10.4.1 Case study: Building a retirement income

Suhata earns \$50,000 a year. Now age 65, she has saved:

• \$205,000 in an Registered Retirement Savings Plan (RRSP)
• \$10,000 in a Tax-Free Savings Account (TFSA), which serves as her emergency fund.

Suhata has already decided to work a little longer and keep saving. She will save \$5,000 each year in her RRSP until age 70 and then retire. (At 71, she will convert her RRSP to a Registered Retirement Income Fund.) As she makes her plans, she considers three main questions:

1. How much income will she need? Suhata estimates that she will need about 70 percent of her gross yearly income to live on in retirement. Based on her current salary, that comes to \$35,000 a year.
2. Where will she get this income? Suhata will have income from four main sources when she retires:
Source of income How much income she will receive each year (in today's dollars)
Canada Pension Plan \$11,840
Old Age Security \$6,481
\$280,400 in savings from her Registered Retirement Income Fund (RRIF) \$16,355
\$12,000 in savings from her Tax-Free Savings Account (TFSA) \$1,000
Total yearly income from all sources: \$35,676 (before taxes)
This calculation assumes annual RRSP contributions of \$5,000 from age 65 to age 70, made at the end of each year; an inflation rate of 3%, investment rates of return of 4% until Suhata begins to receive her government pension at age 70 and 3% after she receives her government pension. She will have no more savings in this plan by age 85.

3. Will it be enough? Based on these numbers, yes – but it's close. After she retires, Suhata will have a yearly income of about \$35,676 to age 85. That's just a little over her \$35,000 target. But she knows her savings may grow faster or slower than three percent each year, depending on how her investments perform.

By age 71, you must close a Locked-in Retirement Account (LIRA). Then you can:

Suhata decides to talk to an investment adviser about how to invest her RRIF and TFSA savings after she retires, to be sure she'll have enough.

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