Key Concepts
Plain-language explanations of financial concepts used throughout RetirePlan.
The 4% Rule
The 4% Rule is a guideline from the 1994 "Trinity Study" (by finance professors Bengen, Cooley et al.) suggesting that a retiree can withdraw 4% of their initial portfolio in the first year, then increase that amount by inflation each year, and have a very high probability of the money lasting 30 years.
Example: A $1,000,000 portfolio supports ~$40,000/year in inflation-adjusted withdrawals with high confidence over 30 years.
Why it's just a guideline
- It's based on US historical returns. Canadian and global portfolios may differ.
- It assumes a 30-year retirement. If you retire early (age 50) and plan to age 95, a 45-year horizon may warrant 3%โ3.5%.
- Sequence-of-returns risk matters โ a market crash in year 2 of retirement is far worse than one in year 20.
- 3.5%โ5% are all defensible depending on your return assumptions, flexibility, and risk tolerance.
RRIF โ Registered Retirement Income Fund
An RRSP must be converted to a RRIF by December 31 of the year you turn 71 (or converted sooner voluntarily). The RRIF holds the same investments and continues to grow tax-sheltered, but you must withdraw a minimum amount each year.
Minimum Withdrawal Rates
The CRA sets the minimum annual RRIF withdrawal as a percentage of the January 1st balance. The percentage increases with age:
| Age at Jan 1 | Minimum % | Age at Jan 1 | Minimum % |
|---|---|---|---|
| 65 | 4.00% | 79 | 6.82% |
| 66 | 4.17% | 80 | 6.82% |
| 70 | 5.00% | 85 | 8.51% |
| 71 | 5.28% | 90 | 11.92% |
| 75 | 5.82% | 95+ | 20.00% |
These withdrawals count as taxable income in the year received. Since the percentage grows with age, a large RRSP can result in significant forced income in your 80s and beyond โ sometimes pushing you into higher tax brackets or reducing income-tested benefits. This is called the "RRSP/RRIF tax bomb."
RRSP Meltdown Strategy
A common strategy is to deliberately draw down your RRSP before age 71 (after retiring but before CPP/OAS begin) to reduce the RRIF balance and the resulting mandatory withdrawals. RetirePlan models this automatically when you set a tax-optimized withdrawal strategy.
CPP & OAS
CPP โ Canada Pension Plan
CPP is a contributory pension you've been building throughout your working life. You can start receiving it as early as age 60 or as late as age 70.
| Start Age | Effect on Benefit |
|---|---|
| 60 | Reduced by 0.6% for each month before 65 (max โ36% at 60) |
| 65 | Standard 100% benefit (your calculated amount) |
| 70 | Enhanced by 0.7% for each month after 65 (max +42% at 70) |
To find your estimated CPP amount, check your My Service Canada Account. Enter this amount (at age 65) in the Investors settings. RetirePlan adjusts it for your chosen start age automatically.
OAS โ Old Age Security
OAS is a monthly government pension available to Canadians aged 65+, regardless of your employment history. The standard monthly payment is approximately $700โ$750 (indexed quarterly to the CPI).
| Topic | Details |
|---|---|
| Start Age | 65โ70. You can defer for a higher payment: +0.6% per month deferred (up to +36% at 70). |
| Clawback Threshold | If your net income exceeds ~$90,997 (2024), OAS is reduced by 15 cents for every $1 above the threshold. At ~$148,000 net income, OAS is fully clawed back. This is called the "OAS Recovery Tax." |
| Should you defer? | Deferring OAS to 70 is beneficial if you expect to live past roughly age 82โ84 (the break-even point) and have other income sources to bridge the gap. RetirePlan's Insights tool can calculate this break-even for your specific situation. |
TFSA vs. RRSP โ When to Use Each
| TFSA | RRSP | |
|---|---|---|
| Tax Treatment | Contribute after-tax; withdrawals are completely tax-free | Contributions reduce taxable income; withdrawals are fully taxable |
| Contribution Room | Accumulates every year (currently $7,000/year). Withdrawals restore room the following January. | 18% of prior year earned income, up to an annual limit (~$31,560 for 2024) |
| Ideal for | Lower-income years; expected higher income in retirement; flexible access to funds; emergency reserves | Higher-income working years (bigger tax deduction); expected lower income in retirement |
| Mandatory Conversion | None โ no age limit or mandatory withdrawal | Must convert to RRIF by end of year you turn 71 |
| OAS Clawback | Withdrawals do not count as income โ no OAS impact | Withdrawals count as income โ can trigger OAS clawback |
| Income Splitting | Not applicable | Spousal RRSP contributions are a simple income-splitting tool |
Income Splitting
Income splitting moves income from a higher-income spouse to a lower-income spouse, reducing the combined tax bill. There are two main mechanisms relevant to RetirePlan:
Spousal RRSP
You can contribute to your spouse's RRSP using your own contribution room. The contributions grow tax-sheltered in their name. When withdrawn in retirement (subject to the 3-year attribution rule), the income is taxed in their hands โ at their (presumably lower) rate. Ideal when one spouse will have significantly more RRSP income in retirement than the other.
Pension Income Splitting (in Retirement)
Canadians 65+ can split up to 50% of eligible pension income (RRIF withdrawals, registered pension income, annuity income) with their spouse for tax purposes. This doesn't require any fund transfers โ it's done at tax time. RetirePlan models this when you enable income splitting in the scenario Advanced settings.
