How it works: assumptions and simplifications

Please note this page has not been recently updated and may not reflect the current version of the app

Below are a number of assumptions and simplifications made within the model. Please note how each may limit or otherwise affect the results of your solution.

The model is based on the simplistic notion that you will want to spend a constant amount in the coming years. This is of course highly debatable. Late in life you will not be taking as many cruises - but perhaps you will do more. Or spending on vacations may be replaced with spending on medicines and supplementary health or personal care services. In any case, this model assumes constant level of spending, adjusted for inflation.

  • The concept of 'retirement' has grown ever more murky over the past decades. The repeal of mandatory retirement, the demographic swell of (generally healthy) boomers and the economic necessity for many to supplement their incomes while collecting pensions have wiped out the image of the 'retirement years' as a period of leisure following a lifetime of earning.
  • There is no 'retirement age' in RetPlan. You earn income or pensions or not. You can start collecting CPP while earning employment income. You can return to work after a period of rest. You draw down on registered and non-registered savings and investments as required. One partner can continue to work long after the other has stopped. These are all possible, even likely, in real life.

  • The primary objectives are to achieve your spending target each year while retaining a given amount of net worth at your 'expiry date'. The secondary objective is to send as little money as possible to the government, so you have more to spend or give away.
  • The spending target is the after-tax amount you hope to have available each year, excluding home ownership and rental costs that are explicitly listed elsewhere (rent, property taxes, condo/strata fees, mortgage and HELOC payments.) Other residency costs, such as insurance and utilities not included in rent, ARE included in the spending target. The number you enter applies to the base year and it is increased by the rate of inflation in each subsequent year.
  • The objective net worth is the amount you hope to retain at your 'expiry date'. This could include bequests you wish to leave to family or charities, or it may be a reserve for contingencies. Enter a number for present-day values (that is, for example, if you were to make a gift to family in the base year) and RetPlan will increase it by the rate of inflation each year.
  • The Fit Index is an attempt to provide a single numeric evaluation to compare different scenario versions. Its algorithm combines spending target differences, differences between objective and actual final net worth, and income taxes paid. The lower the number, the closer you are to achieving your obectives. Hypothetically the perfect score is zero, however, this could only be done by paying no taxes which is highly unlikely.
  • The Fit Index does not distinguish between positive and negative differences so a scenario that ends with a net worth greater than your objective (all else being equal) will score higher - worse - than one where you meet your objective. RetPlan will suggest you increase your spending target - enjoy the surplus!
  • RetPlan will try to find the most tax-efficient way to achieve your spending target, choosing between taxable sources (such as RRSP withdrawals) and non-taxable sources (such as TFSA withdrawals). The system will split income between taxpayers whenever possible and will suggest some actions (an early conversion from RRSP to RRIF, for example) to improve the results. However, in many situations there are options for reducing taxes that are far outside the scope of RetPlan. If you see a substantial tax bill in your future, consult a financial planner or tax lawyer.
  • Any tax optimizations done by RetPlan are done only on an annual basis. You may need to run a number of scenarios, adjusting your inputs, to see the multi-year effects of, for example, deferring the start of your CPP benefit payments.

  • A scenario starts with a set of facts (your financial and income status as of the start of the base year) and projects your situation out to the end of the model period, using the economic variables (inflation and interest rates), financial objectives (spending target, remaining amount) and actions (buy/sell house, work part time) you have entered. In one scenario, you may may see what happens if you decide to continue working until you are 70 and sell your home at age 80. In another, you may examine what happens if you stop working now, sell the home and move into a cheaper house or condo.
  • Each scenario can have multiple versions. For example, you may compare each scenario in a high-interest high-inflation environment with a low-interest, low-inflation world.
  • There is no hard distinction between scenario and version. You can model all of the above examples as multiple versions of one scenario.
  • A scenario is based on a set of facts and each version of that scenario is based on the same set of facts. In contrast, if you create a second scenario to mirror the first one you will need to enter and maintain the facts for each.

  • The model timeline runs for a maximum of 35 years.
  • All events occur on 1 July: birth, death, buy or sell a house, borrow money, start pension payments. If you start CPP at age 66 you receive six monthly payments in that first year when you turn 66. If you sell a house it will appreciate for the first half of the year and the proceeds of the sale will attract interest for the second half (if the proceeds are not used to purchase another asset.)

  • (Most) federal and provicial tax brackets (or rate thresholds) increase by a rate set annually to the anticipated rate of inflation.
  • In Ontario, the top 2 thresholds at $150,000 and $220,000 are fixed but RetPlan begins to inflate them, arbitrarily after the 10th year, so the lower ranges do not overtake them.
  • In Ontario, the Health Premium is fixed (and has been since 2004) and RetPlan does not increase it.

