You can use our retirement income calculator advice to estimate what your future looks like financially. We also look at how RRSPs and RRIFs can help you save more along the way

These days, we find that more and more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you might not have enough savings to be able to earn the retirement income stream you were banking on.

Our retirement income calculator advice shows how you can predict what your retirement finances may look like. We also outline some strategies for saving more money before retiring.

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A retirement income calculator can only give you predictions based on estimates, not exact numbers

It’s hard to figure out how much money you will have accumulated when you retire, and how much you’ll need.

Even the most seasoned expert can only estimate your investment income. It depends on how much and how long you save, your investment returns, RRSP/RRIF rules and so on. And, since you may only have a general idea of what you’ll do when you retire, you don’t really know how much you’ll spend. A conservative estimate is more realistic than one that counts on too many optimistic projections.

Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and expect to add $15,000 to it in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.

Retirement income calculator: What you can expect

Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. To illustrate, let’s assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400. (*Be sure to check your figures. There are many compound-return calculators available online.)

Income and outgo

If you continue to earn 6% a year, and you withdraw $50,964 a year (6% of the $849,400 in your RRSP at age 65), you can avoid dipping into capital until your mid-70s, when RRIF rules require larger withdrawals.

However, if you start taking money out faster, or earn lower returns, you may live long enough to run out of money. If you withdraw $90,000 a year while earning 6%, the money you’ve accumulated will last just over 13 years. If you earn 5% but withdraw $90,000 a year, your money will run out in just over 12 years.

Ways to save more money for retirement: RRSPs and RRIFs

If you want to pay less tax on your investments while you’re still working, investing in an RRSP (Registered Retirement Savings Plan) is one of the best ways to go.

To cut tax bills, RRSPs are a great option. RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.) When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives for Successful Investors at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.

Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that starts at 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95.

If you have one or more RRSPs, you’ll have to wind them up at the end of the year in which you turn 71.

Do not get caught in a vicious circle if a retirement income calculator predicts lower results than you expect

Some investors, worried about their money eroding, or tempted by even greater gains, seek higher returns in riskier investments such as high-risk junior stocks. In years when these volatile investments lose money, these investors have less capital for the following year. This can lead to a vicious circle of lower future income and shrinking capital.

Use a retirement income calculator to get an idea of what is ahead for you…but above all follow this Successful Investor tip

Overall, we believe if you’re heading into retirement and are short of money, you should move your investing in the opposite direction: aim for safer investments, rather than taking one last gamble.

Some investors get more aggressive with investments when they do not feel they have saved enough for retirement. How much does that reflect your strategy?

What do you think is the best way to invest and save towards a retirement income?