----------



## naysmitj

Max CPP benefit at age 65 is currently $1065/month or $12,780 annually plus OAS at age 65 is $563/month or $6,756 annually for a total of $1628/month or $19,536 annually
But if you delay collecting the maximum at age 70 will be $1512/month or $18,147 annually plus OAS at age 70 is $765/month or $9,188 annually for a total of $2278/month or $27,335 annually before cost of living increases.


----------



## gibor365

> But if you delay collecting the maximum at age 70


 you may get nothing


----------



## gaspr

gibor said:


> you may get nothing


The problem is never with dying young...if that happens your money worries are over. The problem is when one lives much longer than expected and runs out of funds...AKA longevity risk.


----------



## gibor365

gaspr said:


> The problem is never with dying young...if that happens your money worries are over. The problem is when one lives much longer than expected and runs out of funds...AKA longevity risk.


Why ran out...? If suddenly I live very long, I`ll get CPP and OAS until I die, if i ran out of savings, will get GIS.... Also spendings much less when you are old.... Doubt that I`d like to claim Alps in this age


----------



## gaspr

gibor said:


> Why ran out...? If suddenly I live very long, I`ll get CPP and OAS until I die, if i ran out of savings, will get GIS.... Also spendings much less when you are old.... Doubt that I`d like to claim Alps in this age


I guess my point is that it seems to be prudent to maximize the income sources that you can't outlive...put your old age on cruise control.


----------



## My Own Advisor

I'm planning on taking CPP at 60, at the very latest, 65. 70, no way.


----------



## gibor365

My Own Advisor said:


> I'm planning on taking CPP at 60, at the very latest, 65. 70, no way.


99% taking it at 60 if still will be around


----------



## gaspr

...you can lead a horse to water...:biggrin:


----------



## livewell

gaspr said:


> The problem is never with dying young...if that happens your money worries are over. The problem is when one lives much longer than expected and runs out of funds...AKA longevity risk.


I respectively disagree with this with a passion, the problem is to avoid dying young. I recall my father dying a few months after retirement @65 and how that affected my thinking in that I did not want that to happen to me. Too many people worry about running out of money that they delay retirement beyond a reasonable time yet alone an optimum point where health and finances allow one to really benefit from financial independance.

Also in a partnership you have a spouse who still has money/longevity concerns. As others have said there is a considerable safety net in this country with the CPP/OAS/GIS structure + healthcare system (Which I am considerably grateful for) that even running out of all savings is not disastrous.


----------



## gibor365

livewell, that is what I think.... my dad passed away at 48 from heart attack, last 1.5 years, 5 my co-workers (2 males and 3 females) passed away from cancer and heart issues.... so you never know ... and if I reach 67 in addition to what left of savings we CPP-OAS-GIS ...


----------



## Eclectic12

gibor said:


> .... Doubt that I`d like to claim Alps in this age


LOL ... I'm sure it's a typo ... but I did get a chuckle that you'd turn down whatever profits one could make by claiming the Alps simply because of one's age. :biggrin:

Climbing the Alps (which is what I believe you meant) is a different proposition. :frown:



Cheers


----------



## GreatLaker

gaspr said:


> I guess my point is that it seems to be prudent to maximize the income sources that you can't outlive...put your old age on cruise control.


If you really think about it, yes. Delaying CPP/OAS means you get more and your indexing starts at a higher amount. It protects against 3 things: longevity, high inflation, and low investment returns. If you don't have an indexed DB pension it is a good way getting more inflation indexed income in later life.

Here is a good article. It is US based, but the principles apply anywhere:
http://www.kitces.com/blog/how-delaying-social-security-can-be-the-best-long-term-investment-or-annuity-money-can-buy/


----------



## gaspr

^Yes, Kitces and several other retirement experts in the US have been calling the delay of SS benefits a "no brainer" for years now. Curious that that the advice in Canada seems to be the opposite. Part of the problem may be that financial advisors are reluctant to advise clients to spend down savings early in retirement...it lowers their assets under management.


----------



## naysmitj

The way I look at it is that in the case of CPP, if I collected it for the 5 years until I am 70 and deposited all of it directly into an RRSP account to delay income tax, then I would have $1065 monthly for 60 months providing a total of $63,900. If I can safely average 5% for the 5 years then I end up with about $72000 in 2020 in my RRSP. 
By deferring CPP for the 5 years, my monthly CPP payment before cost of living increases, increases from $1065 to $1501 in 2020. On an annualized basis this provides an additional $5200 every year until I die. To achieve a return on the $72,000 to get $5200 I would have to safely get a return in the 7% range every year until I die.


----------



## Beaver101

^ And I also question where can you get a 7% return, safely, even 5 years from now?


----------



## gibor365

> By deferring CPP for the 5 years, ......until I die.


 and do you know this day?! What if it's happens while you deferring?


----------



## strathglass

avrex said:


> Some notes from myself....
> 
> *3. cFIREsim *
> I also like to use the The Crowdsourced FIRE Simulator.
> The user inputs on this webpage are much more detailed than the simple FIRECALC webpage.
> There are several options (including Monte Carlo) to show probabilities of success.


I hadn't ever tried this CFIRESIM tool, though I vaguely recall hearing about it before. Thanks for pointing it out. See results using CFIRESIM added to summary below.



avrex said:


> *4. Your own Personal Spreadsheet/Calculation*
> Similar to @livewell, I've also maintained a personal spreadsheet projecting (guessing) how my account balances will change after each year until death. I've compared it to some of the methods above to make sure that I'm at least in the right ballpark.
> And also similar to @livewell, my calculations always seem to end up closer to steve's number versus the other methods.