  • Real estate prices are not included in the Consumer Price Index so you must set a separate value (for fixed rates) or rate curve for real estate inflation.
  • RetPlan applies the same inflation rate to all real estate assets so condos and freehold houses, rural and urban properties, principal and secondary residences all increase at the same rate.
  • Publicly available data on house prices is spotty prior to the mid-1980s so the database contains historical data for select cities from 1985 (in contrast to other rates that date to 1960.) When using historical or random rate curves in your scenario, select a city where the price history reflects your expectation of future price movements without regard to where you actually live.

  • RetPlan supports fixed, historical and random rates for inflation and interest rates and asset price changes. All scenarios are initialized with fixed rates. It is strongly recommended that you build your scenario with fixed rates, then use historical or random rates to test the resiliency of your solution.
  • To support the use of historic rates, Retplan includes a database of interest and inflation rates, stock and bond prices, dividends and bond yields that date to 1960. This data was taken or derived from publicly available sources and cross-checked with other sources for validity but THERE IS NO GUARANTEE OF THE ACCURACY OF THE DATA.
  • As a matter of interest, you could apply historic rates to see how your scenario would perform if it represented the financial standing of your parents' (1985-2019) or grandparents' (1960-1994) era.
  • For random rates, Retplan will calculate the average and standard deviation for each base rate type (derived rates are described below) and uses these to generate a random set of values using a normal distribution. This limited approach results in greater volatility than in real life where you can expect to see multi-year momentum (eg. several years of rising inflation or falling interest rates.)
  • When generating a set of random curves, the following dependencies are in effect to create a logically consistent set of values:
    • the Canadian overnight rate is created randomly
      • a stepped value is added to the overnight rate to create the prime rate
        • a value (positive or negative) dependent on the household credit score is added to the prime rate to determine mortgage, reverse mortgage and HELOC interest rates
      • a random value (positive or negative) is added to the overnight rate to create the Canadian bond yield
    • USA and Other bond yields are created randomly
      • Canada, USA and Other bond price changes are derived from year-to-year changes in their respective yields
    • interest rates below zero are not allowed to avoid complications with negative rates. Randomly-created negative rates are set to 0.01%
  • Fixed rates are each independent. If you enter fixed rates you must ensure you are creating a logically consistent set of values

  • Income of any type from non-registered accounts is split evenly between both taxpayers.
  • Dividends earned from foreign stocks are subject to a 15% withholding tax, except when held within a RRSP or RRF account. This reduces the cash available for reinvestment although some or all of the tax paid may be credited on the tax return.
  • Rental income could come from a separate suite or spare bedroom, on a long- or short-term or basis. If it is to be split between taxpayers it must be done manually and entered separately.
  • You can enter non-tax income which will be applied to the spending target but will not be declared on your tax return. WE DO NOT ADVOCATE NON-COMPLIANCE WITH INCOME REPORTING RULES! This capability exists in recognition of the fact that such income streams do exist. For example, you may receive interest payments on a non-arms-length loan you made to a family member who is not claiming a deduction for the payment. Or you could be sharing your home with family members who contribute to the cost of running the household. There are some income items that do not need to be declared, such as strike pay or compensation for being the victim of a criminal act. For a complete list search for "amounts that are not taxed" on the CRA website.
  • You can enter any number of windfall events such as receiving an inheritance or winning a lottery. These amounts are deposited into your non-registered account with no tax consequences, so enter an after-tax amount if it is a taxable event. These items are one-time awards with uncertain timetables and it is highly unadvisable to base any type of financial plan on them. However, RetPlan is designed to do what-if scenarios so you may plug in an amount and see how your life would change if it became a reality.

  • Funds in each of the account types (RRSP, RRIF, TFSA and non-registered) can be allocated among stocks, bonds and cash. Stocks and bonds can be further allocated among Canada, USA and Other regions. Cash is assumed to be kept in Canadian dollars.
  • The "Other" region could be any sub-component of global markets: European, Japanese, Asian, emerging markets. For the pre-defined or random curves, the underlying data uses historical global ex-North America index values.
  • Scenarios are initially set to have all accounts use the same allocation, which is 100% cash. You can choose to set different allocations for each individual and/or each account type to reflect varying requirements for income or growth and tolerance for risk.
  • RetPlan will keep 50% (or six months' worth) of your spending target in cash. Cash on hand is abitrarily divided: 80% in the TFSA, subject to contribution room, and 20% in non-registered accounts.
  • Accounts are rebalanced twice a year, on 30 June and 31 December, under the following rules:
    • If an account contains less than $10,000 it will be kept as cash, disregarding any other allocation set for it
    • For non-registered and TFSA accounts, allocations to stocks and bonds occurs only after the minimum cash amount has been exceeded, so you may see the cash holding far greater than the percentage allocated (until [minimum cash amount] / [account balance] > [percent allocated to cash])
    • Out-of-balance amounts must meet minimum values before the account is rebalanced. These minimums are currently and arbitrarily set to $1000 and 3% of their allocation.
    • No transaction fees, early redemption penalties or other costs are considered or included
  • In each year, TFSA accounts are maxed out with cash from non-registered accounts, subject to contribution room and the requirement to keep cash on hand.
  • RetPlan assumes there will be no lifetime cap on TFSA contributions.
  • Any funds in a RRSP will automatically be moved to a RRIF in the year a taxpayer turns 71.
  • Any net income (spending power) that exceeds that year's objective (spending target) is deposited into the non-registered account.

