The $2-million dilemma

Is $2 million enough to retire on? That was the question the National Post posed on a handout to support a talk I gave on its behalf at the recent Financial Forum in Toronto.

A subsequent questionnaire aimed at middle-aged Canadian investors asked more than 200 showgoers how much they thought they needed to retire.

The actual question posed -- by me, not the paper -- was "What amount of accumulated capital do you believe is necessary in order to spin off an adequate retirement income?"

In a nutshell, the average figure was $1.6-million, but answers varied widely from as little as $500,000 to more than $10-million. (The exact percentages are posted at www.the boomer.com, a Web site I manage.)

It should come as no surprise that some people have modest lifestyles a and expect to get by on government pensions and a moderate amount of income generated from a $500,000 RRSP or RRIF.

Nor is it hard to comprehend that those with more lavish lifestyles -- multiple children in private school, vacation homes in various exotic locations, etc. -- need to accumulate $5-million, $10-million or even more before they think they can slow down.

Even so, this little survey sparked a heated debate on the Internet. Critics attacked the question itself, arguing it should be income-based rather than total-sum based, that it should specify constant dollars and indicate retirement age.

But it was the answers that really got some riled. Some angrily insisted you can get by on far less than $1.6-million or $2-million. This camp says you need only "replace" half your working income and generous government pensions like Canada Pension Plan and Old Age Security greatly reduce the need to accumulate massive RRSPs or non-registered investment portfolios.

Indeed, for society's unfortunate, accustomed to living on a shoestring, government pensions in retirement might constitute a step up from what they experienced in their working lives.

Similarly, those with gold-plated private sector or government pensions will also need far lower levels of savings. Indeed, if you're in a defined benefit (DB) plan from a company you joined right out of college, or you're a teacher or public servant, you may not need one thin dime in your RRSP.

These fortunate souls have almost impregnable pensions but are a minority; their numbers are dwindling, as few corporations start new DB plans these days. Increasingly the trend is to defined contribution plans or group RRSPs, both of which transfer risk from employers to employees. Many more will have only their RRSPs and non-registered savings to rely upon.

For these people -- the middle class taxpayers who fund the two groups who don't need to save -- it's a worthwhile exercise to estimate how much capital need be accumulated.

Steve Salter, president of Vancouver-based Fimetric Systems used his RRIFmetic software to calculate how much income various RRSP nest eggs would generate beginning at age 64. He assumed an average return on investments of 5%.

He found the $2-million nest egg will provide a single person with a yearly retirement income of $74,383, and a couple with $95,987 (after-tax).

The $1.5-million sum would generate $60,916 and $80,629 respectively; $1-million spins off $47, 994 and $64,635.

These figures are, admittedly, higher than the average industrial wage. They correspond to an upper-middle-class urban lifestyle, but can hardly be construed as lavish when compared to the lifestyles of celebrities, athletes and business tycoons.

In his calculations, Mr. Salter assumed each full entitlement to CPP and OAS, inflation at 2% and the retirees "die broke" at 95.

Of course, you may think you can get 7% a year from a balanced portfolio rather than 5%, or you may wish to leave your heirs an estate. With a 7% return, the single person with $750,000 in her RRSP would see her $40,314 lifestyle jump to $47,352. If she wants to leave $200,000 to an heir, her lifestyle reduces to $44,360 annually.

Glenn Patterson, a retired helicopter pilot from Quebec, says he calculated his capital requirements carefully before venturing into early retirement. He had no company pension and considered himself short of capital.

"Now, 13 years later, I would suggest that $1-million invested is barely adequate and $2-million would be much more comfortable."

The problem with limited capital is risk, Mr. Patterson says. The capital must work harder to cover expenses, taxes and inflation. That means assuming more risk, he says.

"With $2-million invested, however, lower returns can be tolerated for the same dollar amount and risk reduced to very low levels ... With $2-million, one could live much more comfortably on 4% of it. $1-million might do in a pinch but $2-million offers more options and lowers the risk. $1.5-million might be a passable compromise."

Other retired boomers believe less is required. Lethbridge-based do-it-yourself investor Keith Betty insists most people who accumulate $2-million retirement portfolios won't need it. "They are savers, don't have an expensive lifestyle and will wind up giving a lot of it away."