Retirement Calculations – Part I

As I previously mentioned, I have determined that I need about 40% of my current income in retirement which would mean I need about $25,000/year net income in retirement for my wife and I (in today’s dollars). Now how I’m going to obtain that money from age 45 onwards is a long process, so I’m going to divide it into parts. Today is Part I – Government benefits.

The good news is getting a $25,000/year income is easier than you think. The government is going to give me a lot of money through various programs, especially if I’m in a low income bracket. Here are some of the details.

1) Canada Pension Plan

You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to have it all back over a long period of time. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.

I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. In my case I got $7094 for me and $3897 for my wife. I know that doesn’t look like a lot but combined, the $10991/year is 44% of my net income for retirement. The added tax benefit of a CPP pension is income splitting is allowed.

2) Old Age Security

I know that some ‘experts’ don’t suggest depending on OAS for your retirement calculations. I disagree. I believe that any government that tries to remove this program will be voted out so fast that it will make their heads spin, after all seniors tend to have a high voter turnout and lots of time to be interested in politics. Based on the current rates, I expect my wife and I will collect an additional $5558/year each after I we turn 65.

So that would take me up to $22,107/year combined income or 88% of my goal. Not bad for not including any RRSP or company pensions. Tomorrow I’ll cover the rest of the plan.

Tax Changes for the Better in SK

Well it happened and I didn’t even notice until I was reading on that SK finally changed their tax laws to account for the federal enhanced dividend tax credit.

What does it mean? Well if your like my wife who collects all the dividends (taxable accounts) it means she actually gets a reduction on her other income by getting dividends. I love the government! If your happen to have a low income, you get all the breaks. Which is partly how I plan on retiring at 45. If you get most of your income from capital gains and dividends you are paying way less tax for the same net income.

Retirement Myths

Most of the retirement planning people provide advice like:

-You need 70% of your pre-retirement income in retirement to keep the same standard of living
-You are going to live longer, so plan to live to 100 years old.
-You can’t count on government pensions

All of the above is bullsh!t.

If you are following my previous post guideline of the 30-30-40 budget, you need exactly 40% of your pre-retirement net income to keep the same standard of living. After all your house should be paid for so you don’t need 30% and if you are not saving for retirement you don’t need another 30% of your net income.

Check out the government’s average life expectancy (~75 for males and ~81 females) and you will be a bit overly optimistic to assume that you medical science will keep you alive for another 20 to 25 years.

The entire myth about the CPP running out of money is a bit of carry over myth from the US where social security is on rocky ground. We have been assured that the CPP fund has enough money to keep going.

So remember to take any ‘advice’ from someone selling you a mutual fund or other product with a grain of salt. After all they are just trying to earn a living by making you work longer than you need.

A blog about early retirement and happiness