I do the same, and as one would expect, yes, the numbers for success are lower with the spreadsheet approach for the obvious reasons - simple constant or minimally varied return rate etc!




avrex said:


> @strathglass, you have also performed your own calculations for the 6k/month scenario.
> For the 6k/month scenario, you have determined that you need, 2.2 million.
> The SWR of 3% (excluding CPP and OAS) shows that you need 2.4 million.
> FireCalc shows that you need 1.95 million for 100% success success rate.
> RRIFmetic shows that you need 1.4 million.
> It's interesting to see the differences between each method, isn't it.
> 
> *Summary*
> I would say, review the details of as many of the above methods as you can.
> This will provide you with more confidence in your decision on when to "pull the plug".


Agree, and exactly why I started this thread! 

I've added an updated summary below, adding in RRIFmetic numbers from Steve, and results from CFIRESIM (with defaults except same kind of adjustments I made for FIRECALC to match the proposed scenario).


RRIFmetic Note: I am not confident in these numbers from Steve because they are so much lower, and because I don't know the exact methodology and haven't used the tool yet myself. Hopefully this will become clearer once I try the tool.

CFIRESIM Note: I used the default method that uses historical data. I also tried the Monte Carlo method and it is interesting to see (a) how Monte Carlo generally needs MUCH higher numbers for success (somewhat higher I understand, but it is more than I expected), and (b) Monte Carlo does not give you a success figure: a figure that yields 100% success on one run may on the next run yield some failures on a subsequent run, and vice-versa!

*SUMMARY RESULTS (SORTED BY INCREASING PORTFOLIO SIZE REQUIRED):*








Same data, maybe not formatted as well as the image used above:

--------------RRIFmetic--4%SWR------FIRECALC---CFIRESIM---3%SWR
$5k/m spend: $1,036,000 $1,286,000 $1,550,000 $1,700,000 $1,714,000
$6k/m spend: $1,374,000 $1,661,000 $1,950,000 $2,150,000 $2,214,000
$7k/m spend: $1,746,000 $2,086,000 $2,450,000 $2,700,000 $2,781,000


----------



## avrex

Cool. Thanks for compiling this summary.


----------



## steve41

5K per-mo 

OK, here is 1/2 of the spousal pair for the $5000 per month example. To solve the 'how much' question, I start the individual off with an arbitrary $1M.

I force the remaining ATI from the 2nd year onwards to $30K, amortize (die broke) at 90.

The answer is the number in the 4th page (retirement income proj). The RRSP principal is $518,014. You will notice the principal reduces to zero in the last (90th) year. The net spending column is on the far right.... $30,000 for the $5K per month example.

One reason the results are lower is perhaps they didn't factor in the reducing effect of income tax due to bracket indexing.


----------



## My Own Advisor

Steve, what are your thoughts on folks trying to "live off dividends".

Meaning, say I try and have a stock portfolio of $1M eventually before I retire.

I take dividend payments to live from (~3-4%; ~$30k-$40k), slowly sell off some of the capital as I get older (into my 70s and 80s), and rely on capital appreciation and dividend increases to cover inflation (~3%).

Thoughts?


----------



## steve41

Stay tuned..... I'll try to simulate it.


----------



## steve41

OK.... first spouse needs 445K, 2nd spouse needs 482K. Its the good old dividend tax credit at work, I guess.


----------



## My Own Advisor

steve41 said:


> Stay tuned..... I'll try to simulate it.


Great stuff!


----------



## Spudd

In the simulation was it all in a taxable account or was some of it sheltered?


----------



## My Own Advisor

Let's say all of it non-registered to keep things simple.


----------



## steve41

It was all nonreg and taxed 100% as dividends.


----------



## gibor365

My Own Advisor said:


> Steve, what are your thoughts on folks trying to "live off dividends".
> 
> Meaning, say I try and have a stock portfolio of $1M eventually before I retire.
> 
> I take dividend payments to live from (~3-4%; ~$30k-$40k), slowly sell off some of the capital as I get older (into my 70s and 80s), and rely on capital appreciation and dividend increases to cover inflation (~3%).
> 
> Thoughts?



This is exactly what I was talking at the beginning of the thread ... Dividend stream , espesially if you are diversified, more predictable than portfolio appreciation... today it can be 1M and in one month 800M ...


----------



## gibor365

My Own Advisor said:


> Let's say all of it non-registered to keep things simple.


More realistic scenario 50/50 (this is what we gonna have)


----------



## strathglass

steve41 said:


> 5K per-mo
> 
> OK, here is 1/2 of the spousal pair for the $5000 per month example. To solve the 'how much' question, I start the individual off with an arbitrary $1M.
> 
> I force the remaining ATI from the 2nd year onwards to $30K, amortize (die broke) at 90.
> 
> The answer is the number in the 4th page (retirement income proj). The RRSP principal is $518,014. You will notice the principal reduces to zero in the last (90th) year. The net spending column is on the far right.... $30,000 for the $5K per month example.
> 
> One reason the results are lower is perhaps they didn't factor in the reducing effect of income tax due to bracket indexing.


Thanks for sharing that. Nice to see how it all comes out in the report.
I am not sure what you meant by the "amortize" remark but otherwise understand the scenario.
Nice to have the tax-accurate results!
The only drawback is the reliance on the constant return rate (5%), although it appears as a rough approximation we can take the first few (6) columns of data from the second table and play with specific return rates in specific years to simulate the effect of a varying return rate and see how much more of an initial portfolio we might require to avoid depleting it! Would be cool if your tool could do that for us.


----------



## steve41

You can vary the rate year by year. I chose a constant rate, however. Amortize is my 'made up' word. It means adusting the ATI until the capital just runs out. (or ends with a given estate value.)


----------



## strathglass

steve41 said:


> You can vary the rate year by year. I chose a constant rate, however. Amortize is my 'made up' word. It means adusting the ATI until the capital just runs out. (or ends with a given estate value.)


OK, that makes sense - nice that your tool can do that, because that is exactly what we want!
Also good to know you can run scenarios yourself with different returns in different years (now if that part could be automated based on some sets of return data, it would be almost perfect!)


