The other day I started discussing how I plan to fund my retirement with government benefits. With CPP and OAS I determined my wife and I can fund about 88% of my retirement goal of $25,000/year after I turn 65. Today I’m going to look at other sources of funding my retirement so I can leave work at 45.
1) Company Pension
When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.
I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.
If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.
Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.
So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.
I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.