You don’t Need $1.7 Million to Retire in Canada

In my personal experience, you require considerably less

Ravi Taxali
15 min readFeb 15, 2023
Photo by fauxels

According to the BMO Annual Retirement Study released on Feb 7, 2023:

Canadians believe they will need $1.7 million to retire, up 20 per cent from 2020 ($1.4 million).

That number (1.7 million) will look scary to most Canadians who plan to retire in a few years, since the majority of them have relatively low investments in their RRSPs, TFSAs, or other investment accounts. I don’t know who participated in that study, however, I believe that even 1/3rd of that amount is more than enough to lead a comfortable retired life in Canada, as I will show you in this article.

I stopped working in October 2020 at 60. A combination of factors including COVID and my wife’s health played a major role in this. Although my situation changed and I had the option to return to work after some time, I evaluated my savings, expenses, and anticipated income from different sources and ultimately chose to retire, despite the advice of my family and friends. In this article, I would describe the analysis of my financial situation that helped me to make the decision, as well as the methods and strategies I’m implementing to maximise my income during retirement. I trust that this information will be useful to you, particularly if you’re planning to retire within the next 5 to 10 years, or if you’ve already retired. This may also inspire you to consider early retirement, as you may discover that you are richer than you think!

My Financial Background

I moved to Canada in 1997 with my wife and two children. We bought our first (and last) home in 1999, which is mortgage free. In accordance with the financial advice I received from multiple sources, I have maxed out my RRSP contribution room and have placed any surplus funds into both unregistered (cash) and TFSA accounts. Starting from 2005, I have been overseeing all of my investments in self-directed accounts with RBC and TD. My portfolio is entirely composed of equities, primarily Canadian. Both my children are working and live independently. I don’t have any credit card or Line of Credit debt.

My Financial Situation in 2021

In 2021, for the first time in my life, I looked at the debit and credit entries in my bank account to determine our monthly expenses, which was a little under $3,000 per month — perhaps COVID reduced it a little bit as we have not travelled since March 2020. My wife is currently working her income is more than our monthly household expenses.

At the beginning of 2021, the approximate total value of all my investment accounts was $591,000 as per the following breakup:

  1. RRSP (Registered Retirement Savings Plan) Account: $360,000
  2. TFSA (Tax Free Savings Account): $104,000
  3. Cash Investment Account: $127,000

My wife also has savings in her RRSP, TFSA and Cash Investment accounts, however, I don’t want to bank on her investment for my retirement income planning.

Retirement Goals

To have enough income during retirement to live a comfortable life and to pass as much money as possible to my children after my death. I want to live an active life, however I don’t have any intention to travel the world during my retirement or buy luxury cars. The retirement income should last at least until age 89.

Retirement Income Planning

I plan to have about an after tax income of $4,000 per month or $48,000 per year from my savings and government benefits, such as Canada Pension Plan Pension (CPP) and Old Age Security (OAS).

The CPP and OAS government benefits begin at age 65, though one can take CPP early starting at age 60 at a reduced rate. As per the Government of Canada website

If you start before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if you start at age 60

If you start after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if you start at age 70 (or after).

When I checked my Service Canada account in 2021 for my CPP contributions, it estimated $785 as my monthly CPP pension at age 65 (in Oct 2025). (My CPP pension estimates are low because I have contributed to CPP only for 22 years.) If I decide to take CPP payments early at age 61, the $785 payment would decrease by 28.8% to $558.92 per month. Delaying the receipt of CPP is generally viewed as a beneficial strategy by most financial experts, including myself, provided that one is in good health. By delaying the start of CPP, you can receive larger payments, resulting in a higher cumulative amount of CPP over your lifetime. As I am in good health, I decided to delay taking CPP to age 70, which will increase the monthly CPP payment by 42% to $1,115.

The payments for Old Age Security (OAS) commence when an individual reaches the age of 65 and are determined solely by the number of years they have lived since turning 18. To be eligible for the full OAS payment, an individual must have resided in Canada for 40 years since the age of 18. As I arrived in Canada when I was 37, I will not be receiving the full OAS payment. It’s worth noting that OAS payments are not available before the age of 65. Also, please be aware that both CPP and OAS payments are indexed to inflation, which means they automatically increase each year in accordance with the annual inflation rate.

