How Soon Can You Retire Using Your RRSP?

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You’ve been told to use your Registered Retirement Savings Plan (RRSP) to save diligently for retirement.

But, how soon can you retire using your RRSP?

Might it be better to use your RRSP instead of your TFSA to retire early?

As always, we’ve got answers and break down these questions in today’s post.

Why the RRSP? How soon can you retire using your RRSP?

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend of course. We believe depending on what you want to spend in retirement, you don’t need a million dollars. In fact, determining what you need is always the perfect starting point – we shared as much in these case studies below!

We believe, the more case studies you read on our site, the better. This way, you can apply the lessons learned from others to tailor your own path. That’s part of our goal here – entirely for free of course.

There are different roads to any retirement – RRSP or TFSA?

Members of our site have already learned the powerful math behind any retirement plan:

the more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Let’s face it: there is only so much money to go around.

On My Own Advisor, Mark covered a few savings targets by the age to aspire to but these are just targets. Your mileage will vary.

Because you have limited funds, you might have to choose between investing in your RRSP or your TFSA – since both accounts can be equally beautiful wealth-building vehicles. Investing in one or the other isn’t a bad decision at all but there are some things to keep in mind.

  1. Effectively, the TFSA and RRSP are mirror images. Using the TFSA you contribute with after-tax dollars. Money grows tax-free inside the account and money can be withdrawn tax-free. Because you earn an RRSP-generated tax refund (effectively a government loan you have to pay back) with any RRSP contributions, if you’re in the same tax bracket when you withdraw money from your RRSP as you were when you made the RRSP contributions, then RRSP and TFSA “math” is effectively a wash.
  2. TFSA contribution limits can be lower for some Canadians, than RRSP contribution limits. Using those after-tax dollars, you’ll need to save about $500 per month or $6,000 per year to max out your TFSA this year. You can always see the year-over-year TFSA contribution limits and really, everything you need to know about the TFSA in this post here: Everything You Need to Know about TFSAs

For some investors, based on their earned income, RRSP contribution room might allow you to contribute more than this $6,000 or so per year, per adult inside your TFSA. In fact, your RRSP contribution limit for 2021 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $27,830. For 2020, the dollar limit was $27,230.

At the end of the day, whether you use the TFSA or the RRSP to help fund your retirement, we believe either one can work as long as you stick to it. In fact, we just shared that any young couple today can retire with millions inside their TFSAs in the coming decades if they just stick to a disciplined TFSA contribution and investing plan!

So, how soon can you retire using your RRSP?

A bit early in fact. Let’s look at our case study to find out.

Here are the assumptions we made leveraging the work we did in our retire using the TFSA only post:

  • We have a young couple living in Ontario that recently finished post-secondary studies.
  • Both are 23 years old making $50k/year (increasing with inflation annually).
  • They are going to invest in an aggressive 100% equities approach. We’ll assume 6.5% returns with 100% equities in their asset accumulation years.
  • When they retire, they will dial it back: their portfolio is adjusted to 60% equities and 40% fixed income (returning 4.9%).
  • They qualify for average CPP and since they have lived in Canada their whole lives, maximum OAS.
  • To maximize their CPP, they will also take CPP at age 70 for the 42% payment boost.
  • Since the housing market remains out of control, they decide to rent.
  • 2% average annual inflation.

They have some cash savings, but not much. They have been told to “max out their RRSPs” if they can – so they ignore TFSAs for the purposes of this post. They always re-invest the RRSP-generated refund.

How soon can our couple retire only using their RRSPs?

Let’s take a look at retirement at age 65 to give the couple as much time as possible to let that RRSP compound.

  • How much do they need in retirement? At $50k/year income, maxing out their RRSP means they start $9k in contributions per year (each). (18% of $50k earned income per year.) Accounting for taxes, we’ll assume this couple is living off about $65k/year together. Assuming that they maintain this lifestyle, it means that a comfortable retirement would be in the same range. As you know however, life is not a straight-line.
  • How much are their RRSPs worth at age 65?  A whole lot – about $2.2M EACH (in future dollars assuming 2% inflation)!
  • Can they maintain their lifestyle in retirement? As you probably guessed, with a $4.4M RRSP balance, it’s more than enough to spend $65k/year (in today’s dollars) at age 65. In fact, if they maintain that spending in retirement, they will leave an estate value of $1.45M (after tax and in today’s dollars) at age 100. For this exercise, we assumed that any excess cash flow from RRIF withdrawals in their 70s was simply kept as cash. If the excess cash flow is invested in a 60/40 TFSA, then the final estate value jumps to a whopping $2M (after-tax and in today’s dollars).
  • What is the most they can spend in retirement? Since our couple had money remaining in their investment accounts at age 100, the projections show that they could spend much more during their retirement years. Providing the markets cooperate and the investment returns meet the assumptions above, the most they can spend annually after-tax (in today’s dollars) throughout retirement is…. drum roll please….  $104k/year (about 60% more spending than during their working careers).

Here is a chart of their income sources from age 24 to 100:

Back to what started this post in the first place – if they have “too much money” retiring at age 65, can they retire a little earlier?

Yes, they sure can!

Much earlier – as early as age 55!

  • How much can they spend in retirement if they retire at age 55? Again using our projections software, the most they can spend annually after-tax (in today’s dollars) throughout retirement is $66.7k/year which is slightly more than their pre-retirement lifestyle!  If they wait until age 60, they will have a financial buffer with about $83k/year after-tax spending until age 100 (in today’s dollars).

How soon can you retire using your RRSP summary

At Cashflows & Portfolios, we’re not suggesting to use the TFSA over the RRSP exclusively, or vice-versa. I mean, both accounts have great merits so you use both if you can!

Here is a great summary table how the TFSA or the RRSP can help you build wealth for retirement if you really have to pick one over the other:

TFSAs – Withdrawals are not considered taxable income.  Income-tested benefits and income tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by any TFSA withdrawals.  Withdrawals don’t reduce these benefits.RRSPs – Withdrawals are considered taxable income.  RRSP withdrawals could reduce amounts you receive from income-tested benefits and income tax credits such as the GST Credit, OAS and GIS.  RRSP withdrawals could reduce your post-retirement government benefits.

In this case study, it makes perfect sense that if your RRSP contributions can always exceed any TFSA contributions (currently $6k per year per adult), then assuming most things stay the same, you should be able to retire very comfortably in your 60s – by only maxing out the RRSP and ignoring the TFSA. This case study highlights the extreme power that compounding can provide to wealth-building over time.

That said, saving 18% of your income for your RRSP contributions over decades of time is a tall order for many Canadians. Most investors will need to choose investing inside their TFSA, or RRSP, and maybe a bit of both, to fund their retirement.

As always take some time to look at your financial situation and try and figure out what works best for you. Ask us any questions along the way!

Remember, nobody cares more about your financial future than you.

Need any support with your retirement income projections?

Knowing how to save and invest wisely, to help you get the most out of your portfolio, is something we can help with. We’ve been there!

In addition to that asset accumulation work, if you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more as well!

If you are interested in obtaining private projections for your financial scenario, read more about our retirement projections service.

A reminder to those who have recently joined our readership and new fans of the site – our site is growing thanks to you!! As an example, a big thanks to Rob Carrick for mentioning our site and services in The Globe and Mail. From Rob:

“TODAY’S FINANCIAL TOOL

Cashflow$ & Portfolios is the name of a website built to help people learn how to reach their long-term financial goals with budget and long-term investing. Brought to you by a pair of veteran personal finance bloggers.”

Thanks Rob Carrick!

Stay tuned for more case studies and great articles over time.

Related Saving and Retirement Reading:

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