Impact on SWR today for future pension stream?

[MMMdude]

I anticipate retiring in 4 years using a 3% SWR on $1.5 Million.  I will be 45 at that time - so $45K in expenses annually.

Now, in 20 years I will begin receiving Canada pension plan of approx $15,000 per year in TODAY's dollars and this is indexed to inflation.

What I'm trying to work out is what is that future pension worth today in terms of being able to boost my SWR rate above that 3%?  If I were to receive this at 45, my expenses of $45k minus $15K pension = $30K.  30/1500 = 2%SWR.  That is an easy calc to make....what i'm trying to do is the same calculation but moving it 20 years earlier.  Thoughts?  My guess would be it is worth around 0.5% meaning I should feel safe at a 3.5%SWR at age 45 in anticipation of this future income stream.  I'm hoping this will not turn into a discussion about my SWR, I simply would not be comfortable at 4% for a 45+ year retirement.

[shuffler]

You can model a future income in FireCalc/CFireSim, so that's what I'd do.
Just play around with the withdrawal-numbers until you get a success-rate that is comfortable, and then there's your answer.

[MDM]

There are probably many ways to estimate this.  Here's one:

1) Find the CAGR that just allows a 30 year retirement with a 4% WR to succeed.  With expenses taken at the beginning of the year and annual compounding of the resulting balance, that's ~1.31%.
2) Using that 1.31% return, pick a WR (e.g., 3%) and thus an annual spending (for 3%, $45K).
3) Calculate the balance remaining after 20 years.  For 3%, that is $911,277.
4) Subtract the $15K/yr pension from the annual spending and calculate the new WR.  For the numbers above, we get ($45,000 - $15,000) / $911,277 = 3.3%.
5) Compare the new WR to the 4% Safe Withdrawal Rate expected to allow a 30 year retirement.
6) Adjust the WR in step 2 and iterate until the WR calculated in step 4 is 4%.

An initial WR of 3.224% meets the conditions specified above.

Of course, different assumptions are likely to yield different answers.  Good luck!

[Al1961]

Were you including OAS with your stated CPP amount?

[MMMdude]

Were you including OAS with your stated CPP amount?

Yup.  Have about 20 credits now, so add 4 gets you to 24 for CPP.  24/maximum of 39 earn in years X approx $1100 per month max CPP that is now + $575ish for OAS.

I will be under OAS clawback range.....now will OAS be there when we retire?  I truly believe so, any party getting rid of it will be extinct pretty fast.  My only concern is that it will somehow be asset means tested down the road.

[RichMoose]

If you use cfiresim, you can do some pretty cool modelling using real historical data. With $1.5m and estimating a conservative $15,000 in social benefits coming in at 65 years old, and living until 95 you can withdraw about $50,000 a year today and grow that up with inflation. Your success rate on that is 100%.

I call it the 30x Rule in my blog because, even without the social benefits, the success rate is about 98% over a 50 year retirement. The 30x Rule implies a withdrawal rate of 3.33%.

With a 3.5% WR, your success rate with CPP/OAS is still over 98%.

At a 4% WR, your success rate drops to a hair under 95% with CPP/OAS.

What is acceptable risk or your "SWR" is up to you personally. But don't forget that even if you adjust your annual spending increases to 50% of CPI during bad market years, your probability of success goes up a few points. Unfortunately I don't know of any calculators that can handle those types of adjustments.

BTW, congrats on accumulating $1.5m by 45. That's an impressive accomplishment.

[Retire-Canada]

OAS is not going anywhere and asset means testing is difficult which is why income testing is used. It's easily checked by CRA. If you got rid of OAS all those old people would apply to other Government support programs, which cost more to administer.

As suggested above I would plug you numbers into cFIREsim including CPP/OAS and play around with the results until you hit a success rate you are happy with.

I would also calculate CPP at 60 and 65 to see if taking it early might be beneficial as you will have 5 less zero years at 60. My quick numbers are $497/month at 60 and $686/month at 65. Total payments after 20yrs for the lower amount is $119K and 15yrs for the higher amount is $123K. That doesn't factor in the additional investments returns because you will be withdrawing less from your portfolio for the period 60-65 if you take CPP early. cFIREsim will work that all out for you if you want to wargame both scenarios to see what impact they have on your success rate.