Okay, I have decided not to take CPP early and OAS won’t be available until Oct 2025, what should I do with my RRSP and other investment account? Given that my wife’s current income is sufficient to cover our household expenses, there is no urgent need to withdraw funds from any of our accounts, and perhaps it is a wise move to let my RRSP & TFSA account continue to grow tax free.

No, retirement income planning is not so simple!

How to Increase Income During Retirement?

In contrast to the working years, it’s not possible, or at least not desirable, to boost one’s income through work during retirement. In retirement, increasing income can only be accomplished by strategically timing government benefit payments and minimizing income taxes, which can be achieved through one or more of the following approaches:

  1. Timing of withdrawal from RRSP
  2. Benefiting from the RRIF pension credit
  3. Capitalizing on the dividend tax credit
  4. Taking advantage of Capital Gains

In Canada, you will be taxed on all your money in your RRSP/RRIF (Registered Retirement Income Fund) account, no matter what. You either pay tax on withdrawals from RRSP/RRIF during your lifetime or CRA will include all amount in your RRSP/RRIF in the final tax bill after your death (RRSP/RRIF amount may roll over to your spouse tax free after your death, however, your spouse will still need to pay tax on that amount.) Since tax rates in Canada increase as taxable income rises, it’s recommended to remain in the lowest tax bracket possible during retirement as well as at the time of passing, as this is key to maximizing income in retirement and leaving more funds to beneficiaries such as children. Furthermore, it’s important to utilize all available tax credits and take advantage of lower tax rates for specific types of income, including eligible Canadian dividends and capital gains.

In 2023, the lowest federal tax bracket on regular income, including employment and RRSP/RRIF withdrawals, up to $53,359 is 15%. Therefore, if you keep your annual income under $53,359, you are obviously paying the least amount of tax possible. Besides, you don’t pay any tax on the personal amount ($15,000), therefore the average tax rate for this tax bracket is much lower. Moreover, by combining income sources that include eligible Canadian dividends and capital gains, the average tax rate can be further reduced, which I will explain shortly.

My Retirement Income Planning Until I Turn 65

In late 2021, I decided that though I don’t need any income from my investments to meet our household expenses for the next couple of years, however, I would still

  1. withdraw $35,000 to $40,000 every year from my RRSP account in the lowest tax bracket and invest that amount in my TFSA and Cash Investment accounts.
  2. I would use the new investment in my Cash Investment account to buy shares of blue chips Canadian companies that pay handsome dividends. These companies mainly belong to the Canadian banks, insurance, telecommunications and utilities sectors.

You may be unaware that for individuals in the lower tax bracket, Canadian eligible dividends can potentially lower their average tax rate or even reduce their total tax liability. Sounds confusing? This is because the CRA provides preferential treatment to eligible dividends through the provision of dividend tax credits. Allow me to provide an example to illustrate this.

Let’s consider the case of John, a 62-year-old resident of Ontario who has retired and does not have any employment income. In 2022, John withdrew $40,000 from his RRSP account for personal expenses, and no other income was earned that year. When I plug these details in a tax calculator, such as Wealthsimple or TaxTips.ca, John’s total tax payable comes to $5,748, resulting in average tax rate of 14.37%, and after-tax income of $34,252, as shown here:

Next, let us assume that during 2022, in addition to $40,000 RRSP withdrawal, John also earned $10,000 in eligible dividends from shares of Canadian companies, i.e. he had a gross income of $50,000. Upon entering these details into a tax calculator, the total tax payable is reduced to $5,721 from $5,748, despite a 25% increase in gross income. Consequently, the average tax rate is significantly decreased to 11.44% from 14.37%, and John’s after-tax income amounts to $44,279, as demonstrated below.

To put it differently, John received $10,000 in tax-free dividend income, and his total tax was reduced as a result. However, if John were to withdraw $50,000 from his RRSP without any dividend income, his tax bill would increase to $8,057.

Here is the summary of three scenarios:

Undoubtedly, the second scenario is more favourable for John as it results in a greater after-tax income and a reduced tax liability. This is the approach that I have been implementing since 2021, i.e.

  1. Withdrawing funds from RRSP while still in the lowest tax bracket.
  2. Invest money withdrawn from RRSP in TFSA and Cash Investment accounts to buy shares of Canadian companies that pay handsome dividends.
  3. Participate in DRIP (Dividend Reinvestment Plan). Under this plan, my financial institution reinvests the dividend payments to purchase additional shares of the same company on my behalf, leading to further growth in dividend income. My projected dividend income for 2023 is $8,400, which is equivalent to a dividend yield of approximately 3.3%.

