Tax Rate in Retirement

by Avrex on February 22, 2015

Years ago, I built a spreadsheet to calculate how much money I would need to retire. I would update it regularly. One of the biggest factors in knowing ‘when you have enough to retire’ is to look at your spending habits and determine how much you want to spend in your retirement years. For example, in today’s dollars, I have estimated that I might need about $33,000 annually to retire.

However, one factor in my spreadsheet that I just glossed over, was the average tax rate during retirement. During my working years, my average tax rate is about 23%. In the spreadsheet that I created years ago, I also blindly used the same 23% tax rate during retirement.

That meant that during my retirement years, I would need an income of $42,850 at 23% taxation in order to obtain the $33,000 in after tax dollars that I require.

But, I now realize that my average tax rate in retirement will probably look much different than it does during my working years.

Example 1: Retirement income

I pulled up the 2015 calculator for Ontario, and entered a breakdown in today’s dollars, an example of how I might receive my future retirement income.
RRSP withdrawal: $10,000
Cdn dividends: $5,000
Income/interest: $17,000 (this includes $13,000 from CPP/OAS)
Capital gains: $5,000

The calculator states that with 37,000, I would pay approx. $3,700 in taxes, leaving $33,300 for retirement income. This is an average tax rate of 10 %.

I now see that I don’t need nearly as much money as I originally thought I needed.
i.e. $42,850 @ 23% versus $37,000 @ 10%

Example 2: Early Retirement income

The news gets even better, if you are saving for early retirement. i.e. The years before you receive CPP (at age 65) and OAS (at age 67) from the government.

Here at Avrex Money, to reach “Financial Independence” as soon as possible, we are maximizing our RRSP/TFSA accounts and are pouring further savings into a non-registered account.

In order to bridge the time between early retirement and receiving CPP/OAS payouts from the government, I’ll need to withdraw money from my RRSP as well as selling dividend stocks from my non-registered account.

Once again, using the Taxtips calculator, I entered another scenario of how I might earn income in my early retirement years.
RRSP withdrawal: $15,000
Cdn dividends: $10,000
Income/interest: $5,000
Capital gains: $5,000

The calculator states that I would pay approx. $2,000 in taxes, leaving $33,000 for retirement income. This is an average tax rate of 5.7 %.

In this early retirement example, I would only need $35,000 @ 5.7% tax (versus $42,850 @ 23% in the original calculation) to receive the $33,000 that I require for retirement income.


The Average Tax Rate in retirement can drastically affect the calculation of how much money you require in order to retire. In my examples above, I discovered that I only need to allow for 5.7% taxation in early retirement and 10% taxation during the normal retirement phase.


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2015 Option Income Goals

by Avrex on January 11, 2015

In 2015, I’ve challenged myself to generate income by selling call/put options.
With that said, here is the 2015 Avrex Options Income Challenge


I would like to make a $12,000 profit in 2015. (i.e. $1,000 per month).

However, the problem with options, is that the resulting returns are highly variable. There is a large range of possible outcomes.

What are my past results in selling options?
2014. n/a. (I didn’t trade any options. Life was too busy.)
2013. -$2,720 (After sustaining loses early in the year, I shut things down.)
2012. +$17,940 (This was a great year. I hope to get back to this level of success.)

What is my options strategy?

1. Sell options for premium.
The purpose of the above portfolio is to generate income by selling call/put options. Sometimes I will sell these options naked. Sometimes I’ll employ an option spread to protect against excessive downside losses. In all cases, I’ll be selling for a credit and a potential profit.

In general, I look for options with volatility. By selling this volatility, I want to gain premium dollars.

In this challenge, I will be sharing my transactions of selling these calls and puts in my non-registered portfolio. (I do buy long calls and long puts in my registered RRSP/TFSA accounts. However, that won’t be included here.) My goal is to demonstrate profits by short selling.

2. Duration.
The average contract length in my opening portfolio is 6 months. By initiating contracts that are about 6 months away, I hope to be lazy and not do too much trading in the interim. I’ll just monitor and make changes as I need to . (I do also occasionally dabble in weekly options).

3. Directional bias.
I select options in which I have a directional bias in the underlying. With short contract durations, I can’t necessarily expect the underlying to move in the expected direction in that time frame. However, a directional bias is still important, as I’m still playing the probability that it might move in that direction.

Why do I call this a challenge?
Options are a zero-sum universe. Somebody wins and somebody loses. For every transaction, there are an equal number of dollars won and dollars lost. The theoretical return on options is zero. (To take this further, the return is actually negative, due to commissions.)

The second reason that this is a ‘challenge’ is because I’m openly posting this here for all to see.
This is not a paper account. This is a real account. If my positions crash and burn and I lose a lot of money, you will see it documented here.

There is substantial risk here. Each individual option position contains a fair amount of risk and will fluctuate wildly. i.e. I could have some big winners and some big losers.

Does this worry me? Not overly. I look at this like stock diversification (or in this case, options diversification). By holding many (different) options, in aggregate, I believe that my risk is reduced.

For example, here’s what I expect my individual returns will look like: small win, small win, BIG LOSS, small win, small win, BIG LOSS, small win, BIG LOSS, small win, etc. Aggregated, I expect to have a positive result.

Options as part of a diversified investment portfolio.
I hold low-fee bond and equity index ETFs plus individual stocks in my overall investment portfolio. Options can be a good alternative investment class to add for further diversification of your portfolio.

Did I mention that this was risky?
I did a stress test on my opening account positions.
If all of my underlying stocks crash by 30%, I will lose -$20,000.

If a short term major event happens, that unhinges the market, there’s nothing I can do about it. I accept it. I’ve calculated the probabilities and believe that over the long term (years), I have a positive Expected Value.

If Options are a zero-sum universe, why do you bother?
I believe that options are like insurance. There are many investors that are willing to pay an insurance premium, in the form of an option, to ensure a minimum return on their associated stock positions. I believe that option buyers are paying a higher premium to protect their underlying position, than the expected value. Therefore, I believe I can be profitable, long-term, by net selling option premium / extrinsic value / volatility / time decay.

I hope to update the 2015 Avrex Options Income Challenge spreadsheet regularly. You can access it, by selecting the menu action “Resources – 2015 Avrex Options Income Challenge” or just click on the above hyperlink.

Disclaimer: By no means am I recommending that you do what I’m doing here. Everyone has their own method of investing. The risk profile of my option subset has a particular fit in my overall portfolio. The method of this subset suits my style and I understand the risks involved.


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