John and Jane Smith, both age 25, came in to see me the other day and were wanting my advice on how to get a million dollars each by retirement by contributing monthly into a RRSP. They always had this number in their head as what they thought would be a good number for a comfortable retirement. They were both unsure of how much money they would need during their golden years, but were curious as to how exactly a million dollars could fund their retirement. They both finished university 2 years ago and have been working full time since. Neither of them have pension plans through their work, and both of them expect to live until age 95 as there are no patterns of family illness or disease on either side. John figured he would like to work until age 65 as he found that reasonable considering he enjoys his work. Jane figured she would only like to work until age 60, as she does not enjoy work as much and feels she can live more frugally in retirement compared to John. John is comfortable being an aggressive investor based on his high risk tolerance, so we will assume an 8% rate of return over his accumulation years. Jane is more conservative than John and will have a balanced portfolio based on her risk tolerance, and we will assume a 6% rate of return for her accumulation years. During the payout phase (retirement) they would be a lot more conservative, and so we will assume a 3% rate of return for both during those years.
How to get the million dollars?
John needs to start contributing $284.55 to his RRSP at the start of each month for the next 40 years until he turns 65, assuming an 8% rate of return. Jane needs to start contributing $698.41 to her RRSP for the next 35 years until she turns 60, assuming an average 6% rate of return. Both of these ways will have their RRSP’s grow into $1 million. Because Jane wants to work for 5 less years and her rate of return is less based on her risk tolerance, is why she has to contribute much more than John every month into her account. Both John and Jane were comfortable with those projections and with how to achieve them.
How will their million dollars payout during retirement?
John retires at age 65 and expects to live to age 95, which will mean his million dollars will have to last 30 years. If he takes out monthly amounts and the account is earning a 3% rate of return during those years, he can then expect to withdraw $4205.52/month or $50,466.24/year until age 95. Jane retires 5 years earlier, but still expects to live to age 95, so her million dollars will have to last 35 years. Her monthly amount she would receive would garner her $3838.90 or $46,066.80/year. Both of these methods would leave them with zero dollars at the age of 95. This does not take into account the extra retirement income they would be receiving from Canada Pension Plan and Old Age Security which would be approximately an additional $20,000/year assuming they both wait to withdraw CPP at age 65. Both were happy to hear those kind of numbers and were excited to start saving to reach their million dollar dream.
***This is merely an isolated example of how a specific couple can earn $1 million for retirement, and how it would pay out during those years. Everybody is different in how much they can afford to save, need to save, or want to save, and each individual is different in how much is needed/wanted to live off of during retirement. There are many more factors to also consider when saving for those golden years that an experienced financial advisor can help you with. If you want a personalized retirement plan created for you, then please feel free to contact Marty or Alvin at Metz Financial today.
Happy Saving!
-Marty Metz
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