Planning for Retirement After Age 65

Once an individual reaches the age of 65, retirement planning should take into account several additional factors, including CPP, OAS, RRIF, and strategies for maximizing available credits for senior citizens. As I mentioned earlier, I have investments in RRSP, TFSA and Cash Investment accounts. I have no intention of accessing my TFSA unless it is absolutely necessary. Instead, I plan to use it as a means of passing money to my beneficiaries after my death, as well as an emergency fund during my retirement.

Earlier I stated the values of my RRSP and Cash Investment account at the beginning of 2021. I have been withdrawing money from the RRSP account and putting it in the Cash Investment and TFSA accounts. Furthermore, over the last 26 months, especially in 2021, these accounts have yielded good returns, largely due to the oil and fertilizer shares in my portfolio. As of mid-February 2023, the estimated values of these accounts are as follows:

  1. RRSP Account: $400,000
  2. Cash Investment Account: $256,000
  3. TFSA Account: $150,000

Assuming a 6% annual investment return over the next three years and transferring $40,000 from my RRSP to my Cash Investment account in 2024 and 2025, I anticipate the following account values at the end of 2025.

  1. RRSP Account: $397,000
  2. Cash Investment Account: $360,000, with dividend income of about $11,800 per year.

Upon turning 65 in October 2025, I will take the following measures:

  1. Apply for Old Age Security (OAS). I anticipate receiving $481 per month in today’s dollars, and it’s worth noting that OAS payments are automatically adjusted for inflation.
  2. At 65, I plan to postpone applying for CPP and wait until I turn 70 to receive higher payments. By age 71, I estimate that I will receive approximately $1,115 per month in today’s dollars..
  3. I will convert my RRSP account to an RRIF (Registered Retirement Income Fund) account. Similar to an RRSP, investments held within a RRIF account are allowed to grow tax-free. However, there is a requirement to withdraw a minimum percentage of the account value each year. (See RRIF Minimum Withdrawal Rates) Withdrawals from the RRIF account will be considered as income for that year, but they will also be eligible for the Pension Income Tax Credit and subject to lower withholding tax rates.

Recall that my goal is to achieve an annual after-tax income of $48,000 after I reach the age of 65. Between the ages of 65 and 71, my expected income will be $481 per month, or $5,772 annually, from OAS payments and $11,800 from dividends, for a total of $16,772. To reach my goal of $48,000 in after-tax income, I will need to rely on withdrawals from my RRIF account, but I must also take into account taxes and inflation.

Upon reaching 65, I will be eligible for two additional tax credits that will considerably reduce the amount of tax I owe:

  1. Age Amount
  2. Qualified pension income (up to $2000)

Let us assume that I withdraw $36,000 from my RRIF account (Actually I will need to withdraw $38,768 to compensate for inflation. Though the current inflation rate is much higher, I use 2.5% in my calculations, which is higher than The Bank of Canada’s long-term inflation target of 2%.)

Alright, when I reach the age of 65 in 2026, my gross income will be $52,804, comprising of the following sources:

  1. OAS: $5,772
  2. Present value of Eligible Canadian Dividends: $11,032 (Actual dividend amount is $11,800)
  3. Qualified Pension Income: $2,000 (Part 1 of RRIF withdrawal)
  4. Part 2 of RRIF Withdrawal: $34,000

When I enter in these numbers in the taxtip.ca calculator for 2023 tax rates, my total tax works out to be $4,388 and after-tax income of $48,416. The total tax payable results in an average tax rate of only 8.31%!

NOTE: I have utilized the present value of RRIF withdrawals and dividends in my computations using the 2023 tax rates. Since tax rates and credits, especially the personal amount, are regularly adjusted for inflation, I am confident that my calculations will closely approximate the actual tax calculations in 2026.

The withdrawal plan for the years 2027–2031 (ages 66–70) will remain the same, and the income and tax calculations for this period are presented below.

NOTE: I have conservatively estimated that my RRIF and Cash Investments accounts will grow at an annual rate of 6%. However, based on their performance over the past decade, where they have generated returns of more than 9%, I am confident that these accounts will likely generate annual returns of at least 8%. (The long-term annual rate of return on the S&P/TSX Composite Index (TSX) was 9.3% per year between 1960 and 2020.)

