Last week, I shared a couple of retirement success stories about people with pensions. Unfortunately, less than half of the current workforce in Canada belongs to a pension. Let’s take a look at a couple of other successful retirees that retired without a pension plan.
Dave and Christine are both 65. Christine has already been retired for a year and Dave is ready to retire on his 65th birthday. Dave feels that he could have retired much sooner but he really likes his job and especially the people he works with. Dave admits that not only would he miss work but he might get bored with too much time. He’s not much of a traveler and his hobbies are pretty simple. Christine agrees but would like to travel a bit, maybe one nice holiday per year.
Neither Dave nor Christine have a pension but they also feel they are not big spenders. They are debt free and their two kids are grown up and doing very well financially on their own. Dave figures they only need about $3000 per month to live but that does not include any traveling.
The good news is retirement at 65 means Dave and Christine with both qualify for Canada Pension Plan and Old Age Security. Combined, that will give them about $2600 per month of after tax income, which is only $400 per month short of what they need to live on.
After they paid off their mortgage 10 years ago, Dave and Christine have aggressively been putting money into their RRSPs. They have been very careful to make sure their RRSP balances are evenly split. As a result, they each have about $125,000 in their RRSPs.
If they each convert their RRSPs to a RRIF at 65, each would get a minimum of $5500 per month giving them an additional after tax income of $4900 each. Their total combined after tax income would be about $3400 per month exceeding their target lifestyle goal by $400 per month.
Christine felt that the next five years would be their best five years of retirement and would like to do some traveling in that time. Christine wanted to know if they took out an additional $5000 each out of their RRSPs to pay for a trip or two, how that might affect the longevity of their portfolios.
Based on some really conservative return assumptions, taking out an extra $5000 per year for five years from each of their RRSPs (bringing their total withdrawals to $10,500 each) would deplete some of the capital but they still would not run out of money. In fact, spending more of their RRSPs simply means they will give less money to their children who probably don’t need it in the first place.
My two cents
Dave and Christine are examples of a successful retirement with perfect income splitting. Even with some significant RRSP withdrawals to supplement their retirement income, they both manage to stay in the lowest marginal tax bracket by keeping their individual incomes under $37,885. One of the most tax efficient strategies for retired couples is to split their incomes so they each make $37,000 of income. Together, they will net about $5000 per month of after tax income. If you can live on $5000 of after tax income in retirement, then this strategy is perfect.
Although Dave and Christine do not have pensions, their success lies in the fact they have a reasonable cost of living because they are retiring debt free and dependent free. It also helps that Dave wanted to work to age 65 instead of feeling the need to retire earlier. Early retirement is not all that it is cracked up to be especially if you like what you do for work. Retirement doesn’t have to be about saving millions of dollars. If you don’t believe that, just ask Dave and Christine.