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  • Eric Watchorn

Wealth Management

Updated: May 4, 2021

How much do you need to retire in Canada?

Possibly more than ever before… inflation is set to be allowed to run free.


Gotta keep the interest rates low! The economy needs it. It depends on it. So we need to prepare with open eyes.

COVID-19 has also affected many people’s retirement.

In many cases people have lost jobs, had the value of their small business eroded, or realized they would need to invest in technology for their business to compete in a new normal.

In other cases, people have become contemplative and decided to retire early or switch careers.

Michael Kitces, a pre-eminent retirement expert in the United States discusses a safe withdrawal rate in retirement. His focus is to figure out the end need. I like his approach as it reduces the guess work.

Keep in mind that the safe withdrawal rate is then used to reverse-engineer your required nest egg for retirement.

Markets have been stronger than in any other time, and unless you were GIC centric or Canadian-equity centric, you likely would have had above average stock market returns.

Consequently, if now retired, your sequence of returns would have likely been advantageous to your retirement. I personally have not seen anyone fall off the rails from their retirement plan, but years of relatively good markets is not exactly a great sample size.

The famous 4% withdrawal rule is the most commonly accepted retirement rule of thumb (assuming the portfolio makes more than 4%). Created by William Bengen, this rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30 years.

So if you need $100,000 a year to live in retirement, you will need a nest egg of $2.5 million ($100,000/.04).

Yet many experts see deficiencies inherent in the 4% rule: the withdrawal rate doesn’t take income tax into account; it ignores management fees; the equity portfolio lacked international diversity (as it was US centric); and that it was premised on a historically higher interest rates for the fixed income 2/3 (bond) portion of the portfolio and used a constant set 4% withdrawal rate.

Mr. Kitces is not only a great researcher, but he is also a very engaging speaker, who is able to passionately break down a complicated topic into plain English. His Youtube podcasts are highly recommended and informative and should listen to if you are interested in what your withdrawal rate should be in retirement.

He has noted the following findings in respect of the 4% rule:

1. The three worst retirement start dates in history were 1907, 1929 and 1966, and these form the floor of the 4% rule. It is extremely important to understand that the historical safe withdrawal rate of 4% is not based on historical averages (if they were, he notes the withdrawal rate would be much higher), but they are based on the three worst historical 30-year retirement periods noted above. These three worst periods would have allowed a retiree to just barely meet the 4% withdrawal scenario. That is why he and others consider the 4% rule a safe withdrawal rate; it is a historical worst-case scenario, not an average.

2. The safe withdrawal rate has a 96% probability of leaving more than 100% of the original principal (these are nominal returns, not inflation-adjusted returns, but still your original principal is almost all intact in historical dollars).

3. The median value (50% of the time) is 2.8 times the original principal. Thus, you have a high likelihood of having more money by the time you die, not running out of it.

4. Only one time does the retiree run out of money and that is in Year 31 of retirement. So despite the inherent flaws in the 4% rule, I note in the fifth paragraph of this post, Mr. Kitces is of the view that because historical safe withdrawal rates are not based on historical averages but rather on historical worstcase scenarios, the 4% rule is more than an excellent rule of thumb.

We see challenges ahead with this approach. How?

Taxation and sequence of returns.

Taxation will increase. Covid is the most obvious reason, yet the current Canadian Governments need to charge more to accommodate a growing population and correspondent spending. Withdrawing from an RRSP and spending apportion of that deferred tax is just that, the realization of a lifelong deferral, not a deductions as it is sold to the average Canadian. The give you a tax benefit when you deposit the seed (RRSP contribution) and then they tax the harvest when you are required to make your retirement withdrawals (RRIF).

The sequence of returns is great right now, yet volatility is increasing and the fixed income market is not performing. When volatility grows and the markets pull back after moving up historically for a dozen or more years, then it will be a fight to preserve principal, let alone rely on regular returns or fixed income magic.

Most do not know of the guaranteed options that still exist in Canada – we do.

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