----------



## steve41

Yes, you can maintain rate histories (the S&P, say) and have the rate history drop into the rate vector starting at a particular year.  You can also montecarlo the rates.


----------



## cannew

gibor said:


> This is exactly what I was talking at the beginning of the thread ... Dividend stream , espesially if you are diversified, more predictable than portfolio appreciation... today it can be 1M and in one month 800M ...


We are 100% DG equities and our position is above. Currently we have 6.05% TFSA, 61.17% RRIF and 32.77% Non-Registered. Until they lowered the minimum RRIF withdrawals taxes were a concern. The lower rates mean I can leave much more in the RRIF and the dividends will cover the withdrawals. We transfer RRIF shares to the TFSA and only draw $10,000 in cash. The balance goes into the joint (to continue reinvesting the dividends). 

This thread ask how much you need to save (No one mentioned "The Rule of 20", if you want a quick calculation), but I don't think that should be your goal, rather concentrate on how much Income your saving can generate. Dividends and dividend growth!!! It's worked for me.


----------



## gibor365

> $5k/m spend: $1,036,000 $1,286,000 $1,550,000 $1,700,000 $1,714,000


I did some "reverse engineering", trying to calculate SWR when parameters are set...
In my example, I assume that we both retire when my wife will be 50 (I will be older) and take in consideration that we have 1,2M and take CPP at 60 and OAS at 67 (thanks to dogger I can estimate our future CPPs). In order to maintain 60K annually, we need to start with SWP 4.8% for 8 years , than 4.3% for 2 years, than 3.8% for 7 years and 3.3% until we die 
This without my wife's DB, which is impossible to even estimate if she retires at 50 (just know how much she can get if she continue working until 55) , thus , I took 45% of amount she should get at age 55 - assuming she will retire at 50 and will defer pension until 55.
In this case, SWR rates are: 4% for 8 years , than 3.5% for 2 years, than 3% for 7 years and 2.5% until we die 
So looks like 1.2M in savings will be sufficient


----------



## My Own Advisor

With:
-CPP income
-OAS income
*and* $1.2 M with withdrawal rate about 3-4% I think you're "safe" assuming 0% debt.

Anything higher than 4% is risky I think. 3% is quite safe.

Sounds like you're in excellent shape!!


----------



## cjay

Great information on this thread. My scenario is similar to the original poster and I am trying to hit an initial withdrawal rate of 3.5% based on 6K/month spend at age 55, and when CPP kicks in at 65 it drops to 2.7% and with OAS at 67 drops further to 2% till the end. The only new thing I'll add is for 4 years I've been trying to find the point where we only spend (not including savings or work related expenses) 3.5% of portfolio value per month (ie. the YMYL crossover point). So far my best year was about 10% over the 3.5% target but lately I'm running about 35% over despite a bigger nest egg - not a good sign! Once I'm convinced we can hit 3.5% pretty consistently for a year or two, I'll feel better about stopping paid work.

Oh, to answer the original question my numbers for 6K/month spend which are pretty conservative I'll admit (portfolio real return of 3.5% for 70/20/10 stock/bond/cash) give me a savings target of about 2.1M at age 55.


----------



## steve41

Here is where I throw in one of my patented sighs.... SIGH.


----------



## cjay

haha - that is a good sigh Steve, too conservative?


----------



## GoldStone

steve41 said:


> Here is where I throw in one of my patented sighs.... SIGH.


Ah, now you know how I feel when you post RRIFmetic projections based on a constant return.

SIGH.


----------



## gibor365

> The only new thing I'll add is for 4 years I've been trying to find the point where we only spend (not including savings or work related expenses) 3.5% of portfolio value per month (ie. the YMYL crossover point).


Don't know what is YMYL , but I also did some simulation.... after I substructed all amounts we spend on kids, travel, work related expenses like presto and gas, took in consideration that we'll need only 1 car and so on... our spending amount from around 100K went down to around 40-45K ... if I add travel and additional recreation spendings, I think 60K/year should be enough....


----------



## cjay

gibor said:


> Don't know what is YMYL , but I also did some simulation.... after I substructed all amounts we spend on kids, travel, work related expenses like presto and gas, took in consideration that we'll need only 1 car and so on... our spending amount from around 100K went down to around 40-45K ... if I add travel and additional recreation spendings, I think 60K/year should be enough....


Your analysis makes good sense to me. By the way, YMYL is a book called Your Money or Your Life. It tries to help answer the question of how do you know the point when you have enough to quit working. It's all about needs and wants of course so difficult to answer. One of the exercises they suggest in the book is to plot your monthly passive investment income (here I use 3.5% SWR divided by 12 instead of actual returns) against your monthly spending (not including savings). I modify my spending to exclude work related and kids tuition but leave everything else alone. When your monthly income meets your spend you hit the magic crossover point which is similar to the "financial independence" day I guess.

I track this as part of my retirement plan. If you could see my excel chart there are 48 months representing the last 4 years. As an example, when my investment savings were at 1M there was a point at 35,000/12 = 2,900 representing income and another point representing my actual monthly spend (adjusted as above). The spend point was well above income at 7,000 to 9,000 per month during the year savings where at $1M (I use savings from the previous year end balance). So $1M clearly wasn't enough for our family at that point in time. Over time this exercise has helped get monthly spending down and savings up to try and hit the crossover point sooner. The cool thing about this is that you have a choice - adjust your life and live on 2,900 per month and retire now or wait longer to spend more.

So in my method, if you are at 40-45K adjusted spend now, then you hit the crossover when your savings hit 1.1M to 1.3M assuming you use the same 3.5% SWR. Congrats!


----------



## My Own Advisor

Your Money or Your Life is a great book and I'm currently reading it.

It solidifies what I have thought about for many years now, we need about $1 M invested, churning out income + 2x pensions + paid off home to retire. 

It is my hope that investment churn out $35k - $40k without touching the capital; pensions will be a bit less (that is our fixed income) and home, well, is a home. 

