Assumptions and Methodology
Target Retirement Income
The Common Wealth plan sets a 60-85% target replacement rate as a default depending on income level to help future retirees maintain, on average, their living standards in retirement.
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The 60-85% figures are based on a study that economist Keith Horner conducted for the federal government, with slight adjustments upwards for higher-income groups to account for out-of-pocket health care costs such as home care and long-term care, which were not included in Horner’s study, and to allow for a margin of conservatism. The study was done across a large group of Canadians and individual circumstances can dictate a higher or lower income replacement ratio.
Projected Retirement Income
Projection period is from the member’s current age to the age at which they have a 25% probability of survival, as recommended by FP Canada Standards Council. For more details, please refer to section on “life expectancy assumptions” below.
To calculate the projected retirement income from both existing retirement savings and future retirement savings, we use the following assumptions based on guidance from the FP Canada Standards Council and the average glide path of BlackRock’s target date funds: investment returns, net of plan fees including management expense ratio, of 4.95% in the pre-retirement phase and 3.35% in the post-retirement phase. All projections do not take taxes into account as individual tax situations may differ.
Please note that these return assumptions do not vary by fund selected, but are based on average returns over the accumulation or post-retirement periods. Retirement income is projected to last until the age that the member has a 25% chance of living (based on the life table and calculations described below), factoring in post-retirement inflation of 2.0%.
If a member inputs a monthly pension amount for Registered Pension Plans as part of their existing savings for retirement, it is assumed that the monthly pension will not be indexed for inflation.
- For Old Age Security (OAS) and Canada Pension Plan (CPP) benefits, we assume the member begins these benefits at the indicated age of accessing these benefits. Benefit calculations for both CPP and OAS are adjusted upward or downward to factor in this age, based on the factors used by the government of Canada (for CPP, increased by 8.4% for every year past age 65 and decreased by 7.2% for every year before age 65; for OAS, increased by 7.2% for every year past age 65). In the event there is a difference between the retirement age and the age at which CPP and OAS begins, the dollar amount in the projected retirement income bar chart is averaged out to the amount the member will receive over their retirement period.
- For Guaranteed Income Supplement (GIS), we assume that members who are eligible to receive GIS in their retired years will receive it, and estimate amounts based on marital status and past and future contributions to a TFSA or RRSP. In the case of a married person, we assume the household income to be double of the individual annual income as provided by the member, and the calculated household income is used to compute the GIS. We also estimate that GIS will be clawed back based on any projected retirement income from CPP, RRSP, RRIF, RPP or other savings.
- For OAS, we assume the member would live in Canada going forward. If the member’s projected retirement income is above the level at which OAS benefits are clawed back, we estimate the clawed back amount using rules provided by the Government of Canada as well as the remaining OAS amount, if any.
- For CPP, we assume that the member has and will continue to contribute to CPP. For those members whose inputted incomes are above the Year’s Maximum Pensionable Earnings (YMPE), we assume they will receive maximum CPP. For those whose inputted incomes are below the YMPE, we adjust their projected CPP benefits down proportionally. The CPP projection incorporates enhanced CPP, making a simplifying assumption that contributions before 2022 are subject to the base CPP benefit, and contributions in 2022 and beyond are subject to the enhanced CPP benefit. CPP benefits are assumed to be calculated based on the 40 years of income and CPP contributions before a member retires.
Suggested savings are calculated based on the savings required to fill any gaps between the target retirement income and the projected retirement income from government benefits and existing savings. Regular monthly savings in this plan, however, are capped at the combined annual RRSP and TFSA contribution limit. A member may have a savings gap, meaning that they would need to save outside of this plan to be able to meet their target retirement income.
All figures are presented in today’s dollars.
Life expectancy assumptions are based on the life table provided by the FP Canada Standards Council with supplementary calculations. For members who indicate their gender as non-binary, we use the average of male and female for estimation purposes.
The life table provided by the FP Canada Standards Council are for ages 20 to 100, in 5-year increments. For ages in between these 5-year increments, supplementary calculations were performed using a mortality table developed by the Canadian Institute of Actuaries, called CPM2014. Because this table has mortality rates that were appropriate for a year in the past, 2014, the table has been adjusted for improvement in mortality using another standard assumption, called CPM-B.
Supplementary calculations were performed by R.C.W. Howard, FCIA, FSA (Fellow, Canadian Institute of Actuaries; Fellow of the Society of Actuaries). He was a member of the committee that developed the mortality table CPM2014 and the improvement scale CPM-B for the Canadian Institute of Actuaries.
The calculations concern probabilities rather than certainties. A particular individual may live longer or die earlier than shown in the table. The probabilities are most useful when dealing with a large number of people.
Disclaimer: The projections in the Common Wealth plan’s digital platform are for educational purposes only and should not be considered financial advice. These projections are based on research-based assumptions and the information you will provide, and will be updated from time to time. They may not take into account all the relevant details of your financial situation. Common Wealth is not responsible and cannot be held liable under any circumstances for any damages resulting from the use of these projections. Unless otherwise noted, all projections are in today’s dollars.