Retirement planning with gross incomes can be misleading

I met Mary at one of my Retirement Planning Workshops. Mary is divorced and has 2 adult children. She makes a gross income of $103,000 per year or $8583 per month. Her net pay is $4300 per month.

Mary is fiscally responsible. Her home is almost paid off as she only has 20 months of payments left at $1200 per month. She has $400,000 in RRSPs. Most of it is in a group RRSP plan through work with a healthy matching program. She went to see a financial advisor to see if she is in a position to retire in 5 years at age 63. The financial advisor said there was no way her RRSPs could replace $103,000 of income with her current RRSPs. The advisor sat down with Mary using an online financial calculator from Mackenzie Financial and told her she needed $1.7 million to replace 100% of her income. The advisors advice was to borrow money on a line of credit and invest it into a diversified growth portfolio.

What do I think if this advice?

Mary asked me what I thought of this advice. I had 20 minutes to show her some of my retirement planning math. Here’s what I did quickly:

Instead of looking at her gross income, let’s work some calculations on her net income. Mary is living off her net pay of $4300 per month. This is the amount she gets not just after tax but after deductions including her contributions to the group RRSP plan. If you think about it, she does not need to replace $103,000 gross but rather the $4300 per month net ($51,600 per year). Here’s a handy chart to illustrate the net income based on different gross incomes (for Albertans) – Gross vs Net Income Chart (2011) .

If we look at what it takes to create a $51,600 per year net income, she only needs about $67,000 per year gross income. If I use the same financial calculator, she only needs $1,000,000 to replace this income.

The mortgage will be paid off

In 20 months, Mary will have an extra $1200 per month. If you think about it, she is really living on $3100 per month (or $37,200 per year), which is the $4300 less the mortgage payment. On that basis, Mary needs $46,000 gross to create $37,000 net.

What about government benefits?

When Mary turns 63, she is eligible to collect $700 per month from Canada Pension Plan. She will also get $524 per month from Old Age Security at 65. Together this amounts to $15,000 of income. Mary asked me if she will be able to count of CPP and OAS. I said why would you not include government benefits in retirement planning? (you can read the article if you want to know why).

If we take this $15,000 of income and subtract it from $46,000, Mary really needs $31,000 per year from her RRSPs to achieve her target income goals.

Does Mary have enough?

Remember Mary has $400,000 in RRSPs. At a 5% projected growth rate, her RRSPs will be worth over $510,000 with growth and contributions. Using another Mackenzie Financial Calculator, assuming a $31,000 withdrawal assuming a 5% return, the $510,000 will last more than 25 years. If I inflate the income at 2% per year, the money only lasts 21 years.

Any way you look at it, the picture doesn’t look as bad as the advisor painted.

Why is leverage the answer?

Mary had a bad case of retirement anxiety because a financial advisor painted a pretty bleak picture with the message that she had to not only save more but she had to leverage to ensure that she would not have to live on Kraft Dinner and stale bread. I think the numbers show that Mary can maintain her current lifestyle into retirement and that’s all she wanted.

There’s something wrong if someone can’t retire with a paid off home and over $500,000 in RRSPs. Do you really need millions of dollars to retire happy?

I’d love to hear your thoughts on Mary’s situation. Did I miss anything? When it comes to simple retirement planning, am I totally out to lunch or is the advisor out to lunch?


  1. Art Ford

    I have recently, at age 64 gone through a similar exercise to what you did. Mary will potentially need to add the expense of income tax, since that was omitted from the formula, but it will be much less than she is now paying.

  2. Mike Holman

    That advice was good for the advisor’s assets and income. 🙂

    I know two cases where someone went to an advisor to invest their house downpayment (very short term) and the advisor wanted to buy 100% equity mutual funds and get this – DSC load.

  3. Richard Stooker

    Shouldn’t telling someone in their late 50s to go into debt to fund a growth portfolio for five years in the future at least borderline unethical? Am I wrong in believing that advisor was motivated by the commissions they would receive?

    I know you want to make the point about gross versus net income, but advising someone to buy growth stocks with borrowed money . . . stands out most to me. If she’d done so in late 2007 she’d still be in the hole, at least on US exchanges.

    As to the rest . . . I don’t people maintain their “current” lifestyles when they retire. They don’t have the expenses from the job, but they have the additional expenses of what they’ll do to stay busy all day. Even if it’s watch TV, that will mean a higher electric bill.

  4. Derrik Hubbard, CFP

    Thanks for your insights.

    I agree that gross income would be very misleading.

    I believe that it is better to do retirement planning based on retirement expenses rather than gross or net income which may or may not have any correlation to what is needed to sustain a retirement.

  5. George

    Jim Yih’s analysis is very good. Mary clearly has enough money to retire without borrowing money to invest. The financial advisor who provided this advise was thinking of his own commissions rather than Mary’s financial health. Taking unnecessary risk at Mary’s age is ridiculous.

  6. David

    What happened to the 60% rule…only need 60% of take home income?

    • Jim Yih

      The problem is it’s a rule of thumb. Not everyone can or should live on 60%, 70%, 50% or some arbitrary number.

      The best planning is personal and reflects everyone’s individual needs. Rules of thumb never give accuracy.

  7. Jennifer

    Thank you. A couple of additional things I always take into consideration: the daily transportation cost is generally lower, because the person won’t have the parking, fuel & “driving to work” insurance expenses. At 65 insurance costs often drop even more drastically.

  8. Geraldine Beauchamp

    I posted a question earlier, but it appears it was deleted. Would like to know if a retirement pensions earnings of $4577 per month is sufficient for my retirement. My home is paid off. I have a Rif fund of $139988 and a tfsa of $ 70,000 currently sitting in a savings account as I got out of the market in 2017 due some errors in converting my RRSP into a Rif . At that time, my RRSP had an amount of almost $ 165,000. I have since drawn it down in 4 Rif payments. What should I do? Sit on the savings or re-enter the stock market at age 75?

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