Wants to retire early

Question: I am 36 years old and would like to retire (or semi-retire) at age 55. I have a very good start as far as my own RRSP funds and that which is contained in my employee Group RRSP. Could you give me a rough idea as to the amount of RRSP funds that I would need to accumulate in the next 20 years to draw an annual salary of $50,000. I realize that there are many variables (interest rates etc.) but if I were to retire today, there must be numbers that are used by financial advisors today to determine annual cash flow from RRIFs. I would like to know if I’m in the ball park because at current interest rates I estimate that I’ll have approximately $880,000 in my RRSP at age 57. Is this enough? I’m married and my wife works and has a separate pension plan so we can leave that end of the equation out.

Gordon Pape answer: Interesting question, with a lot of variables. Let’s use the $880,000 figure you mention, even though you won’t have it until a couple of years after your target date of 55. Many years ago, I was involved in the development of a retirement planning software program. I plugged various scenarios into that program and here’s wt I found.

Assuming retirement at age 55, a total of $880,000 in the RRSP, and an average annual return of 8% in a RRIF, you could withdraw a flat amount of $72,503 a year and not exhaust the plan until you turn 100. That’s well in excess of what you say you need. If we lower the expected average annual return to 6%, the annual flat income to age 100 drops to $56,685. That’s still above what you believe you require.

I then plugged in an RRSP value of $600,000 at age 55, combined with an 8% annual return within a RRIF. Annual withdrawals to age 100 would be $49,434 — almost exactly on your target. So to answer your question, you would need slightly more than $500,000 in the plan at age 55 to achieve your $50,000 a year withdrawal target, as long as you can generate the 8% annual return.

But, and it’s a big but, this does not allow for the impact of even modest inflation. You could be retired a long time. If you live to age 100, it would be 45 years. Let’s say you live until age 85 and that inflation averages 2% a year over that time. To retain the same purchasing power that $50,000 a year had at age 55, your income at age 85 would need to rise to $86,000. Be sure you take this into account in all your calculations.

You’ll find a lot more on this subject in my book Retiring Wealthy in the 21st Century.