If I had a million dollars
Jan 31, 2018
“If I Had a Million Dollars” was a song released by the Barenaked Ladies in 1992. At that time, most 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, “If I had a million dollars, I’d be rich” got me thinking. Let’s say as a family you saved a million dollars in your Registered Retirement Savings Plan (RRSP), how much retirement income would it provide today?
Annuity check
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 does provide a good benchmark for how much retirement income you could generate today from a million-dollar investment.
The following income chart is based on a couple purchasing an annuity today for a million dollars:
| Age | Date of Birth | Annuity Purchase | Annual Income | Withdrawal Rate |
|---|---|---|---|---|
50 each | Jan. 1, 1967 | $1,000,000 | $ 28,404.87 | 2.8% |
55 each | Jan. 1, 1962 | $1,000,000 | $ 29,071.56 | 2.9% |
60 each | Jan. 1, 1957 | $1,000,000 | $ 31,703.88 | 3.1% |
65 each | Jan. 1, 1952 | $1,000,000 | $ 36,065.88 | 3.6% |
Source: Manulife Financial
A few things to note about the above income chart:
- Data are based on a joint and survivor annuity, with a reduction of 30% income on the first death
- Indexed at 2% per year
- Income is taxable each year since the income is from an RRSP
- Quote is based on Manulife Financial as of October 31, 2017, with principal protection.
What an annuity provides for the couple in the example 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 indexed by 2%. Upon the first death, the payments are reduced by 30%. This is like purchasing your own pension.
Projected maximum withdrawal rate
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 buy an annuity.
For example, if your total investments are $1,000,000, and you need to withdraw $25,000 per year to cover all your expenses and taxes, your initial withdrawal rate would be 2.5%.
Below is a summary based on asset allocation and initial safe withdrawal rates for a 55-year-old with an 80% chance of sustaining the rate over a 40-year period. An 80% success rate means that 80% of the time, your money would last for the entire time period, and 20% of the time, your capital would be depleted by the end of the time period.
| Equity Allocation | Safe Withdrawal Rate |
|---|---|
0% | 2.1% |
20% | 2.4% |
40% | 2.7% |
60% | 2.9% |
80% | 3.0% |
100% | 3.0% |
Source: Safe Withdrawal Rates for Retirees in Canada Today, Morningstar, January 2017
As an example, if you were 55 years old today and wished to plan to age 95, and had a $1,000,000 investment account with an allocation of 60% equities, the safe withdrawal rate would be 2.9%.
The question to ask yourself then is, if you are 55 years old today with a million dollars, could you live on $29,000 per year?
A million dollars is a lot of money, but it may not provide as much retirement income as you may think. In your financial plan, you should determine how much capital you need to save in addition to your sources of guaranteed income - such as CPP and OAS benefits - to provide the lifestyle your family desires.
If you’re unsure of how much enough is, contact your financial advisor.
The information provided is for illustrative purposes only. Actual rates of return may vary and are dependent on your personal investment, savings, loan and insurance profile. Rates of return are hypothetical and not meant to represent any specific investment. Rates of return will vary over time, particularly for long-term investments. Please consult your financial advisor to discuss your situation before making any financial decisions.