When I turn 71, I will begin to receive CPP payments, which will amount to approximately $1,115 per month, or $13,380 per year. To keep my income close to the lowest tax bracket ($53,000), I will decrease the amount I withdraw from my RRIF account to account for this additional income. However, my RRIF account will be nearly depleted by the time I turn 82, as illustrated below:

Although my RRIF account is nearly depleted, I can still withdraw $2,000 from it annually over the next six years in order to qualify for the Pension Income Credits. Therefore now I will withdraw more money from my Cash Investment account to compensate for the reduced RRIF withdrawals. The tax treatment of dividends and capital gains in the Cash Investment account differs; dividends are taxed in the year they are received, whereas capital gains are taxed in the year they are realized through withdrawal. The Cash Investment account is projected to have a value of $360,000 at the start of 2026 and $541,385 at the start of 2044, with a total capital gain of $181,386 over this period. ($360,000 is mostly original investment, but includes some capital gains.)Withdrawals from my Cash Investment account can consist of the original capital, capital gains, or a combination of both. The Canada Revenue Agency provides preferential tax treatment to capital gains income, as only 50% of the capital gains are subject to taxation, and the remaining 50% is not taxed at all! Therefore, I plan to initiate the withdrawal of capital gains in 2044. The income and tax calculations for the next seven years (until I reach 89 years old) are presented below:

Note the relatively low amount of tax payable during this time period. This is due to only 50% of the capital gains being subject to taxation. By the end of the 88th year, the majority of the $475,782 in my Cash Investment account will be the original capital, resulting in a minimal tax liability when this amount is included in my final tax bill after my passing. Additionally, in February 2023, my TFSA account held $150,000 worth of investments. Assuming an annual growth rate of 6%, I anticipate that my TFSA account, which had $150,000 worth of investments in Feb 2023, will reach a value of $636,321 after 25.8 years. Notably, this amount is entirely tax-free.

Summary and Final Thoughts

As of February 2023, my investment accounts had the following amounts:

  1. RRSP Account: $400,000
  2. Cash Investment Account: $256,000
  3. TFSA Account: $150,000

Starting in January 2026 at age 65, my RRSP and Cash Investment accounts, along with Government benefits (CPP and OAS), are anticipated to provide an after-tax income of $48,000 for the following 24 years. At the end of this period, it is estimated that my accounts will hold at least the following values:

  1. Cash Investment Account: $475,782 (includes some capital gains)
  2. TFSA Account: $636,321 (100% tax-free)

During the 24 years of retirement, I will be paying very little tax ($1,116 — $4,423 / year). This will become possible as:

  1. I plan to limit my yearly income to remain in the lowest tax bracket.
  2. I plan to defer my CPP payments until age 71 to increase the payments by 42%.
  3. Roughly one-fifth of my income will be comprised of Canadian dividends, which are subject to favourable tax treatment, particularly when in the lowest tax bracket.
  4. I will take advantage of the $2,000 pension income credits.
  5. In the later years of retirement, Capital Gains, which are only 50% taxable, will form a major part of my income.
  6. I will let my TFSA account grow tax-free and will not use this to generate retirement income.

My calculations give me assurance that I don’t need $1.7 million to live a comfortable retirement life, and most probably, you also won’t need that kind of money. The financial services industry wants you to save more and more, so that they earn more commission and fees to manage your money. You may take some tips from this article to reduce taxes and increase your income during your retirement.

Taking into account my wife’s upcoming retirement in a couple of years, our combined retirement income would see a significant increase. Put simply, sharing your retirement years as a couple results in an automatic increase in your combined retirement income, since both of you would be eligible for OAS and potentially CPP. Consequently, the necessary amount of retirement savings decreases even more.

I eagerly await your feedback, especially if you come across any errors in my calculations or assumptions.

Disclaimer: The information provided in this article is for educational purposes only and does not constitute investment advice. Please consult your financial advisor before making any investment decisions.

See Related Articles

  1. Want to Retire? You need to plan for it…
  2. My First 2 Years in Unplanned Retirement
  3. Earning Less than $50,000 in Canada? RRSP may not be good for you
  4. Stop Using RRSP if You Earn a Middle-Class Income in Canada
  5. Stop Using RRSP if You Earn about $90,000 in Canada

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Ravi Taxali
Ravi Taxali

Written by Ravi Taxali

Software developer and self-taught investor, who writes about technology, self-development, health, life lessons and finance.

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