Will your RRSP be enough to retire with?

I just read an article that has shaken me. I’d like to explain what it was and why I’m bothered.

The Motley Fool published a great article sharing research into actual RRSP account values people are retiring with in 2024. The study found that the average Canadian has $129,000 saved in their RRSP when they reach 65+.

$129,000.

Is that a lot? Let’s answer that question the long-winded way. Time to bring in some back-of-the-napkin math. In full disclosure, I’m stealing this example from my new book. Since it’s not yet completed publishing, you may not have heard me share this example.

I just shared that the average Canadian has $129,000 in RRSP at retirement o’clock. We’re all stronger than average, obviously. Our number is a whopping $500,000! Sounds ambitious in comparison, yet it also feels low for some reason. I’ll just stick to the script and say this is going to be your account value at 65. Congrats on your $500,000.

You have been patiently working and waiting to get here. Your plan now is to take your spouse on a world tour for a whole year. You may even fly first-class because you are first-class. You reckon it will cost about $120,000 to do this right for the year. That’s $10,000 per month. Eating every meal out, staying in hotels, organizing for tours, all of this costs a few bucks but that’s what you want and you deserve it. You’ve worked all of your adult life to get here!

So you commit. This is happening. Here we goooooo!

Step 1: Plan for an RRSP withdrawal to get that $120,000 in your pocket. Keep in mind that withdrawing from your RRSP is the same as collecting income, so there will be income taxes applicable. You worked part of the year or perhaps you have other passive income. When you withdraw this money let’s assume it will be subject to 40% average income tax. [Before a CFP, CPA or mathlete @’s me: reader, please note that this average tax rate could be lower, and it could also be higher.]

Step 2: Withdraw $200,000 from your RRSP. You will have $80,000 payable in income tax under the tax rate assumption we are working with. This leaves you with $120,000.

Step 3: Go YOLO, because you only live once.

When you get back home after a splendid year abroad, you may notice that your RRSP balance is probably still somewhere around $300,000. This is $200,000 less than your balance a year ago, or 40% if you prefer to look at it that way. In one year, you’ve reduced your pool of available funds by 40%.

One year took 40% of your money.

You realize that you probably can’t do that again. So what can you do? You probably have a lot of life left in you and want to live comfortably for the next 10, 20 or 30 years. One year took 40% of your money. How can you possibly life off the remaining $300,000 for that long? Don’t forget, every dollar you take from your RRSP is going to also be taxable. $300,000 is not $300,000 to you.

Let that sink in.

Now imagine if you are an average Canadian and that RRSP balance you started with is $129,000 and not $500,000.

I want to encourage you to also read that article and analyze that research. It does bring up TFSA savings as well. Hopefully this average Canadian with their $129,000 in their RRSP is also the same average Canadian with $160,000 in their TFSA mentioned in the research. That will help, a little.

The bottom line is this: I just can’t see a world in which $500,000 will be enough to survive on for an average Canadian, particularly where I live in Toronto, let alone the $129,000 that the average is currently suggesting. The part that hurts the most as someone who sees these types of numbers regularly is that people don’t often find out that it won’t all work out find that out far too late to change the outcome.

I’m sorry to have to make you aware that you may need to rethink your thinking, but I’d feel worse if I didn’t at least share this with you when you at least able to make some corrections.