Let’s play a game of Necessity Tetris (Retirement Income Edition). Your screen is the amount of monthly income you’d like to have in retirement, and the tetrominos (yes, I looked it up) are the various sources of income you’re counting on to appear as a result of your hard work, diligent saving, employee benefits, and government assistance.
You are an average Canadian, with average earnings, average savings, and – likely – an average spouse. You’re planning on retiring at 65, and you’re both old enough that none of the recent changes pushing the “suggested” age of retirement to 67 affect you (that means you’re 56, for those of you too frustrated by the Service Canada website to figure it out.)
First, let’s figure out the size of the screen. How much money do you need to keep body and soul together? That is, what’s the minimum income you need to cover essentials like food, housing, clothing, and other necessities? (Let’s assume you own your home, your mortgage is paid, and you enjoy food but don’t go crazy at the grocery store with the filet mignon, etc.)
Would $3,000 a month make you comfortable? $5,000? Set that number as your target and get ready…the income blocks are coming (I’m going somewhere with this, I promise.)
The first block to fall is your Canada Pension Plan entitlement. The average monthly benefit right now is $602.86. The next block that falls is your Old Age Security payment of $550.99. That was easy, wasn’t it? Well, for the “average Canadian” it was, anyway.
If you’re one of the 4.4 million Canadians with a defined benefit plan, the next block will be fairly easy for you, too, since all you should have to do is pull out your pension statement, draw your finger across the line, and see your monthly benefit amount conveniently printed out for you.
Now we’re on to the tougher blocks, the ones that don’t quite fit so easily into place, and – Tetris metaphor or not – aren’t as neatly defined as the CPP, OAS, and DB plan blocks that came before. You might have some money in a defined contribution plan at work, an RRSP nest egg that you’ve saved up over the years, and a burgeoning TFSA account that seems small by comparison. You probably have a spouse with an equally spread out set of accounts. Turning them into reliable and sustainable monthly income is a post (or book) all by itself, which is why we’re playing this game in the first place.
As a couple of average Canadians, you’re expecting $1,153.85 each in government benefits every month, and whatever your defined benefit pension will pay you if you have one. Do the blocks fill up the screen? Is that enough to keep you warm, fed, clothed, and reasonably comfortable? What’s missing? This is the block you need to find – the income that you to create out of the carefully saved collection of account balances in your RRSP, TFSA, LIRA, and defined contribution plan at work.
Now, as I oh-so-casually mentioned earlier, calculating how much lifetime income you can sustainably withdraw from a basket of investments with different withdrawal rules and tax treatments is that weirdly shaped tetromino that seems like it won’t fit anywhere on the Tetris screen and takes some fine maneuvering and finessing to navigate into position, which isn’t the point of this post.
So that means that since we’re not calculating the income from your investments, the much longed for point of this post is must be this: consider an annuity.
I know what you’re thinking, believe me I do, and I’d love to hear your thoughts on annuities in the comments, because – even more than mutual funds in recent years – annuities are the red-headed stepchild of the financial product family: unloved, maligned, and generally scoffed at.
The thing about annuities in this: If you know how much income you have to receive to keep yourself in food, shelter, and (hopefully) clothes, and your guaranteed income from government programs will fall short, what are the compelling reasons against buying a financial product that will pay you a guaranteed stream of lifetime income sufficient to cover those necessary expenses?
If you’re looking at your savings and wonder how you’ll turn them into income, want to be utterly confident that you’ll be able to eat, wear clothes, and sleep comfortably in retirement, using some of your retirement savings to purchase an annuity might be for you. Once purchased, you can use the remainder of your savings to keep you in travel, better food, and – of course – video games.
Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario. She and her husband have three kids under five, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough. She takes her clients seriously, but not much else.