Figuring out whether you can afford to retire now

While almost everyone looks forward to retirement and an end to the day-to-day demands of working life, there’s also no question but that the decision to give up a regular paycheque is a stressful one. Particularly when the cost of life’s necessities – groceries, rent, mortgage interest payments – seems to be continually increasing, individuals wanting to retire have to wonder whether they can actually afford to do so, or whether it would be foolhardy, in the current economic realities, to walk away from a reliable, regular paycheque.

The first financial task faced by anyone contemplating retirement in the very near future is to determine what financial resources they will have to live on, and whether those resources are sufficient. And, while no one can accurately predict where inflation or interest rates are going, it is nonetheless possible to formulate “best case” and “worst case” scenarios, and to test one’s retirement income expectations against both.

For most Canadians, income in retirement will come from three sources. The first two sources – a Canada Pension Plan (CPP) retirement benefit and Old Age Security (OAS) payments – will be received by nearly all retirees. The fortunate minority who are members of an employer-sponsored registered pension plan will also receive a monthly benefit from that plan. For the majority of Canadian retirees who will not receive a pension from their employer, the balance of their income in retirement (after CPP and OAS) will come from private retirement savings accumulated in registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and tax-free savings accounts (TFSAs). The real question for most Canadians is how to determine the amount of annual after-tax income which all those sources of income will generate during their retirement years, and that’s not a simple calculation.

Money can be withdrawn from an RRSP, an RRIF, or a TFSA at any age, a CPP retirement pension can start anytime from age 60 to age 70, and Old Age Security benefits can be received as early as age 65 or as late as age 70. For both CPP and OAS, benefits will rise with each month that receipt of such benefits is deferred. As well, income from the different types of retirement income may be subject to different tax treatment, meaning that the after-tax amount received on $100 of income may vary widely, depending on the nature and source of that income.

The number of factors to consider and, especially, the complexity which results from the interaction of those factors, could reasonably lead the average Canadian to conclude that it’s just not possible to make an accurate determination of the best way to structure their income in retirement in order to ensure a reasonable income throughout their retirement years. But help is at hand – and it’s free!

That help is in the form of two online retirement planners which are available on the Government of Canada website. The first of those is a new “Retirement Hub” webpage which can be found at Learn and plan for your retirement – Retirement Hub – Canada.ca. While the Retirement Hub does include financial calculations, it goes beyond finances to provide more broad-based information on transitioning to and living in retirement.

For purely financial calculations, the federal government provides a Retirement Income Calculator. That Calculator is included in the Retirement Hub webpage, but can also be found in a stand-alone version at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

Using the Retirement Income Calculator, individual Canadian taxpayers can enter their personal data, including their date of birth, gender, and planned age of retirement, without the need to provide any personal identifying information. The user is then asked to provide information on income amounts which will be received from various sources, including any employer pension and Canada Pension Plan amounts and the age at which the user plans to begin receiving such income. Information is requested on the user’s period of residency in Canada, in order to determine whether he or she will be eligible to receive Old Age Security benefits and the amount of OAS benefits which will be provided at different ages. The calculator also allows the user to input the total amount of savings accumulated to date. Finally, information is requested on any other sources of income which will be available during retirement.

Using that data, the calculator estimates the amount of income which will be available to the individual from each source during each year of his or her retirement and generates a bar graph and a table showing those income amounts.

The real benefit of the calculator, however, lies in the individual’s ability to vary the inputs – to create “what-if” scenarios in order to determine the effect any changes made will have on retirement income at various ages. Users can change the age at which they choose to receive government-sponsored retirement benefits like CPP and OAS, or can specify a different rate of return (pre- or post-retirement) earned on retirement savings. They can also change the period of time (i.e., life expectancy) over which retirement income will be spread. That way, the user can obtain answers to frequently asked questions like the following:

• How much more will I receive if I accelerate – or delay – receipt of Canada Pension Plan or Old Age Security benefits, or both, for one, two, or more years?
• What if I work an additional year or two after age 65 before starting RRSP withdrawals?
• What if I earn income from part-time employment during retirement?
• What if I choose to begin receiving CPP and OAS as soon as I am eligible, but defer making RRSP withdrawals?
• What if I live longer than the average life expectancy?

For each of these what-if fact scenarios, the calculator will determine the effect that particular change will have on the amount of income receivable from each different retirement income source, and will provide a summary of income for each year of retirement from all such sources under each fact scenario created by the user.

There are, of course, some factors which can’t be incorporated into any calculator because they cannot be predicted or planned for. No one can predict how long their retirement will last (although the Calculator does project retirement income based on average life expectancy for individuals of the age and gender of the user). Similarly, it’s never possible to know what investment returns will be earned on retirement savings during retirement, or what the rate of inflation will be. The calculator’s ability to estimate future income data based on a number of different fact patterns does, however, allow users to create retirement income projections under both “best-case” and “worst-case” retirement income scenarios. And, based on those income projections, an individual can determine whether retirement in the near future is financially feasible.