To the Editor:
Each week you publish a financial advice column sponsored by one of our well respected local financial institutions, and in the main the column provides good, well balanced advice which is of benefit to all readers. In last weeks article entitled “Planning to Live Longer” however, there are some issues which probably need to be explored if not corrected.
The scenario in the article is a woman of 65 who “needs” to withdraw $3,000 per month from her Registered Investment Income Fund (RIF) giving her an income of $36,000 per year, and states that in order to achieve this she, depending on how long she lives, would need to have between $375, 425 and $543,160 in the fund. The mathematics is indisputably correct – the concept (which sits behind the scaremongering of most RRSP planners advice) is however is fatally flawed. These sorts of figures make people throw their hands up in despair as they feel they cannot achieve this without paying huge amounts into their RRSPs (and on the way pay significant commissions to their financial “advisors”).
Most Canadian pensioners can expect to receive between $11,000 and $16,000 each year through CPP and OAS. For a couple, this means between $22,000 and $32,000 per year. During their working life the average income of this couple would have been around $60,000 per year, and from this they would have had to pay around 30 per cent taxes, incur the cost of travelling to and from work, run two vehicles, feed and educate their children, pay off their mortgage and contribute into their RRSPs.
This would have cut their disposable income to less than $30,000 per year – which ironically is what they can to expect from CPP and OAS, which they also will not have to pay significant taxes on. Data from Statistics Canada indicates that this level of income in itself is sufficient to live a reasonably comfortable but not extravagant lifestyle even if you are paying rent on an apartment. If you own your own home and are not paying rent, which many seniors are, then you would have around $7,000 per year more to spend.
Quite a few people will have either a company pension or have some money invested in RRSPs. and then the situation becomes rosier. The current thinking is that if your RIF is earning a fairly conservative return of around four per cent per year and inflation is running around two per cent per year, to make the fund last to the average life expectancy of 85, you can afford to withdraw around six per cent per year. This would supplement your already sustainable income by around $6,000 per year if you only have $100,000 in RRSPs. If you then take into account the fact that at some point you will likely sell your home, say for $250,000, you would also then have a lump sum, which invested could potentially provide another $15,000 per year. This is significantly more than most couples would have had to spend throughout their working lives, and they will be incurring far fewer expenses.
As I approach retirement myself the whole concept of retirement planning had me worried, particularly in the light of articles such as last week`s advice column. I have researched this subject extensively in the last year in my own self interest and would recommend that any readers in a similar position invest $10 in the ``MoneySense Guide to Retiring wealthy” which is the best summary I have seen on this issue, and perhaps we can all rest easier in our beds.
Jim Bagley, Cawston