  • Real estate assets are designated as either a principal residence or secondary property. Canadian income tax rules heavily favour principal residences by exempting them from capital gains taxes when sold. RetPlan currently does not deal with capital gains on real estate sales but uses the principal/secondary designation as described below.
  • RetPlan expects you to have an unbroken chain of principle residences and rental accommodation (including retirement or nursing homes) throughout the scenario (after all, you must live somewhere). If at any time you do not have a residence, RetPlan will ask you to either buy or rent a unit before recalculating the solution.
  • Rentals are not end-dated (unlike principal residences that are sold). If you enter a new residence, owned or rented, RetPlan assumes you have moved into the new unit.

  • Borrowing against real estate can be an important source of retirement funding and provides a way to draw liquidity from what is likely your most significant asset without having to sell it. RetPlan simplifies the vast range of options in terms, rates, payment periods, prepayments etc as described below. The three types of loans allowed are defined to make clear the effects on cash flow and net equity when you pay principal and interest (a conventional mortgage), interest only (a line of credit) or nothing at all (a reverse mortgage).
  • Payments on a conventional mortgage are calculated with a payment frequency of one a month (12 each year). Mortgages that exist at the start of the scenario must be entered with the interest rate in effect and year of amortization. RetPlan calculates the payments required to reduce the balance to zero by 30 June of that amortization year, regardless of the actual anniversary date. Initially it is assumed the mortgage has a 3-year term remaining on it and RetPlan will use the actual rate you entered to calculate the payments. The payments should be close to, but are unlikely to match exactly, your actual payments. Thereafter, RetPlan will use the rate in effect for 5-year fixed terms to calculate payments until the amortization year. New (future) mortgages are given a 25-year amortization in a series of 5-year terms.
  • Payments on a Home Equity Line Of Credit (HELOC) are interest-only so the principal does not change unless additional drawdowns are made. HELOCS are assumed to be variable so the payments will vary with the interest rate each year.
  • No payments are made on a reverse mortgage. Interest is added to the principal and compounded annually. Payments will be zero each year while the principal increases. As with conventional mortgages, existing reverse mortgages are assumed to have a 3-year term at the start of the scenario and then are renewed for 5-year fixed terms. New (future) reverse mortgages are given a series of 5-year terms.
  • When a real estate asset is sold, all loans against it are repaid in full. This is the only way HELOCs and reverse mortgages are cleared. The model makes no allowance for extra payments that could considerably reduce your interest costs and mortgage amortization period.
  • All loans that exist at the start of the scenario remain as separate loans. Future mortgages also remain separate, to avoid complications with amortization and payments. Multiple drawdowns on future HELOC and reverse mortgage drawdowns are consolidated.

  • Income tax calculation does not include charitable contributions, medical expenses, or any other special federal or provincial tax program.
  • RetPlan will try to minimize taxes by splitting income - RRIF withdrawals and eligible pensions - between taxpayers when there is a difference in income levels.
  • Any withholding tax paid on foreign dividends may be credited back. Note the tax credit is proportional to the foreign dividends earned as a percentage of your net income so the credit may be less than the tax paid. Any excess of tax paid over the federal tax credit may be applied to the provincial tax credit.
  • Realized net capital losses are carried forward indefinitely and not applied to the previous three years as allowed by the tax laws. This may result in a suboptimal solution. The losses are used to reduce future capital gains as realized.

Income and account withdawals are applied in the following order until the spending target is reached in each year:
  1. Nontax (unreported) income
  2. Employment, self-employment and rental income
  3. CPP and OAS income
  4. Investment income
  5. Mandatory RRIF withdrawals
  6. Non-registered account withdrawals
  7. TFSA withdrawals
  8. RRSP withdrawals
  9. Voluntary RRIF withdrawals