Ideally, you would not have to worry about investment risk in retirement. If you could draw the same income whether your portfolio achieved a 2-per-cent return or a 6-per-cent return, then you would be virtually immune from investment risk.
This is essentially true for those in the public sector, where defined-benefit pension plans prevail. While most private-sector workers are not so lucky, they can at least narrow the gap by taking their CPP and OAS pensions at a later age. This is shown in the chart below for a couple, both age 63, with $1-million in RRSPs and TFSAs.
How much does retirement income
depend on investment returns?
Year 1 income for a couple age 63 with
$1-million in investable assets
2%
annual return
3%
4%
5%
6%
$100K
$13K
$19K
50K
Defer CPP & OAS
Early Start for
CPP & OAS
Note: Returns are before fees of 0.6 per cent.
THE GLOBE AND MAIL, SOURCE: CALCULATIONS
USING CUSTOMIZED PERC AT PERC-PRO.CA
How much does retirement income
depend on investment returns?
Year 1 income for a couple age 63 with
$1-million in investable assets
2%
annual return
3%
4%
5%
6%
$100K
$13K
$19K
50K
Defer CPP & OAS
Early Start for
CPP & OAS
Note: Returns are before fees of 0.6 per cent.
THE GLOBE AND MAIL, SOURCE: CALCULATIONS
USING CUSTOMIZED PERC AT PERC-PRO.CA
How much does retirement income depend on investment returns?
Year 1 income for a couple age 63 with $1-million in investable assets
2%
annual return
3%
4%
5%
6%
$100K
$13K
$19K
50K
Defer CPP & OAS
Early Start for CPP & OAS
Note: Returns are before fees of 0.6 per cent.
THE GLOBE AND MAIL, SOURCE: CALCULATIONS USING CUSTOMIZED PERC AT PERC-PRO.CA
The five bars on the left side of the chart show the “Defer Scenario,” meaning that CPP and OAS pensions start at age 70. Their total income in Year 1 of retirement is just $13,000 less if annual investment returns are 2 per cent compared with returns of 6 per cent. (Note income is projected to rise in future years with inflation.) The gap is small because the pensions are deferred. As a result, the couple draws down their personal savings more quickly in their early retirement years, which reduces their exposure to poor investment returns.
Now look at the right side of the chart, the “Early Start Scenario,” when CPP and OAP pensions are started at age 63. The income gap between good (6 per cent) and poor (2 per cent) investment returns has grown to over $19,000. Moreover, the amount of income the couple can draw safely is substantially lower across the board.
In fact, the couple can draw as much income with investment returns of 3 per cent under the Defer Scenario as with returns of 5 per cent under the Early Start Scenario, and they can do so with less risk. (This chart was produced using a customized version of PERC (Personal Enhanced Retirement Calculator) that is accessible at perc-pro.ca. It was assumed that income would have to last until age 95.)
Frederick Vettese is a former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