CPP and OAS are considering icing on the cake but not required to retire.

I think if folks save enough for 3% SWR, they are set. Sorry to make you sigh Steve!!


----------



## RBull

^ I'm going to have a look at that one too.


----------



## gibor365

> The spend point was well above income at 7,000 to 9,000 per month during the year savings where at $1M (I use savings from the previous year end balance). So $1M clearly wasn't enough for our family at that point in time


 Are you talking about adjustment spendings or current?



> you have a choice - adjust your life and live on 2,900 per month and retire now or wait longer to spend more.
> 
> So in my method, if you are at 40-45K adjusted spend now, then you hit the crossover when your savings hit 1.1M to 1.3M assuming you use the same 3.5% SWR.


as per my assumptions 40-45K is kinda minimum , I substructed travel, as this is difficult to predict.... now mostly we travel with kids and obviously spend more on it.. also we are travelling when kids have vacations, and if we retired we can go when it's cheaper and more convenient and for longer terms....Also aproximetely every second year we are taking more expensive trips to Europe, and other years somewhere closer 
So with travel our adustment spending are closer to 60K... and also you have choice here  for example travelling to 4 star resort in Cuba vs 5 stars in Aruba 



> portfolio real return of 3.5% for 70/20/10 stock/bond/cash


 70% stock looks pretty agressive  We have 40-45% is cash/fixed-income...
Curious what kind of stocks do you invest?


----------



## cjay

gibor said:


> Are you talking about adjustment spendings or current?
> 
> 
> as per my assumptions 40-45K is kinda minimum , I substructed travel, as this is difficult to predict.... now mostly we travel with kids and obviously spend more on it.. also we are travelling when kids have vacations, and if we retired we can go when it's cheaper and more convenient and for longer terms....Also aproximetely every second year we are taking more expensive trips to Europe, and other years somewhere closer
> So with travel our adustment spending are closer to 60K... and also you have choice here  for example travelling to 4 star resort in Cuba vs 5 stars in Aruba


That is adjusted spending! but I do include all travel which is a big expense that we probably would like to continue with. Also included are all larger "one-time" expenses in the year averaged into the monthly - like new furniture, car, kitchen reno, etc.. I assume sometime over 40 years in retirement we'll be doing the same or similar again so I keep it in just to keep myself honest. Since our house is paid for and no debt, fixed expenses are actually really low about 20K per year covers all the basic bills but additional 50K discretionary should allow us to pretty much do whatever we want within reason. Still, I think the trick is actually getting our spend down before we retire and it becomes essential.

I find that as I get closer to the date, I become more conservative and would rather risk having too much money left over than plan for a "die broke" scenario and actually achieve that. My investments have 7% CAGR over 20 years I've been tracking, I've no reason to assume that won't continue. But, if I get really unlucky I don't want to run out and have no pension other than CPP/OAS maybe to fall back on. I have toyed with 3% SWR but this seems excessively conservative even for me!

Thanks for the feedback, and best of luck to everyone in coming up with a plan that works for you!


----------



## cjay

gibor said:


> 70% stock looks pretty agressive  We have 40-45% is cash/fixed-income...
> Curious what kind of stocks do you invest?


A mix of Canadian and US individual stocks (50 positions). Mostly blue chip, dividend payers with some growth. About 41K/year in dividend income last year. Also, some global mutual funds. Works out to about 40% CANADA/40% US and 10% GLOBAL at the moment. Bonds are only at 10% now so some re-balancing is needed to get to my eventual retirement target


----------



## GoldStone

*New article by Wade Pfau* compares two classic SWR studies, Bengen and Trinity.

One key difference between Bengen and Trinity is the choice for bonds.

Bengen used intermediate government bonds.

Trinity used long-term high-grade corporate bonds.

Pfau thinks that Bengen choice makes more sense, because intermediate gov't bonds do a better job of dampening portfolio volatility. This is very important in the withdrawal phase.

Pfau re-created the Trinity study using intermediate government bonds. See the table in the article.

What I found the most interesting: the impact of the time horizon on the success rate.

For example:

50% - 75% allocation to stocks
4% withdrawal rate

30 years time horizon: 98% - 100% success rate
40 years time horizon: 86% - 92% success rate

That's quite a difference! Those of us who look to retire in the early 50s (and have a family history of longevity!!) should pay close attention.

Also, the last paragraph is hugely important:



Wafe Pfau said:


> It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


----------



## steve41

> anyone seeking to plan their retirements


 Let me get this straight..... people actually _plan_ their retirements... who knew?


----------



## gibor365

> 30 years time horizon: 98% - 100% success rate
> 40 years time horizon: 86% - 92% success rate


True! But if you even live to mid 80's, I doubt you will need too much expenses like travel  In any case you have a GIS safety net....


----------



## gibor365

cjay said:


> A mix of Canadian and US individual stocks (50 positions). Mostly blue chip, dividend payers with some growth. About 41K/year in dividend income last year. Also, some global mutual funds. Works out to about 40% CANADA/40% US and 10% GLOBAL at the moment. Bonds are only at 10% now so some re-balancing is needed to get to my eventual retirement target


Very similar to our stock allocation  only our dividend/interest income is just below 30K ... also we count on DB my wife pension that wil be 21+K if she retires at 55 .



> Since our house is paid for and no debt, fixed expenses are actually really low about 20K per year covers all the basic bills but additional 50K discretionary should allow us to pretty much do whatever we want within reason. Still, I think the trick is actually getting our spend down before we retire and it becomes essential.


 we also own house and don't have any debt.... also in case of difficult financial situation we can always sell out detached house and move to condo... and we are not so much in renovations  in 15 years we own house , the only big expense was a finished basement ... not big at landscaping expenses as well, we have German all weather professional ping-pong table for recreation, some trees and berry's bushes  ... our biggest expenses are travel and recreation.... on other case when my wife retires , she can give figure skating lesson that will compensate her figure skating expenses.....


