We have the retirement conversation a lot. Even though we are not financial planners, our clients, particularly those over about fifty-five, want to know how much money they will need when they stop working. They want to know if they are behind where they “should” be, and therefore have to work harder and save more, or whether they have already put enough aside for the future. They want to know how much income they will have when they retire, and whether that income will be vulnerable to the ups and downs of the market. Really what they want to know is if they should be worried.
Of course, there are no absolute answers, and every family has its own particular set of circumstances. None the less, there are certain rules of thumb that we use when trying to answer these questions. Here are some of them:
• Over the past fourteen years, our clients’ have had a compounded rate of return of about 7.7% per year, after fees, but before income taxes. At that rate, money doubles in just about ten years. We assume that this will continue, more or less, into the future, and that without further contributions $500,000 today in an RSP will become $1 million in ten years and $2 million in twenty years.
• Regular contributions to tax sheltered plans make a huge difference. For the fifty year old with that $500,000 RSP, twenty years of contributions at today’s top rate, with the very same rate of growth, will take the RSP to $1.4 million in ten years and $3.2 in twenty years.
• After retirement it is reasonable to assume that savings, whether in or out of a registered plan, will produce a post-tax return of about 4% per annum, depending on the account and the tax circumstances of the family involved. Savings of $3 million will produce retirement income of roughly $120,000 per year or $10,000 per month, without dipping into capital.
• It is a mistake to worry too much about inflation when making these kinds of calculations. Our 4% after-tax return number is a valid assumption in today’s very low interest rate, very low inflation environment. We believe that returns in our managed accounts will go up with inflation, so that if inflation rises to say 5% per year, we would expect our returns to rise by about the same amount. The available real disposable income, in other words, would be the same each year, although the actual dollar values would be inflated.
• We find that our clients, particularly those over 80, have reduced spending as they get older. Families often go from two cars to one, or to none. They may downsize their homes, and they may travel less than they used to. However, as our life spans continue to increase, and as medical advances extend good health and activity further and further into old age, it is a mistake to assume that income needs will drop radically or quickly. We believe it is prudent to be conservative and expect spending to continue at close to a flat rate for a long period of retirement. More importantly, with cutbacks in health care the need to have reserves for supplemental care must also be considered as part of a long term plan.
Many of us will spend from thirty to forty years working. Many of us will enjoy almost as long in retirement. For any healthy couple in their mid-60’s it is now reasonable to assume that at least one of the pair will live to age 90 or beyond. That is a lot of years without employment income. The quality of that retirement, the amount of disposable income, and the freedom to make choices will depend to a great extent on decisions made earlier in life. In the money business it is certainly the case that earlier is better, but at same time, it is never too late. We are always happy to talk to our clients about their plans for the future and what needs to happen for them to reach their goals. A good New Year’s resolution might be to give us a call and come in and have the retirement talk. If you are a potential client and considering switching money managers or looking for a second opinion, feel free to give me, Barry or Scott a call.
On behalf of all of us at Baskin Financial, I wish you and your family all the best for the holiday season and the coming year.