Rebalancing
Rebalancing is the process of resetting your portfolio back to its target asset allocation (e.g., 60% stocks / 40% bonds) after market movements have caused it to drift.
Example: You target 70% equities. After a strong stock market year, equities are now 82% of your portfolio. Rebalancing sells equities and buys bonds/cash to return to 70%.
Why Rebalance?
- Keeps risk at its intended level โ a portfolio that has drifted to 85% equities is more volatile than you planned for
- Naturally enforces "buy low, sell high" by selling what has grown and buying what has lagged
- Reduces sequence-of-returns risk near retirement
Rebalancing Frequency
| Frequency | Tradeoff |
|---|---|
| Monthly | Most responsive to drift; higher trading activity |
| Quarterly | Good balance of responsiveness and stability |
| Annually | Low friction; common for passive investors; minor drift accepted |
| Off | No rebalancing; holdings grow and shrink at their own rates |
Set rebalancing frequency in Subscription Settings or override it per scenario. See Scenarios โ Advanced Settings.
Risk Tolerance
Risk tolerance is a 1โ10 scale that represents how much portfolio volatility you're comfortable with. In RetirePlan, it is set per Life Stage โ so your risk tolerance in the active years of retirement (age 65โ75) can differ from your risk tolerance in assisted living (85+).
| Score | Profile | Typical allocation |
|---|---|---|
| 1โ2 | Very Conservative | ~80% fixed income (bonds, GICs, CASH) |
| 3โ4 | Conservative | ~60% bonds, 40% equities |
| 5โ6 | Moderate | ~50/50 balanced |
| 7โ8 | Growth | ~70% equities, 30% bonds/cash |
| 9โ10 | Aggressive | ~90%+ equities |
RetirePlan uses risk tolerance in the Risk-Based withdrawal strategy to determine which holdings to liquidate first, and in rebalancing to set target allocation bounds.
Inflation
Inflation erodes the purchasing power of money over time. RetirePlan uses a configurable inflation rate (default: 3.5%) to model:
- Monthly expense growth: Your $5,000/month expenses today become ~$7,000/month in 10 years at 3.5% inflation
- CPP/OAS indexing: Government benefits are indexed to inflation automatically
- Goal amounts: A goal set in today's dollars is inflated to its future cost at the target date
- Real vs. nominal returns: The engine models nominal returns (e.g., 7% CAGR on a stock ETF) and subtracts inflation to compute the real rate of return
Change your inflation assumption in Subscription Settings. You can test scenarios with different inflation rates to see the range of outcomes.
Asset Allocation
Asset allocation is how you divide your portfolio among major asset classes: equities (stocks), fixed income (bonds, GICs), and cash. It's the single biggest driver of both returns and volatility.
Common Heuristics
- "110 minus your age" in equities: Age 60 โ 50% equities. A rough guideline that reduces risk as you age.
- "60/40 balanced portfolio": 60% equities, 40% bonds. A classic starting point for moderate-risk investors.
- Life-stage shifts: Some retirees move to 40/40/20 (equities/bonds/cash) by age 75 to reduce volatility and maintain liquidity.
RetirePlan does not impose an allocation โ you define it through the holdings in your accounts. Use CASH and BOND vehicles to model the fixed-income portion explicitly. The Dashboard shows your current allocation donut chart in real time.
Marginal vs. Effective Tax Rate
These two terms are frequently confused. Understanding the difference matters for planning.
| Marginal Rate | Effective Rate | |
|---|---|---|
| Definition | The tax rate on the last dollar of income โ your highest applicable bracket | Total taxes paid รท total income โ your average rate across all income |
| Example | Earning $120,000 in Ontario puts your marginal rate at ~43.41% (combined federal + provincial) | Same earner likely pays an effective rate of ~26โ30% because the lower income slices are taxed at lower rates |
| Used for | Evaluating whether an RRSP contribution is worth it (saves tax at marginal rate), assessing the cost of an extra withdrawal, and scenario tax estimates | Understanding your overall tax burden; useful for comparing countries or periods |
RetirePlan uses your marginal rate for modeling RRSP contribution benefits and withdrawal taxes. Set your province in Subscription Settings; the Calculate Tax Rate button estimates your combined federal + provincial marginal rate based on your income level. See Investors โ Subscription Settings.
RetirePlan’s Approach: You’re in Control
RetirePlan is a projection calculator, not a financial advisor. Understanding what it does โ and deliberately does not do โ helps you use it with confidence.
You supply the numbers
Every meaningful input โ estimated portfolio returns, expected growth rates, future contribution amounts, CPP projections โ comes from you or your advisor's research. RetirePlan never generates, suggests, or adjusts a number on your behalf. The quality of your plan reflects the quality of your assumptions.
Almost everything can be overridden
Monthly contribution rates, marginal tax estimates, withdrawal schedules, vehicle growth rates, rebalancing weights โ nearly every assumption is adjustable at any level of the model. If a default doesn't match your situation, change it.
We don't recommend investments
RetirePlan does not suggest specific stocks, mutual funds, ETFs, or other securities. We do not recommend brokers, financial advisors, or institutions. We do not suggest that you change your risk tolerance or asset allocation. Those decisions require research, professional judgment, and personal context that a calculator cannot provide.
Verify your plan with a qualified advisor
RetirePlan is designed to help you arrive at an advisor meeting with a well-formed, credible plan โ not to replace that meeting. A qualified financial planner or advisor can review your assumptions, catch blind spots, and help you act on the plan with confidence.