In the third in our series on RRSPs, we advise that your retirement plan doesn’t base your future income on over-optimistic calculations that will end up leaving you short. 

In last week’s article on RRSPs (Inside and outside—which investments are best for your RRSP) we discussed which investments are best kept inside your RRSP, and which are better held outside the plan.

Today, we examine the overall numbers more closely in order to help you ensure that your retirement calculations match your expectations.

As the deadline for RRSP contributions approaches, many investors are confident they are taking concrete steps toward a secure retirement. But are those steps based on realistic calculations?

Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 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.

• 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. For purposes of this retirement plan, we’ll 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 math. There are many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site, www.bankofcanada.ca/rates/related/investment-calculator/.)

Avoid the vicious circle of lower income and shrinking capital

• 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), you can avoid dipping into capital until your mid-70s, when RRIF rules call for steadily rising withdrawals.

  However, if you start taking money out faster, or earn lower returns, you’ll 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 be gone in just over 12 years.

• Beware of getting caught in a vicious circle. Some investors, worried about their money eroding, or tempted by even greater gains, start to look for higher returns in riskier investments. They may take a chance with gold and silver stocks or even with high-risk junior stocks. In years when these volatile investments lose money, those investors will then have less capital for the following year. This may lead to a vicious circle of lower income and shrinking capital.

Our investment advice: Rather than taking on extra risk, we always advise investors to take the safe route to retirement planning. Save more now, work longer, or plan to spend less. Retirement leaves you with lots of free time, and filling it often costs more money than people anticipate. But postponing retirement, or working part-time as long as you’re able, can pay off in higher current income, more contentment and greater long-term security

Next week: How to enjoy the full advantages of a Tax-Free Savings Account.