Case Study: Retirement Planning

By Melanie

Case Study: Save early to ensure the retirement you deserve.

It's easy to put off saving for your retirement, but starting early is the best thing you can do. As a first step, it's important to figure out how much is reasonable to save, and where to invest your savings.

Take John and Jane's story for example. At 25, Jane knew she should save for her retirement, but she faced lots of demands on her income--rent, entertainment and car payments.

Still, Jane decides to contribute $1,000 to her RRSP each year. Jane had no idea if this would be enough for her retirement, but through her career she continued to make these annual deposits at the bank.

Fast forward to age 65 and Jane has enjoyed a long career and a marriage to John. They live comfortably on $7,000 a month. They have no children and live in a condo, with the mortgage paid off, thanks to some extra savings from Jane. She now earns $60,000 per year, taking home $40,000 after taxes and payroll deductions, while John earns $75,000 and takes home $50,000 after taxes and paying government contributions.

John worked in the building trades and has no pension, but he managed to save $100,000 in an RRSP. His RRSPs can expect to pay him $3,000 per year after tax. In addition John could receive up to $1,800 per month from the government and after paying taxes he will get up to $18,000 each year, indexed to inflation.

Jane also does not have an employer-provided pension, but will receive government pensions similar to John. Her RRSP is worth $125,000, after 40 years of contributing $1,000 annually.

Jane can draw down her RRSPs each month, hoping to pay herself $500 per month before tax, which will work out to about $400 per month after tax.

John and Jane can expect to receive after-tax income of $44,000 per year or $3,700 per month. This is a little less than 50 percent of their income before retirement.

To improve their retirement income, John and Jane either have to cut back their standard of living, or work longer. If they both worked until age 70 for the same money, then their after-tax retirement income could increase to $6,000 per month, thanks to increases in government pensions after age 65 and being able to save more while working the extra five years.

Could John and Jane have known that their savings plans were not adequate to maintain the same incomes after retirement? If they had joined MFHA and used our retirement readiness calculator, they could have seen the results of their savings plans and made different decisions to increase their retirement income. John and Jane would have learned that to match their pre-retirement income, they would have had to accumulate $1.5 million in RRSPs. Their annual savings would have had to be not just $1,750 per year but close to $12,000 per year.

Of course, most people can live quite well on less than their pre-retirement income. But even being able to live on 50 percent of their pre-retirement income would have required annual savings of $6,000 each year.

Our advice would have been to consider other options to investing in an RRSPs from the bank, considering the fees they charge on their clients' investments. We would also have advised John and Jane to reinvest their tax refunds from contributing to RRSPs, which could have generated an additional $100,000 by the time they retired.

Committing to a savings strategy for retirement is essential, but remember it's important to adapt your strategy over time to accommodate lifestyle changes such as getting married, buying real estate, and raising children. John and Jane could have re-run our retirement readiness calculator with "what if" scenarios to understand how lifestyle changes can impact planning for retirement.

Join MFHA for a small fee and take advantage of our calculators and advice to be better prepared for all eventualities.