Safe withdrawal rates: The new math

How much Canadian retirees can afford to spend without going broke.

Morningstar Canada 3 March, 2017 | 6:00PM
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Editor's note: The following article is based on a new Morningstar research paper: Safe Withdrawal Rates for Retirees in Canada Today. The paper's co-authors are David Blanchett, Morningstar's head of retirement research; Paul Kaplan, Morningstar Canada's director of research; and Tom Teder, a researcher and business analyst with Morningstar Canada.

Given the heavy reliance by most Canadians on government plans and personal savings to meet their financial needs during retirement, it's important for retirees to have a reasonable expectation of the proportion of their assets they can withdraw safely each year. Commonly known as the "safe withdrawal rate," this is the amount that ensures sufficient capital remains to deliver a similar level of future income.

There are three primary findings from our research. First, while the historical performance of stock and bond markets in Canada has been relatively similar to the global average, future expected returns in Canada, especially in the near term, are likely to be considerably lower. Second, given these lower returns, safe withdrawal rates are relatively low, and may decrease further when incorporating longer life spans and the impact of fees. Finally, a balanced portfolio is likely to be the best asset allocation for Canadian retirees.

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