----------



## agent99

gibor said:


> True! But if you even live to mid 80's, I doubt you will need too much expenses like travel  In any case you have a GIS safety net....


Some acquire complex computer programs to help plan their retirement. But then guess the numbers that they have to input. Whatever, it is good to at least think about these things.


----------



## Intricated

Late to the party, but I ran a SWR calc, and something bugs me:

Retire at 50, expire at 90. Three brackets of spending levels:

Age 50-65 (16 years): 48k
Age 66-70 (5 years): 48k - 6k (OAS) - 9k (GIS) = 33k
Age 71-90 (20 years): 48k - 6k (OAS) - 12k (CPP) = 30k

Total spend requirement over the 41 years = 1.533M, average = 37,390. At 3% SWR, that's 1.246M.

Now, bump expiration to 100. So add 300k to total spend, as well as 10 more years. 1.833M / 51 = 35,941. At 3% SWR, that's 1.198M.

So... living longer means I need less money to retire? That's driven by adding the years at the end, which have lower spend requirements, I see that in the math, but it's hard to wrap my mind around. Can anyone explain the underlying assumptions around SWR that drive this outcome?


----------



## GoldStone

Intricated said:


> So... living longer means I need less money to retire? That's driven by adding the years at the end, which have lower spend requirements, I see that in the math, but it's hard to wrap my mind around. Can anyone explain the underlying assumptions around SWR that drive this outcome?


SWR model assumes constant spending in real dollars. It doesn't account for social payments (OAS / CPP).

In your calcs, the years at the end do NOT have lower spending requirements. It's the same 48K from 50 to 90 to 100. 

But...

OAS / CPP cover part of the spending requirements in the later years. By living longer, you shift the funding burden from your investment portfolio to OAS / CPP. The longer you live, the higher the present value of OAS / CPP payments. 

Add PV of OAS/CPP to your portfolio. The sum of the two is the same whether you live to 90 or 100.


----------



## pdg540

*Models*

This is a really interesting thread and very topical for me as I've been running some iterations of a retirement cash flow spreadsheet I've been adding to and revising for the last couple of weeks. It's


----------



## pdg540

Very nice. I can't edit my posts and answering the human verification question axiomatically posts what you have written. I'll try again:

This is a really interesting thread and very topical for me as I've been running some iterations of a retirement cash flow spreadsheet I've been adding to and revising for the last couple of weeks. I have listed my house for sale (I've lived in it for 8 years and have 3 bedrooms, 3 baths and 3 stories - I'm single , no kids, 47 so really not necessary). It's time to go because prices are as high as they've ever been in my city. When it sells, I roughly estimate the following account balances:

Non reg investment account - 320k
RRSP - 240K
TFSA - 45k

I've read some about the safe withdrawal rate generalizations and other estimating tools but I got a little bit detailed and experimented with the minimization of taxes through balance transfers between accounts and planning income withdrawals from each type of account can make a huge difference on how long your capital will last (of course I am making assumptions based on the reliability of government maintaining a stable and predictable taxation environment for investment..... which certainly doesn't add to my confidence in my model). Anyway, my assumptions were:

- adjusted after tax income for 2% annual inflation
- adjusted CPP and OAS income growth for 2% annual inflation
- maintain $48k annual income after taxes in today's dollars
- no further rrsp or tfsa contributions are made from income
- retire at end of 2022 (55 yrs old)
*- transfer full balance of non-reg acct (taxable) to TFSA and RRSP (non-taxable) as quickly as possible starting now (47 yrs old)
- non taxable 6% annual returns inside TFSA and RRSP
- after tax returns of 4% in Non-Reg account
- delay CPP to age 70 to get extra benefits and increase security when and if money runs out
- have no taxable income (besides OAS and TFSA) to qualify for 9,600 GIS supplement between ages 67 and 70
*

As a sidenote, I think a lot of of models emphasize and take into account inflation with respect to your purchasing power but ignore inflation with respect to your portfolio returns. Of course inflation effects expected returns on investment as well. I understand conservatism but I also think this contributes to over estimating of what one needs to generate a certain level of cash flow in retirement.

I feel the most critical steps are transferring the non-reg acct balance into the tax free accounts ASAP and controlling/deferring your taxable income to maximize your after tax cash flow. 

In a nutshell, my spreadsheet estimates that my $600k-ish (non reg +reg) at 47 right now and retiring at 55, with no further contributions to retirement savings as of now, should last me until age 84 or so with a withdrawal of $4k a month (after taxes) in today's dollars. After 84, minimum income would be the maximized CPP and OAS, at the very least.

What's the best way to post my spreadsheet? It might be fun to look at and I could certainly use some critique!


----------



## steve41

For a 50 yearold, dying broke at 90, with normal CPP/OAS expectations, taxed in BC.... he would need (based on a 4% ROR)

1.3M in an RRSP or 
1.18M non reg (taxed as interest) or
1.053M taxed as divs or 
1.029M TFSA (assuming no cap on TFSA)

in order to deliver him an aftertax spending lifestyle of $48K annually.


----------



## pdg540

steve41 said:


> For a 50 yearold, dying broke at 90, with normal CPP/OAS expectations, taxed in BC.... he would need (based on a 4% ROR)
> 
> 1.3M in an RRSP or
> 1.18M non reg (taxed as interest) or
> 1.053M taxed as divs or
> 1.029M TFSA (assuming no cap on TFSA)
> 
> in order to deliver him an aftertax spending lifestyle of $48K annually.


Are these numbers from a detailed cash flow model, or based on safe withdrawal rates....... or an online retirement income calculator.... or????


----------



## steve41

The former.


