By Allan Norman, MSc, CFP, CIM on February 13, 2024
Estimated reading time: 6 minutes

How to model retirement income in Canada

By Allan Norman, MSc, CFP, CIM on February 13, 2024
Estimated reading time: 6 minutes

The risk of having too much money left when you die is real. Often realizing this comes too late in life. Here’s how to avoid that now.

Happy senior parents and their adult son having fun while greeting in the kitchen.

Image by Drazen Zigic on Freepik

Ask MoneySense

I am retired early at 58 years old. My wife is 56 years old. We live on a Christmas tree farm, which was paid for years ago.

I have a work pension, and my wife was bought out for her pension.

We have considerable RRSPs, farm income, and farm property. Where do we start to see how much we can spend a month? We need a plan. My wife will collect CPP when she’s 60, and I will collect CPP when I’m 65.

How do you cash in your RRSPs? Should you get GICs?

We’ve saved money all our lives, but how to you cash out now? We self-directed all our investments, but now what do we do?

We have questions but no answers. Where do you find someone to help you make a plan to spend, not save?

–Mike

Determining how much money you can spend in retirement

Mike, you may be surprised to learn that a lot of wealth builders have trouble flipping the switch to spend once they retire. They just can’t wrap their brains around it. I’m not sure if that’s the issue you’re asking about, or if you’re asking about the best way to access and maximize your wealth through retirement.

I bet you wouldn’t mind having a time machine to see into your future, enabling you to easily make good decisions today. Well, I don’t have time machine for you, but I may have the next best thing: a planning model and a process you can follow on your own or with a financial planner. Why don’t you give a planning model a try?

How to plan your retirement income in Canada

Start with a planning model by preparing your net worth statement, which lists all your assets and liabilities. Once completed, note the amount of liquid money you have for spending. That’s the money you have easy access to and can spend at any time, versus your non-liquid wealth, such as your home and farm.

Next, prepare your annual cash flow statement by itemizing the money coming in and money going out of your savings account and chequing account. If you haven’t done this before you may find it enlightening. Take note of where you are spending and how much for each item. Some expenses will be fixed, such as housing. And some will be variable, such as entertainment. At the end of the year, you should have a surplus or deficit. I’m guessing you will have a surplus.

Your next step will require access to good projection software, which many financial planners will have. But you can even use Excel or Google Sheets. Project your net worth and cash flow statements into the future to your assumed life expectancy. Be sure to take into account inflation, taxes, investment returns, and anything else you can think of that will impact your money.

This is what I think you are going to see: When you start your Canada Pension Plan (CPP) and Old Age Security (OAS), your income will increase giving you more money to spend each year. That’s even if you have a pension bridge benefit that drops off.

At age 72, your income will increase again because of forced registered retirement income fund (RRIF) withdrawals, giving you even more money to spend each year.

Do you understand what is happening at this point in your planning? As your health and energy levels are declining with age, the amount you have available to spend is increasing. What will happen to your income if you sell the farm and lose your farm income? Do you need the income from your farm? What would you do with the extra income? These answers will make an impact on how you use your retirement income.

When to do tax-planning strategies for retirement income

Here’s what I think: You may invest that extra money. And when you model it out, you will see your projected net worth ever increasing. Then, at your assumed death, you will probably pay a very large amount of tax and still leave someone a lot of money. You didn’t mention if you had children.

Mike, you are at risk of leaving too much money after you die, and it may not be until you reach age 70, 75 or 80 when you realize it. You could think, “I have all this money, and only so much time and energy left. If I had known, I would have done more.”

Lucky for you Mike, you are already thinking about it. Now, it is time for you to engage in some serious play and run some “what ifs” with the projection model you created. Experiment by finding the maximum you can spend each year until your deaths, and then do the same thing again but to the end of your expected health span, when you are too old to enjoy yourself.

When the money runs out in the model you created, find out the value of your house and farm. Would you sell these to support your retired lifestyle? How much money, if any, do you want to leave your beneficiaries? Play with a few different combinations to see what spending patterns are possible.

Don’t worry about how you will draw any funds, taxes or other planning strategies. Just get a good sense of what is possible for you.

Then you will know how much you can spend each year. It’s up to you to decide how you are going to spend or gift your money, which is easier said than done.

Don’t worry if you can’t identify future plans. Instead, make this year a good one, and do the same next year. If you string together a good year after another and after another, and so on, over your lifetime, you will have lived a full and rich life, with no regrets. Once you have a good sense of how you want to live in your retirement, that’s when you can apply tax and planning strategies.

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How to model out retirement income

Mike for some people, the risk of dying with too much money is all-too real. For all the emphasis Canadians place on investments and on tax and planning strategies, there’s very little on the important thing: maximizing life satisfaction.

Using the model as I have described will give you a glimpse into your future, so you can make confident spending decisions today. Updating the model annually will keep your assumptions honest, keep you on track and allow you to enjoy yourself without feeling guilty spending your money.

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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Comments Cancel reply

John Kincardine says:

February 19, 2024 at 4:15 pm

Very good article. I scrimped and saved till I retired. Now my wife and I are too tired to travel and enjoy everything we saved for. We should have enjoyed more while we could.

Reply
Ray says:

February 19, 2024 at 10:32 pm

Why the writer did not answer any of the questions posted by the reader?? In fact, the writer just said “Don’t worry about how you will draw any funds, taxes or other planning strategies.” I don’t see the reader mentioning how much money they have other than they have “considerable RRSP”, Why is the writer insisting the reader will leave too much money. Even if that is the case, there should still be a withdraw and planning strategy for their beneficiaries. Very odd article that did not address any of the legitimate questions.

Reply
Steve Farrell says:

February 24, 2024 at 2:33 pm

Allan,

Just wanted to say that your answer was very well written and explained many of the concerns we retirees have regarding lifestyle concerns and money management.

Steve F. C. P. A.

Reply