Calculating how long your money will last

• you can live off the earnings from your investments and leave the capital to your children;

• you can take a fixed amount each year and leave the capital to your heirs;

• you could take the maximum fixed amount each year using some or all of the capital to finance your desired lifestyle.

Using the using the Fixed vs Variable Income Calculator, letís examine the three options using the calculatorís defaults:

• $500,000 in mutual or segregated funds (income will be taxed and the adjusted cost base (ACB) of the funds will be reduced);)
• life expectancy 20 years from now;
• 45% marginal tax rate;
• 2.7% inflation;
• returns on your investments of 1%, 2.5%, 3.5% in years one, two and three, respectively, then 4% annually thereafter.

Option 1: Fixed income: Optimize for capital preservation

Given the above rate of returns and you withdraw only the income earned by your investments, you can withdraw an annual cash amount of $14,518 (before taxes, indexed at 2.7% for inflation) for 20 years. At the end of that time, your nest egg will be $500,049.

Option 2: Variable income: Use 1% of capital annually

If you withdraw cash earned by your investments at the above rate plus 1% of capital a year, at the end of 20 years, you will still have $408,953.

Option 3: Fixed Income: Optimize for Income

If you want to maximize withdrawals to use up all your capital, you can withdraw an annual amount of $27,873 (before taxes, indexed). At the end of 20 years, your nest egg will be depleted to $47.

The calculator allows you to enter your own beginning capital, marginal tax rate, inflation adjustment, life expectancy and expected rates of return. You can also look at RRSP/RRIF investments (income is not taxed but withdrawals are) or other investments (such as GICs) where the income is taxed but no tax liability accrues due to ACB adjustments.

If you've not taken a look at this powerful calculator, sign up for a free trial today.