I surprised myself with this one.
I’m going to show you how you can generate a $60,000 income in retirement for the rest of your life with $124,430 less savings using the Tax Free Savings Account.
Scenario 1 is the traditional scenario of a person that only invests in RRSPs. Scenario 2 is what we’ll explain in the remainder of this email.
|Scenario 1||Scenario 2|
|RRSP/Pension Savings $736,100||RRSP Pension Savings $329,030|
|TFSA Savings $282,640|
|Total Savings – $611,670|
Let’s get into the numbers of how this works.
Step 1- Begin with your Government Benefits.
With the Canada Pension Plan (CPP)- The maximum benefit for a person retiring at age 65 in 2019 is $1,154.58/month or $13,854.96/year.
Old Age Security begins at age 65 for everyone earning less than $77,580 net income in retirement. The maximum benefit is $601/month or $7,212/year.
This provides you an annual income of $21,066.96/year.
Step 2- Set-up income stream with Registered Assets (RRSPs & Pensions)
To generate the last $38,900/year for your retirement, you will need $736,100 in registered savings. You can do this with any combination of RRSP and Pension savings.
Now I want you imagine…
That the TFSA was available to you your whole life, and you were able to contribute the maximum from age 40 to 65. You would generate approximately $282,640 in your TFSA at age 65.
And that would give you $14,909/year of after tax income.
Now you only need to cover $12,321/year (after taxes) in RRSP or Pension money which is only $329,030.
That’s how you need $124,430 in savings to get the same retirement income.
Crazy I know!
If you want to get a detailed tax and retirement plan, we’ve got a couple spaces free this week to chat to see if this what works for you: http://zabafinancialgroup.ca/retirement-session/
P.S. I had to make a few assumptions when running these calculations. Retirement Age: 65, Life Expectancy: 90, Inflation: 1.5%, Rate of Return: 4%, Maximum Government Benefits (CPP & OAS), Average taxes- 30%.