You Don’t Know Jack; If I had a Million Dollars
“If I had Million Dollars” was a song released by the Bare Naked Ladies in 1992 and it got me thinking about how that would affect families.
By Jack Lumsden, MBA, CFP® Senior Wealth Advisor, Assante Financial Management Ltd.
At the time this song was released, many of my friends had been married for few years, started to have kids, and perhaps started saving for retirement.
I heard the song the other day, and the last lyrics of the song, “If I had a million dollars, I’d be rich” got me thinking. So, let’s say as a family you have saved a million dollars in your RRSPs..
How much income would it provide today?
I decided to do an annuity check to see what an immediate annuity would provide today as income. While I am not suggesting that everyone purchase an annuity with their RRSPs, the annuity check provides a good benchmark on how much income you could generate today from a million-dollar investment.
The following income chart is based on purchasing an annuity today for a million dollars for a couple. (Male and female)
- Based on a joint and survivor annuity, with a reduction of 30% of income on the first death.Indexed at 2.0% per year
- Indexed at 2.0% per yearSince the income is from an RRSP, the entire income is taxable each year.
- Since the income is from an RRSP, the entire income is taxable each year.Quote based on Manulife Financial October 31, 2017, with principal protection.
- Quote based on Manulife Financial October 31, 2017, with principal protection.
What an annuity provides for the couple above, is that in exchange for the $1,000,000 from their RRSPs, they are guaranteed an income as long as one of them is alive. Each year the income is increases by 2.0%. Upon the first death, the payments are reduced by 30%. This is basically purchasing your own pension.
Another way to check this is to review the projected maximum withdrawal rate today if you were to invest the $1,000,000, rather than buying an annuity.
For example, if your total investments are $1,000,000, and you need to withdraw $25,000/year to cover all of you expenses and taxes, your initial withdrawal rate would be 2.5% ($25,000/$1,000,000 = 2.5 %)
The following charts are from research by Morningstar Canada and are the projected safe withdrawal rates in Canada today. Below is a summary based on asset allocation and initial safe withdrawal rates that provides the retiree with an 80% chance of sustaining that rate over a 30- or 40-year period - Potential time in retirement
Age 65 today – with income lasting to age 95 - 30 years with a chance of 80% success
Age 65 today
Age 55 today with income lasting to age 95 - 40 Years with a chance of 80% success.
Example from Safe Withdrawal Rates for Retirees in Canada Today, Morningstar January 2017.
If you were both 55 years old today and wished to plan to age 95 (40 years), had a $1,000,000 investment account with an allocation of 60 % to equities, the safe withdrawal rate would be 2.9 % of $1,000,000, which is $29,000 per year. ($29,071 for the annuity at the same age today)
The question to ask is – How much do you need to save on your own? If you are 55 today, with a million dollars, could you live on $29,000/year? (factoring in Canada Pension Plan and Old Age Security and any other pension incomes you have).
While a million dollars is a lot of money, it may not provide as much income as you think. In your financial plan, you must determine how much capital you need to save in addition to your sources of guaranteed income (CPP/OAS/Pensions), to provide the lifestyle your family desires. If you don’t know how much enough is, as Assante Wealth Management advisors, our team would be happy to provide an essential analysis.
Assante Wealth Management Advisors
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