You have prepared for many aspects of retirement but you have one nagging concern: how much will you be able to withdraw from your non-registered investments each year and still have enough to last as long as you do ó and possibly leave a legacy? To help you sort through the options, Knowledge Bureau has built the Fixed vs Variable Income Calculator, part of the Knowledge Bureau's Client Relationship Toolkit.
Generally, you are well-prepared for retirement: you have several sources of cash flow; you know how much you need to cover daily costs; and you know how much is coming in each month from fixed income sources such as Canada Pension Plan (CPP), Old-Age Security (OAS) and your RRIF. But what it comes to your savings, you are stymied. If you withdraw too much each year, you're liable to run out of money; if you take too little, you may not be able to meet your lifestyle goals.
There are three options to consider:
Using the using the Fixed vs Variable Income Calculator, letís examine the three options using the calculatorís defaults:
$500,000 in mutual or segregated funds (income will be taxed and the adjusted cost base (ACB) of the funds will be reduced);)
life expectancy 20 years from now;
45% marginal tax rate;
returns on your investments of 1%, 2.5%, 3.5% in years one, two and three, respectively, then 4% annually thereafter.
Option 1: Fixed income: Optimize for capital preservation
Given the above rate of returns and you withdraw only the income earned by your investments, you can withdraw an annual cash amount of $14,518 (before taxes, indexed at 2.7% for inflation) for 20 years. At the end of that time, your nest egg will be $500,049.
Option 2: Variable income: Use 1% of capital annually
If you withdraw cash earned by your investments at the above rate plus 1% of capital a year, at the end of 20 years, you will still have $408,953.
Option 3: Fixed Income: Optimize for Income
If you want to maximize withdrawals to use up all your capital, you can withdraw an annual amount of $27,873 (before taxes, indexed). At the end of 20 years, your nest egg will be depleted to $47.
The calculator allows you to enter your own beginning capital, marginal tax rate, inflation adjustment, life expectancy and expected rates of return. You can also look at RRSP/RRIF investments (income is not taxed but withdrawals are) or other investments (such as GICs) where the income is taxed but no tax liability accrues due to ACB adjustments.
If you've not taken a look at this powerful calculator, sign up for a free trial today.