Thinking about retirement but feeling short on funds? You’re definitely not alone in that. A recent survey from CPP Investments found that a staggering 59% of Canadians are anxious about managing their retirement savings.
Moreover, another study revealed that almost half of respondents are concerned about whether their savings will actually last through retirement. This issue weighs heavily on many Canadians, who feel their income just won’t suffice during their later years.
Take Darren, for example. At 65, he earns $70,000 annually and has saved $500,000 in cash. He’s eager to retire, but he realizes that making that dream a reality is going to take some creativity.
Typically, experts suggest that people need around 60% to 80% of their pre-retirement income to maintain their lifestyle in retirement. For Darren, that translates to roughly $4,667 per month.
Darren thinks he can manage on less. He has no debts, lives modestly, is generally healthy, and will receive almost $1,700 monthly from Old Age Security (OAS) and the Canada Pension Plan (CPP). He plans to add about $2,000 each month from his savings to make his retirement comfortable.
The tricky part is figuring out where that additional $2,000 will come from. According to the 4% rule, his $500,000 would yield about $1,667 monthly, which, as you can see, falls short. So, he might need to look into some options.
If Darren can extend his working years, that could be beneficial. Recent Canadian data shows that more older individuals are postponing retirement, either voluntarily or out of necessity. In 2023, around 15% of those aged 65 and older will still be part of the workforce, hitting a record high. While this isn’t everyone’s first choice, working longer could lessen the burden on his savings.
Also, making the most of retirement account contributions could prove advantageous, especially if his employer matches those contributions. Generally, employer matching falls between 3% and 7% of an employee’s salary. In 2025, Canadians will be able to contribute 18% of their income to an RRSP, capped at $32,490.
If Darren’s employer offers a group RRSP, his savings could effectively double. Additionally, a Tax-Free Savings Account (TFSA) could provide him with a means for tax-free growth on his savings. An integrated account can really boost retirement savings over time, especially if he invests consistently during his final working years and capitalizes on employer contributions.
Extending his work life could also increase his government benefits, as both OAS and CPP offer higher monthly incomes for those who wait to make their claims. If Darren delays his OAS, he could see payments increase by 0.6% per month, or 7.2% yearly, potentially up to 36% more by age 70.
Similarly, delaying CPP benefits could yield an increase of 0.7% monthly, accumulating to 8.4% annually, with possible increases up to 42% for those who wait until 70.
Instead of starting to withdraw from retirement savings gradually, another tactic could be to take a portion of those savings and invest the remainder in income-generating assets. This approach allows for keeping funds fully invested while still receiving income. But this method does come with its own pros and cons.
For example, if Darren withdraws $2,000 each month, he would need a 4.8% annual yield to sustain his savings. The safest way to achieve this is through government bonds, but they typically yield much less and might not keep pace with inflation. On the other hand, there are higher-yield options, like Canadian dividend stocks, which can yield up to 4.5%, albeit with added risks and volatility.
A more balanced strategy might involve seeking reasonable investment returns while also dipping into savings. A high-interest savings account could help cover the gap. This would allow Darren to keep more of his funds invested, accept slightly lower yields, and adjust his withdrawals according to the cost of living and inflation. Research indicates that a safer withdrawal rate for new retirees in Canada is around 3.7%.
Another reasonable path might be to aim for a lower yield while gradually using his retirement savings to fill in any financial gaps.
If full-time work isn’t feasible, Darren could think about cutting back hours or exploring options like freelancing, consulting, tutoring, or picking up part-time work somewhere local.
Even working just a few hours could significantly alleviate his financial needs. Bringing in even $1,000 monthly could substantially lessen the amount needed from savings.
In this scenario, Darren might be able to avoid dipping into his savings entirely and rely on his income, OAS, CPP, and investment returns. That way, by the time he officially retires, his investment portfolio could have grown through appreciation and reduced reliance on withdrawals.
Additionally, Darren could tap into his home equity to address any funding gaps. With property ownership, there are ways to extract cash, such as:
- selling and downsizing
- moving to a more affordable location
- renting out a room or part of the house
If these options don’t work for him, Darren might look into a reverse mortgage. This allows homeowners over 55 to turn part of their equity into cash, repaid only when they sell the home or pass away. That said, it’s essential to consider the risks, such as reduced equity and potentially higher interest rates.
This article is for information only and should not be construed as advice. PROVIDED WITHOUT WARRANTY OF ANY KIND.
