moneyFYI
Financial Freedom Is Merely Organized Common Sense
Headline Numbers Are Meaningless Unless You Know How They Were Calculated
Earlier this week, every publication and news agency published a story about how Canadians claim to need $1.7 million in savings to retire. The number surprised me, and after thinking about it for a while, I decided it was likely nonsense.
I have not yet found the survey, the question they asked, or the people they asked it of. Not a good thing.
If they surveyed retiring physicians, the answer is likely different from retiring factory workers.
The big questions
- Why did they ask about the savings required instead of the cash flow requirement the people need to live successfully in retirement? What number did they assume, and for how long? My experience is that people think about money in terms of what it does and not in terms of what capital amount is needed.
- Do the people have any arithmetic ability to do the necessary calculation? Probably not.
- Do the people assume the capital remains and is delivered to their heirs through their estate. If yes, why?. Plus inflation?
- Does the number ignore the capital value of spontaneous retirement tools like employer pensions, Canada Pension Plan, and Old Age Security?
It is not a simple question, and I expect the survey is flawed because randomly selected people cannot answer effectively.
Notice this
In Canada, assuming you are 65 and your spouse is 65 you will have spontaneous income.
- Old age security is $8,200 each
- Canada Pension would be $15,600 each at maximum.
- Employer pensions may exist
An example
Suppose there is $2,000 per month of employer pension between them, and they can get just 75% of the maximum CPP. Could be income below the upper limit or years of not working.
This couple will have $63,800 of income before drawing any from their own savings.
Further, suppose they expect to have $6,500 a month to live as they wish.They need $78,000 plus income taxes. Tax will work out to about $7,000, so income must be $85,000. Their savings must provide the $21,200 shortfall. Where does that come from?
Let’s assume an RRSP. Let’s further assume it earns 6%. The capital need is about $355,000. If we decide to adjust for future inflation then $355,000 will be too little. Suppose we double it to $700,000, and any excess each year goes to a Tax Free Savings Account. That cushions the inflation in the distant future. CPP, OAS, and some employer plans adjust with inflation, so I will ignore them for this example..
A question.
What’s the other $1.000,000 for?
My cynical guess is it supports the idea of saving and making money for a bank. Always assess who did the study and estimate why they do it. Exceptional headlines are fear-inducing, and sometimes that leads to action. Be sure it is the action that makes your life better.
If you have 30 years to accumulate $1.7 million and your investment yield is 6% in a 3% inflation world, with no taxes, you must save $1,250 per month and increase that with inflation as you go. Would that affect your current enjoyment of life?
It is about balance. Over-saving is problem too.
The things to think about
Every case is different, and you can be led very far astray if you ignore tax effects, spontaneous financing, and the amount to leave in your estate.
Look for end-of-life health issues.
Notice at advanced ages, inflation is offset by depreciating ability to spend money.
It is a nuisance to think about all the variables at once, but you should make the effort to at least know about them.
Begin with needed spending and work out your particular capital needs. Look for variations like one person dies too young.
I build strategic, fact-based estate and income plans. The plans identify alternate and effective ways to achieve spending and estate distribution goals.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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