Amazing ! According to the 13e BMO Financial Group’s (Bank of Montreal) annual survey on retirement, Canadians think they will need to accumulate $1.7 million to retire.
If they need to accumulate such a mountain of money for retirement, let me tell you, very few Canadians will do it.
According to the survey, Canadians hold on average in their RRSP a capital of just $144,613. In Quebec, the average drops to just $125,751.
You will agree that we are excessively far from the capital supposedly required to retire financially with complete peace of mind.
Reality
The accumulation of $1.7 million in retirement capital is inaccessible for the vast majority of Canadians. According to BMO, Canadians only contribute to their retirement an average of $7,058 per year. In Quebec, the average annual contribution is only $6,155.
Let’s assume that the annual contributions to the RRSP are spread over 35 years, that is, from 30 to 65 years.
Here is the capital that will be accumulated per $1,000 of contribution, depending on whether the return obtained with our RRSP is 5% to 7%.
To obtain such a return over the very long term, you have to take risks, in particular by investing in a diversified portfolio.
At 5% annualized return, an annual contribution of $1,000 to his RRSP will provide capital of $90,320 after 35 years. At 7%, the capital will reach $138,240.
With his average RRSP contribution of $6,155, the Quebec worker will be able to accumulate the total sum of $555,920 if he succeeds in growing his capital at an annualized rate of 5%. In the case of a compound annual return of 7%, the capital would reach $850,867.
As you can see, we are far from the capital of $1.7 million that Canadians believe they ideally need to retire with peace of mind.
I don’t want to discourage you, but to be able to accumulate RRSP capital of $1.7 million in 35 years of contributing to your RRSP, you would have to invest $18,822 annually if the return obtained is 5% per year.
With an annualized return of 7%, we would reach the threshold of $1.7 million with an annual contribution of $12,297.
How much will you collect?
How much would the ideal $1.7 million RRSP yield that Canadians believe they need, according to the BMO survey?
Assuming that you begin to cash in your RRSP at age 65, and that withdrawals are spread over 25 years (up to age 90), here is the annual amount that it will be possible to withdraw up to when the RRSP capital is depleted.
Assuming that the capital will continue to earn 5% per year, the retiree will be able to cash in $7,095 annually for every $100,000 of RRSP capital.
With a return of 7%, the annual withdrawal would amount to $8,581 per $100,000 of accumulated capital.
This means that with $500,000 in RRSP capital, a retiree could collect $35,475 to $42,905 during the 25 years of retirement.
With a capital of $1 million, it would obviously be double, namely from $70,950 to $85,810.
And at $1.7 million in capital, we’re talking annual withdrawals ranging from $120,615 to $145,877.
The taxman’s hand
Very important fact: these are gross withdrawals, that is to say before taxes are levied by the governments of Quebec and Ottawa.
Just to give you an idea of what remains in our pockets after paying taxes, here is, above, according to the firm Raymond Chabot Grant Thornton, the amount of taxes and the effective tax rates (federal + provincial ) which will be collected in 2023 on the taxable income of Quebecers. The above tax data only takes into account the deduction of basic personal amounts ($14,389 federal and $16,143 provincial) and the indexation of the tax tables.
Don’t be afraid! This is a first glimpse of what awaits us. Depending on each person’s tax status (single, single parent, spouse, 65 or over, etc.), the final charge will be lower than the amounts shown in the table.
Seniors, for example, will be entitled to an age deduction of $8,396 federally and $3,614 provincially. Added to this is a pension income deduction of $2,000 at the federal level and $3,614 at the provincial level. Quebec also offers an amount of $2,000 as a tax credit for assistance to seniors.
income of retirees
According to the most recent tax data compiled by Revenu Québec, i.e. those for the 2019 taxation year, the number of individuals aged 65 and over who earned less than $25,000 was 771,846, or 45.9% of this whole age group.
In the $25,000 to $50,000 income bracket, the number reached 541,775 (32.2%).
This means that 4 out of 5 seniors (78.1%) live on less than $50,000 per year.
Seniors with incomes of $50,000 to $70,000, Revenu Québec counted 199,504 (11.9%). Some 95,487 (5.7%) reported income ranging from $70,000 to $100,000.
And above $100,000, the number 65 and over was limited to 74,154 (4.3%).