----------



## Davis

Pdg540, I’ve also struggled with the prevailing wisdom of the 4% rule. I even started a thread to ask the question, “If I break the 4% rule, will I go to H-E-double hockey sticks?” http://canadianmoneyforum.com/showt...-4-rule-will-I-go-to-H-E-double-hockey-sticks
Like you, I have a detailed spreadsheet -- it forecasts investment income, pension, OAS, CPP, taxes, and capital drawdown for husband and me until we are 95. It allows me to withdraw 6-10% per year from retirement at 50 next year to 65, then falling to 6-7% per year (because of pension, etc.) starting after that.

A few things to keep in mind: the 4% rule is a rule of thumb – it should never be a replacement for actual analysis, like what you’ve done. It is American, extremely conservative, doesn’t reflect your income flows, your benefits, your taxation, your asset allocation. It is a safe withdrawal rate for a retirement at any time, including during the Great Depression. I don’t think the Great Depression will occur again because we learned from our mistakes then. It also assumes that you never vary your withdrawals. If you can tighten your belt a bit when the market is low, or set up a GIC ladder so that you don’t have to sell anything when the market is down, you don’t need the same level of safety in your withdrawal rate.

My spreadsheet starts with our assets and out dividend/distribution yield, and projects income out for each account (2 RRSPs, 2 TFSA, LIRSP, taxable) as we withdraw from each. Over time as we draw down capital, the income from the accounts falls. I have made a number of conservative assumptions:

1.	The yield on the accounts is a bit below the 5.7% yield we are getting now because there will be some reinvestment over the next couple of years, and I am assuming that will be at a lower rate. 
2.	No reductions in dividends/distributions, and no increases either, although about half of our income is coming from companies that have a record of increasing their dividends/distributions.
3.	No capital gains – given the 45 year span of the spreadsheet, this is very conservative. No capital losses either – see references to GIC ladder above.
4.	2% inflation for spending, tax brackets, OAS payments, etc. – this marginally higher than the 1.82% average over the last 20 years. 

I also assume no policy changes, either to taxes or benefits. These are impossible to predict, even for someone who has worked in tax policy for a quarter of a century. I have not assumed that the TFSA contribution limit will remain at $10,000 after this year since we don’t know what will happen in the election.

Our 5.7% yield is derived from three Dream REITS (Office, Industrial and Global), telecoms (BCE and AT&T), utilities (Innergex, Brookfield Renewable Energy, Algonquin Power, Scottish and Southern Electricity), retail (Liquor Stores, Boston Pizza, A&W), and a couple of Chinese banks (Bank of China, Construction Bank of China). 

There are risks to this approach, but I think that a good solid spreadsheet beats a rule of thumb any day.


----------



## pdg540

Hi Davis. It sounds like your model is somewhere in the neighborhood of where I'd like to end up with this whole exercise. It's nice to have something down on paper...... and it can be revised as time unfolds. At this point, I've only projected the expected cash outflows based on assumed rates of return. Next step, gain a better understanding of various investment philosophies in order to satisfy myself on the feasibility of my assumptions on returns and lay out some more detail on the cash inflow end of the equation.

My analysis implies that projected $48k annual after tax income is 5.5% of the total portfolio value at retirement. It's impossible to calculate the pre-tax withdrawal rate due to the significant fluctuations in pre-tax income resulting from maximizing tax deferrals. As an estimate, if I say 48k after tax equals 60k pre-tax, then withdrawal rate would be about 6.9%. 

Thank you for posting the link to your thread. As soon as I get a chance, I'm going to have a look!


----------



## janus10

pdg540 said:


> Hi Davis. It sounds like your model is somewhere in the neighborhood of where I'd like to end up with this whole exercise. It's nice to have something down on paper...... and it can be revised as time unfolds. At this point, I've only projected the expected cash outflows based on assumed rates of return. Next step, gain a better understanding of various investment philosophies in order to satisfy myself on the feasibility of my assumptions on returns and lay out some more detail on the cash inflow end of the equation.
> 
> My analysis implies that projected $48k annual after tax income is 5.5% of the total portfolio value at retirement. It's impossible to calculate the pre-tax withdrawal rate due to the significant fluctuations in pre-tax income resulting from maximizing tax deferrals. As an estimate, if I say 48k after tax equals 60k pre-tax, then withdrawal rate would be about 6.9%.
> 
> Thank you for posting the link to your thread. As soon as I get a chance, I'm going to have a look!


I'd say it is difficult, but not impossible, to calculate pretax income required. I created a retirement income calculator but had to supplement excel with a lot of VB modules in order to accurately capture all of the tax calculations. After 3 provinces, I gave up as it was too much work. BC has so many little niggling surtaxes and the like from what I remember.

Even after hundreds of hours of programming, there is a lot more I could add. When I retire, I'll have the time!

At the beginning of 2015 our projections for retirement in a few years were showing a 4.7% WR which declined to below 3.8% once CPP kicks in (7years after retirement) and below 2% once OAS kicks in 7 years later. Halfway through the year those projections would be even safer because of the large growth in our investment accounts.

Perhaps most important is that we already have a 5 year cash wedge in place. In 2-3 years we anticipate releasing $200k in home equity, after all is said and done, once we downsize and move away from the GTA. I like to have a bit of cash available to nibble away when the market is on sale.


----------



## Davis

The tax calculation needed be that complicated. First, if you're doing the spreadsheet for yourself, you can do one province unless you are a multijurisidictional taxpayer. Second, you can leave out elements of the tax system that don't apply to you -- for me, those are the provisions that relate to very high income and low-income people. (Total respect for janus10 trying to do a calculator for all provinces at all income levels -- too big a job for me._)

I avoid the problem of iteration by counting tax as it is paid, rather than as it applies to the tax year. What I mean by that is that for 2016, I will include the instalments payable for 2016 (based on the 2015 return) plus any tax payable on filing the 2015 return. My 2017 tax then, is the diference between 2016 tax payable and the instalments I paid, plus instalments for 2017 based on the 2016 return. it is probably not perfect, but close enough. This means that my 2016 tax is fixed, and any withdrawals I make in 2016 are counted for taxed in 2017. Otherwise, you end up getting in an iterative loop: you need more money to pay tax, so you withdraw more money, but then that increases the tax you have to pay.


