Necessity Tetris: Retirement Income Edition

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.)

Related: An easy way to determine your CPP benefits

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.

Related: Why I save outside of my defined benefit pension

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.

Related: 5 misconceptions about retirement planning

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.

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  1. Dave on December 13, 2013 at 7:54 am

    You have asked for comments on annuities. There are several reasons why I have rejected them – at present – as part of my retirement plan. First,the rate they pay is exceedingly low, perhaps a reflection of the sad experiences of some companies offering guaranteed income products a few years ago.

    Second, a reasonably savvy person can get equal or better rates of return with little or no risk and little time or effort. The annuity returns I looked at were generally less than 3%. Some 5 year GICs come close to this and many quality companies offer dividends in excess of 3% (all major Canadian banks are in the 4% range).

    Thirdly, if you die an early death the annuity company gets a windfall, not your family.

    Fourth, there is no inflation protection. You can get riders for premature death and/or inflation protection, but there is an additional cost for this. Fifth, the
    general view is that interest rates are at alow rate which is likely to increase in the future. This presumably will increase GIC rates as well as annuity payments. If this is true then a better bet is to invest to GIC’s and secure investments until rates and inflation increase and lock in an annuity at that time.

    • Robert on December 13, 2013 at 10:21 am

      Dave, at age 60 it is easy to get over 6% on an annuity and it rises every year after – over 8% by 70.

  2. Money Saving on December 13, 2013 at 8:52 am

    With annuities, they go away after you die.

    With stocks and bonds, I can pass these onto my kids. Also, any capital gains are zapped, so if I buy a stock at $10 when I’m 18 and it goes to $500 when I die at 80, my kids get this (along with any dividends recurring) for free without having to pay any taxes. It’s like they bought the stock at $500.

    If you don’t have kids, then I agree they could be a good bet. If you’re looking to leave them some inheritance, then I’d consider all of your options.

    • Potato on December 14, 2013 at 1:11 pm

      While I don’t like annuities myself for the same legacy reason, you’re wrong on the capital gains taxes. If you buy a stock at $10 when 18 and it’s $500 when you die at 80, your estate must pay the taxes on the $490 in capital gains before the remainder is passed to your children. It’s only registered charities that can take gifts of stocks without anyone having to pay capital gains.

  3. Robert on December 13, 2013 at 10:13 am

    I have mixed feelings about annuities. Since they are a life insurance product the older you are the more tempting the payouts become. If you wait long enough it becomes hard not to ditch your other investments. Being male that day will come sooner for me.

    There is a point to be made for waiting until interest rates rise, but market timing on any financial product is always mostly about luck.

    Personally I think if I were to liquidate then buy annuities, the amount would have to exceed my current needs. One needs a buffer against future inflation and tax changes.

    What I do find useful about annuities is they provide a benchmark that is easily checked against anything I do without one. For this reason I check the rates regularly, although mysteriously few are published for easy access.

    BTW: There are inequities built into CPP that may change from under us in the future even after we start collecting. For example, the plan makes single people subsidize the married. These sorts of things can be changed in the future if a court decides the discrimination is illegal.

  4. Dave on December 13, 2013 at 2:56 pm

    @Moneysaving – not quite, but close. Any income made within an estate after death is taxable. So if you pass on div stocks to your estate, any div income generated after you pass away is taxable in the hands of the estate. This is why a TFSA is so valuable as far as estate planning.

  5. D monette on February 19, 2016 at 4:04 pm

    I am surprised that you would even suggest an annuity.
    You, who were a banker, should know better.

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