Unless you win the lottery or participate in a defined-benefit pension plan, it is a challenge to save enough to retire early. Consider Joe, a middle-income 30-year-old who plans to save 6 per cent of pay in his RRSP for the next 30 years.
At age 60, the amount of inflation-protected income Joe can expect from his RRSP and CPP pension combined is only 24 per cent of his final average pay. Final average pay is the average earnings over the last five years before retirement.
Assuming Joe has paid off his mortgage and no longer has child-raising expenses by age 60, his target income should be 50 per cent of his final average pay if he wants to maintain the same standard of living in retirement. (Note that all percentages shown here exclude the OAS pension.)
Percentage of average pay in last
five years before retirement
Income target: 50%
67%
Federal PSPP plus CPP
43
RRSP (18%) plus CPP
33
RRSP (12%) plus CPP
24
RRSP (6%) plus CPP
THE GLOBE AND MAIL, SOURCE:
AUTHOR'S CALCULATIONS
Percentage of average pay in last
five years before retirement
Income target: 50%
67%
Federal PSPP plus CPP
43
RRSP (18%) plus CPP
33
RRSP (12%) plus CPP
24
RRSP (6%) plus CPP
THE GLOBE AND MAIL, SOURCE: AUTHOR'S CALCULATIONS
Percentage of average pay in last
five years before retirement
Income target: 50%
67%
Federal PSPP plus CPP
43
RRSP (18%) plus CPP
33
RRSP (12%) plus CPP
24
RRSP (6%) plus CPP
THE GLOBE AND MAIL, SOURCE: AUTHOR'S CALCULATIONS
Even if Joe had contributed three times as much to his RRSP – 18 per cent of pay a year for 30 years – he would still fall short of that 50-per-cent income target. Moreover, he would have used up practically all of his RRSP contribution room in the process.
Retiring early is difficult partly because it is in the public interest for Canadians to stay at work beyond age 60. The ratio of workers to retirees was as high as six to one in the 1960s but is slowly shrinking. It is projected to bottom out at two to one in a few decades, even with high levels of immigration.
In spite of the bleak demographic trend, the federal government – and other public-sector plans – still provide powerful incentives to its own employees to retire early. A mid-level civil servant in the federal Public Service Pension Plan (PSPP) with 30 years of service can retire at age 60 with income, including CPP, of 67 per cent of final average pay, which is well in excess of the income target mentioned above. The PSPP member would contribute about 9 per cent of pay to achieve this result.
It should be noted that Joe’s RRSP income is subject to certain risks. His RRSP income is enough to last until age 95, but there is still a 20-per-cent chance he will live longer than that. Also, the assumed investment return on the RRSP of 5.7 per cent a year before investment fees – and 5 per cent a year after retirement – is optimistic; so is the long-term inflation assumption of 2 per cent.
If actual investment or inflation experience is worse, it would negatively affect RRSP income. The assumptions for investment return, price inflation and general wage inflation that were used in these projections were taken from the 2021 CPP Actuarial Report.
On the other hand, the RRSP income has not been optimized. OAS pension is ignored because the public-sector pension plans tend to ignore it. Also, it is assumed that Joe starts his CPP pension as soon as possible, which is a common strategy but is not recommended. A better strategy for RRSP savers will be shown in next week’s chart.
Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.
