Assumptions and Methodology
Life expectancy assumptions are based on life tables provided by the Financial Planning Standards Council. We use the average of male and female life expectancy in the life tables.
Target retirement income is calculated using the replacement ratio based of the user’s pre-tax, pre-retirement income. The replacement ratio is based on a study that economist Keith Horner conducted for the federal government, which found that higher-income individuals require a lower-replacement rate, and lower-income individuals require a higher-replacement rate. For conservatism, we assume a slightly higher number from the original study, which factors in out-of-pocket health care costs such as home care and long-term care.
The replacement ratio is 60% for individuals with annual pre-tax income of more than $100,000, 65% for individuals between $80,000 and $100,000, 70% for individuals between $60,000 and $80,000, 80% for individuals between $40,000 and $60,000 and 85% for individuals less than $40,000.
- For Old Age Security (OAS) and Canada Pension Plan (CPP) benefits, we assume the user begins these benefits at the indicated age of retirement. If the indicated age of retirement is later than 70, we assume that the user begins OAS and CPP at age 70. If the indicated age of retirement is below 65, we assume the user begins OAS as age 65. 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, increase by 8.4% for every year past age 65 and decrease by 7.2% for every year before age 65; for OAS, increase by 7.2% for every year past age 65).
- For OAS, we assume the user lives in Canada for at least 40 years before retirement and during retirement. All users are assumed to receive maximum OAS unless their projected retirement income is above the level at which OAS benefits are clawed back, in which case we estimate the clawed back amount using rules provided by the Government of Canada.
- For CPP, we assume that the user has and will continue to contribute to CPP. For those users 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 the 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 before a user retires.
To calculate the projected retirement income from both current savings and future savings, we use the following assumptions based on guidance from the Financial Planning Standards Council:
- Gross (i.e., before fees and inflation) investment returns of 5.70% in the pre-retirement phase and 4.10% in the post-retirement phase.
- Net investment returns are calculated as the difference between the gross returns listed above, and the assumed fees (2% for a typical RRSP, and whatever the user inputs for a low-fee plan)
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. We estimate the savings required for retirement income to last until the age that the member has a 25% chance of reaching (based on the life tables described above), factoring in post-retirement inflation of 2%. We assume that monthly savings increase each year by 2%.
The difference between the suggested savings in the typical RRSP plan and lower–fee plan is annualized and shown as money available for you to spend on other things
The number of months earlier you can retire with a lower-fee plan is calculated based on how much faster the user would achieve the target retirement income if saving at the suggested monthly level for a typical RRSP, but paying the lower level of fees specified by the user.
All figures are presented in today’s dollars.