[Retire-Canada]

What is acceptable risk or your "SWR" is up to you personally. But don't forget that even if you adjust your annual spending increases to 50% of CPI during bad market years, your probability of success goes up a few points. Unfortunately I don't know of any calculators that can handle those types of adjustments.

cFIREsim will let you put in variable withdrawal rates based on market returns. Not exactly what you are suggesting, but you can model something that responds to market performance.

Using the OP's numbers using a VWR from $50K to $75K and $1.5M starting balance I get 100% success and average yearly WR of $65K. Being a bit flexible will boost your success quite a bit and allow you to take more money out most of the time.

[Cryocash]

Now.. I'm a little biased. Stock is volatile, but still goes up 75% of the time. That said, it is almost impossible to not get 3% in dividend payouts, 3% of 1.5mil is 45k. Plus you would have the underlying growth aspect to cover inflation. You are young enough to get through a tough market spell as well.

[Al1961]

<snip>

I would also calculate CPP at 60 and 65 to see if taking it early might be beneficial as you will have 5 less zero years at 60. My quick numbers are $497/month at 60 and $686/month at 65. Total payments after 20yrs for the lower amount is $119K and 15yrs for the higher amount is $123K. That doesn't factor in the additional investments returns because you will be withdrawing less from your portfolio for the period 60-65 if you take CPP early. cFIREsim will work that all out for you if you want to wargame both scenarios to see what impact they have on your success rate.

Doesn't work that way. Gov't always calculates your age 65 entitlement and then deducts 0.6% per month for each month before age 65 that you start collecting.

Under the current rules, maximum CPP is obtained after taking your best 83% of earning years over the 47 years from age 18 to 65. You drop out your lowest 17% of years, which leaves 39 years. So MMMdude would have 24/39 or $8,227 if he earned the maximum CPP insurable earnings in each of those 24 years. It would be less if he earned less than the maximum insurable earnings some years (like in university). He would also lose 36% of that amount if taken at age 60.

So agree with your age 65 number (as the max) but you over estimated the age 60 amount a bit.

Oh, and it looks like Morneau's Economic Advisory Panel is now advising the government to increase both the OAS and CPP eligibility ages, so if you are under 55 or so, it might be wise to start using 67 or 68 as the ages that these benefits kick in.

http://www.budget.gc.ca/aceg-ccce/home-accueil-en.html

Al

[Retire-Canada]

Doesn't work that way. Gov't always calculates your age 65 entitlement and then deducts 0.6% per month for each month before age 65 that you start collecting.

It can't work the way you are suggesting. If you collect CPP at 60 there would be no income data for the years 60-65yrs old to base the calculations on.

Stopped working?

If you are retired and have fewer than 39 years of maximum CPP contributions (generally what’s required to receive a full pension at 65), “you may want to consider taking your CPP early,” Mr. Runchey says. That’s because, if you delay receiving CPP, “your calculated retirement pension might decrease with each additional year of zero contributions, which will offset part of the increase that you receive by waiting,” he says.

If come across a number of references that all say something similar to this ^^^.  If you know you won't be working between 60 and 65 it's worth wargaming the impact of waiting and how those extra 5yrs of not working affect your CPP payments.

[Lobo]

Just curious......At age 45 what % of your portfolio will be in equities?

[sokoloff]

Not the OP, but I happen to be 45 and am as close to 100% equities as I can get. (There's a reason for this below; I'm not advocating this as general advice.)

I have real estate equity in my house and incidental cash/equivalents in accounts that I think of as "lubricants" for my life. (I might have $20K extra cash in checking accounts so that I don't need to micro-manage how much cash is there if a few large, auto-paid bills all hit near each other.)

If you're in a situation where you have achieved ~100% certainty of a secure retirement and will likely be passing on an inheritance to your kids or grandkids, you should ask yourself whether you're investing based on your lifespan or theirs. I take the view that once my retirement is completely secured, I'm largely investing on their timetable not mine. I have real estate equity because it's hard to avoid building that up; I have cash because having cash makes financial engineering of everyday life easier. Everything else is in equities, as that's where I believe the growth engine is and they have more than enough time to weather the boom/bust cycles.