----------



## steve41

It turns out that tax is an easy part of the problem. The feds publish a document twice a year (T4127E) especially for payroll programmers. Most of the detailed math is included for the fed as well as the provinces. The tricky bit is the recursion.... "how much do I need to deposit/withdraw in order to derive exactly $X after tax?", and to make it trickier, "what withdrawl/deposit trajectory will take me to age 90/95/100 at which point I exactly run out of money? (or leave a specified estate)" 

Spreadsheets are not well designed for complex recursion.


----------



## pdg540

I dont think its worth getting caught up precisely with the taxation rate 20 yrs from now. I'm guessing it will be equally offensive then as it is now.


----------



## My Own Advisor

Back to the original:

"QUESTION: How do the people here who like to plan for a specific level of (after-tax) retirement spending translate this to a retirement savings target? And specifically what three values does your methodology produce for this scenario with these three spending levels, including these variably timed income flows which makes it not-so-simple?


I still feel $1M in the bank, debate if this is RRSP or TFSA or non-reg. as you will, not including CPP or OAS payments to come, is likely "enough" to spend $3,000-$4,000 per month after taxes and have very little chance of running out of money.


----------



## Davis

pdg540 said:


> I dont think its worth getting caught up precisely with the taxation rate 20 yrs from now. I'm guessing it will be equally offensive then as it is now.


As offensive as your free health care and schooling? As offensive as your roads and police and fire services? Take a look at an American board like early-retirement.com to see how focussed Americans are on paying for health insurance as part of their retirement financial plans. This discussion is pretty much absent from CMF and FWF.

I am also amazed at how much effort people here put into avoiding the OAS clawback and complaining about taxes. Some people seem to be eager to get government services and benefits as long as other people pay for them.


----------



## cjay

I really wonder how useful the 'die broke' planning assumption is. Kind of like planning a driving trip with just enough gas in the tank to get from A to B. I like to plan a large margin of safety that I can spend down if life events/markets go well half way down the road and if they don't go well I'll still have enough to coast in on fumes. If people really want the 'die broke' scenario why not just buy an annuity at 6%-ish payout and call it done with no stress


----------



## janus10

My Own Advisor said:


> I still feel $1M in the bank, debate if this is RRSP or TFSA or non-reg. as you will, not including CPP or OAS payments to come, is likely "enough" to spend $3,000-$4,000 per month after taxes and have very little chance of running out of money.


I'm with you there, as long as one is prudent with asset allocation. 

I think we will retire with about a 50-45-5 ratio between NR-RRSP-TFSA if the TFSA limits go back to $5,500 per year. Then it will be a concerted effort to take out additional money from the RRSPs to top up the TFSAs and potentially wind up the RRSPs in our late 60's.


----------



## My Own Advisor

Seems like a great plan Janus. We hope to use up / move money out of our RRSPs first in our early 60s, before OAS kicks in, then use up non-reg. assets next in our 70s and 80s, and then finally use up our TFSAs in the die-broke / old age plan.


----------



## janus10

Davis said:


> I am also amazed at how much effort people here put into avoiding the OAS clawback and complaining about taxes. Some people seem to be eager to get government services and benefits as long as other people pay for them.


I will likely never collect UI in my life after paying into it for 35+ years. That's preferable to collecting more than you paid in. 

I would support a change in the rules that would deny GIS to people who have massive TFSAs which provides sufficient income for them. 

OAS is paid from general revenues and you need to live in Canada for 40 years to collect the maximum. I hold the opinion that if I have contributed to the general revenues for 50+ years by the time I hit 67, and in an amount that far exceeds the median person, I'm not thinking other people are paying for my benefits. I'd say I'm taking out less than I've put in. *Which makes me very fortunate.* 

If I make so much that they feel the need to claw it back, I'm good with that. I think lowering the limit or even using a rolling average would be fine, too. (Rolling average in case someone needs to take out a large portion of their investments one year that greatly exceeds their normal income.)


----------



## janus10

My Own Advisor said:


> Seems like a great plan Janus. We hope to use up / move money out of our RRSPs first in our early 60s, before OAS kicks in, then use up non-reg. assets next in our 70s and 80s, and then finally use up our TFSAs in the die-broke / old age plan.


Aren't you planning to retire at about 50 give or take? What gets you from ER to your early 60's if you will only start tapping them then? Or perhaps I misunderstood.

This will sound morbid and tangential to the topic, but my wife and I have seen nothing in our families or acquaintances that suggest we want to live beyond 80-85. I'm sure there are sharp witted and relatively healthy people at that age, but except for Hazel the former mayor of Mississauga, I've never actually met one. 

I've seen my parents both suffer to the point where I would not consider it selfish if they wanted to end their lives and I think they should have that right without being judged. Obviously there are religions which would take issue with this and I wouldn't foist my beliefs on anyone else.


----------



## RBull

My Own Advisor said:


> Back to the original:
> 
> "QUESTION: How do the people here who like to plan for a specific level of (after-tax) retirement spending translate this to a retirement savings target? And specifically what three values does your methodology produce for this scenario with these three spending levels, including these variably timed income flows which makes it not-so-simple?
> 
> 
> I still feel $1M in the bank, debate if this is RRSP or TFSA or non-reg. as you will, not including CPP or OAS payments to come, is likely "enough" to spend $3,000-$4,000 per month after taxes and have very little chance of running out of money.


I think you're in the ballpark, and the type of account/assets would affect where in the range.


----------



## pdg540

Davis said:


> As offensive as your free health care and schooling? As offensive as your roads and police and fire services? Take a look at an American board like early-retirement.com to see how focussed Americans are on paying for health insurance as part of their retirement financial plans. This discussion is pretty much absent from CMF and FWF.
> 
> I am also amazed at how much effort people here put into avoiding the OAS clawback and complaining about taxes. Some people seem to be eager to get government services and benefits as long as other people pay for them.


Simply listing services that we cannot manage to pay for by current tax revenues with the balance deferred to our children and grandchildren (and I call them ours not because I have any but because I sure as shite subsidize them) is not really a valid argument against taking offense against a system that is inefficient, wasteful, rife with theft and does not provide good value for the money. Also, I would guess that the real costs of our free health insurance will be very much a part of the discussion when the credit runs out. But probably not until that very day.


----------



## My Own Advisor

Yes Janus, the game plan is to retire age 55 for sure, hopefully around age 50 and then work part-time until age 55. We really don't know. The cash flow from our investments will determine when we retire.

If 55 is considered ER(?) then the cash flow from our investments and any pensions we have at age 55 is what we are relying on. I cannot tap into any pension until age 55, and with massive penalties anyhow, so the cash flow from investments must be enough to supplement the hit/penalties from taking any early pension. 

Regarding the pension, I have intentions of working until age 50 or 55, it doesn't mean the company has the same ones for me. Hence the savings beyond the workplace. I don't want to rely on anyone else for our FI. 

I'm sure most folks who retired at age 50 or 55 or even 60 in here at CMF didn't rely on anyone else either, they just saved, _*lots and often*_, invested wisely and things for the most part turned out very well for them financially. Just guessing of course


----------



## Davis

Pdg540, saying the our tax levels are obscene isn't an argument either. Nor are unsubstantiated allegations about waste and theft. But this isn't the general discussion board, it's the retirement discussion board, so I think we should both back away from this issue, and let the discussion get back to "how much to save based on expected spending".


----------



## fraser

I do not think that this is a very difficult calculation. We do after tax and build in a reasonable amount of flex/contingency. Besides, who really knows how one's lifestyle may change in 10 years. Do the best you can. Determine your shortfall after the givens like pensions, OAS etc. and then determine how much you need to save based on that cash flow. You might simply want to look at the non registered, inflation adjusted annuity rates as a rough guide. 

You could spend months and years trying to work this out to the decimal point. Alas, life is not like that. Our expenses just under four years on are about the same as I estimated however the make up of those expenses is very different. And I expect that to change again over then next four years.

I think the best you can do is come up with a reasonable inflation adjusted number, adjusted upwards for contingency/error, that you are comfortable with. Don't sweat the small stuff down to how much you expect to spend on tomatoes every month for the next 30 years. After all, you could develop an allergy to tomatoes!


----------



## pdg540

Davis said:


> Pdg540, saying the our tax levels are obscene isn't an argument either. Nor are unsubstantiated allegations about waste and theft. But this isn't the general discussion board, it's the retirement discussion board, so I think we should both back away from this issue, and let the discussion get back to "how much to save based on expected spending".


Agreed, not the place.


----------



## pdg540

If you are utilizing RRSPs, TFSAs and non-reg'd investment accounts and you are transferring between them to maximize tax savings/deferrals, you could not possibly determine a consistent pre-tax income amount. It will inevitably vary with the taxability of the source. For example, my particular analysis draws fairly heavy on TFSA non taxable withdrawals in the beginning (low pre-tax income) and ends up with large pre-tax withdrawals from the rrsp/rrif (high pre-tax income).


----------



## Davis

I take quite a different approach.Most of our taxable account is allocated to me, and I have a DB pension, while husband has no pension, but larger RRSP/LIRSP. So the most tax efficient approach seems to be this: from 50-65, draw down a mix of taxable account and RRSP (husband's account to make sure that he had income taxed at the lowest rate), including enough to max ongoing TFSA contributions. At 65, we get CPP, OAS and my pension, so our withdrawals are reduced, but we continue drawing down the taxable account and my RRSP, and topping up the TFSAs until about 70, when the taxable is gone. And that point, we dip into the TFSAs to supplement other fully taxable income.

I am aiming to avoid the high tax brackets by smoothing out our taxable income. Your approach seems to shift taxation to later in life. I guess there would be a time value of money advantage to that, but I think the progressive tax rates will really hurt.


----------



## humble_pie

Davis said:


> I take quite a different approach ... And that point [age 70 & later, after taxable accounts have been withdrawn & spent] we dip into the TFSAs to supplement other fully taxable income.
> 
> I am aiming to avoid the high tax brackets by smoothing out our taxable income. Your approach seems to shift taxation to later in life. I guess there would be a time value of money advantage to that, but I think the progressive tax rates will really hurt.



i tend to agree with you when i am being 100% rational. But there's something about leaving the tax-free for last of all, it's like dying prematurely before ever enjoying the travel & rec opportunities that come with retirement? what if our senior expires during the earlier years, leaving that oh-so-carefully cultivated Tax-Free to wither on the tree, like a lucious but unpicked cherry?

imho there's something to be said on the human scale for having a TFSA blast from age 50 to age 65, never mind the spread sheets ...


----------



## Davis

Oh no, my spreadsheet model does not include either of us dying prematurely. We're going to follow the spreadsheet faithfully, so that won't happen. ;-)


----------



## pdg540

Maximum tax deferral was my first instinct. I'm going to run a modified spreadsheet to play around with adjusting income account withdrawals to smooth out the taxable income from the beginning but keeping within the lowest marginal tax rate. As it sits, accelerating the non-taxable withdrawals results in some pretty hefty taxation starting at age 72 (income into the second highest marginal tax rate). Will be interesting to see if the money lasts longer and/or the after-tax income goes up.


----------



## steve41

> Maximum tax deferral was my first instinct


 NOOO! Big difference. The goal is to maximize the Present Value of those future taxes.


----------



## pdg540

steve41 said:


> NOOO! Big difference. The goal is to maximize the Present Value of those futiure taxes.


minimize?


----------



## steve41

pdg540 said:


> minimize?


 Blush.


----------



## pdg540

Whew. Good to hear. You had me broke at 58


----------

