I’m leaving the world of making money online today as I wanted to share some thoughts about retirement planning and savings. Since 2008, it seems that the whole investment world has changed and companies are using this excuse to make the final move towards less generous retirement benefits for their employees. It is no secret that defined pension plans will soon be extinguished and that Government sponsored pensions will be modified. Regardless if we are looking at a small pension payment or a higher number of years of work before retiring, the whole retirement concept has changed. Freedom 55 doesn’t exist anymore; we can now consider Freedom 75 or something like that.
Can we stop this phenomenon?
Can we make sure that we all have a nice retirement… and that we don’t have to wait until the age of 75 to stop working?
I think there is a solution to this problem: We must force people to save
I think everybody that reads a little bit about personal finance knows about this ultimate savings rule: pay yourself first. What does this mean? It means to consider your savings as important as your mortgage or your car loan payments. In fact, your savings should be your first creditor, the most important one. Before paying your bills, eating or paying your rent/mortgage, you should start saving. Nice theory and those who apply it generally make a very nice living and have plenty of money to enjoy their retirement. This is why I think the Government should apply a “pay yourself first” tax on each pay check.
How about we try to use another well-known personal finance principle: save 10% of your income. Let’s play with number for fun:
Assume you make 50K per year
Saving 10% of your gross income per year would equal to $5,000/year
At a 5% investment return, you will generate the following nest egg in:
20 years: $165,329
25 years: $238,635
30 years: $332,194
35 years: $451,601
40 years: $603,998
As you can see, I’m not talking about astronomical numbers (both in terms of savings and nest egg). Some people will argue that 603K won’t be much in 40 years considering the inflation. Keep in mind that I didn’t increase the salary during 40 years either. Therefore, we can assume that numbers would likely be the same if I increase both the salary of 50K and the savings according to the rate of inflation.
Let’s continue this example and suppose than an individual starts saving at the age of 30 and makes 50K/year. At the age of 65, he will have $451K in his retirement account. If he were to live until the age of 95 (so 30 years), he will be able to withdraw $26,116 per year with an investment return of 4% with a safer portfolio. This is without inflation. If we factor a 2.25% inflation rate, we get $19,477 per year. I don’t know about Government pensions in the States but if you have been working all your life in Canada, you should be able to get a pension of roughly 11K/year today. If you add both numbers, you have $30,477/year in today’s dollar to retire.
If you have managed your budget throughout all these years, you should not have any debt and 30K per year should be more than enough to support your lifestyle.
While my example is quite simple and the math behind my rationale as well, most people don’t save money. They would rather go on vacation, buy a new TV, go out to restaurants… they basically do everything besides saving money for their retirement. And this is why I think we must force them to save.
Instead of leaving people the choice of doing whatever they want with their paycheck; I would setup an automatic withdrawal directly on their pay stub of 10% of their gross income. This amount would not be taxed (in other words, it would be treated as an RRSP contribution for Canadians). This money would be directly sent into an investing account (according to the individual wish). He would be able to manage it as he wishes but would not be able to withdraw from this account until the age of 60.
This would basically force each individual to take care of their own retirement plan. They would build their pension plan over the years. Imagine if your employer would match only 50% of your contribution (as some of them do at the moment). Here are the numbers would you get with the same example:
20 years: $247,994
25 years: $357,953
30 years: $498,291
35 years: $677,402
40 years: $905,998
This would be an easy way to reach $1M in investments before retiring!
Personally, I would be pleased! I would rather be forced to save than be forced to work longer, pay more taxes and support half of the population who didn’t want to save when they were younger!
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As a financial planner, I meet with several clients at different stage of life and with different investor profile. Some of them come to see me to borrow money and invest massively in index funds. Some others are panicking and think that the world will collapse. A lot of clients are asking me the following question:
“I’m about to retire, should I withdraw my money from the markets now?”
If you have asked your financial planner, he already told you that you should definitely not withdraw your money from the market right now. However, you probably have a small doubt that he is thinking about his commission being affected by withdrawals than your own good. Well if it’s the case, you should be better of getting rid of your financial planner now and start looking for another one.
However, I can tell you that he is right (why leaving your financial planner then? Because you don’t trust him!). The very first reason why you should deal with a financial advisor is trust. Then, you look which kind of answers (and explanations) he gives you to your financial questions.
Even if you are about to retire, you won’t be withdrawing all your money the first year.
People have the false belief that they should revise their investment strategy upon retirement. That they should get most of their money into fixed income and other secure investment product. The truth is that if you do that at the age of 55, 60 or even 65, chances are that you will survive your capital (unless you are awfully rich or awfully cheap!). Don’t you want to live the life you always dreamt about? This is why you need a good portion of your money invested in the stock market.
When we are looking at current CD (certificate of deposit) rate, we are barely making 3 or 4%. After the evil inflation got its dirty hands over your yield, you are left with almost nothing. The stock market always gave about 9% over long term (10 year +). Therefore, even if you live through fluctuations, you are still better off with stocks or aggressive mutual funds than with CD’s and bonds.
Let say that you have 1M$ at retirement. If you plan on withdrawing $35,000 every year and your investment drop by 10% the same year, you will still get 868K at the end of the year ((1M$ – 35K) times 90%). Then, if your investment portfolio increases the next year by 10%, you will end the year with 916K. However, if you withdraw your money from the stock market after the first year and you go into a 3.5% CD, your investment will worth 862K after the second year. That’s 50K, or 18 months of retirement gone because you leave the stock market at a wrong time!
The key here is not to try to time the market, but to not cash in your money from the market when you are in a down slump. Wait until it goes back up and then, you will be in a better position to get more secured.
image source: tornatore
Have you notice something about my layout? The whole blog is in different tint of blue and white. Everything but one thingâ€¦ This big orange button. You know what? There is a reason for thatâ€¦ It is because I want to make my RSS FEED button visible! Please register for this blog RSS Feed by clicking on that orange button Then, youâ€™ll get my daily post in your email everyday!
In the first post of this series about My Big Plan for Retirement, I established my financial situation. As it is the case for the rest of the plan as well, this situation might change any time. In order to get my plan started and improve my financial situation, I already took some actions.
The first thing I did was to buy a property where I can live with my family. My house will be very comfortable for my two kids, my wife and myself. Why is that so important? Because moving incurs several costs and if I can avoid them for 5 to 10 years, I will be able to concentrate on other things. We bought a property in a very nice area in a growing city. Therefore, our house has better chance of increasing in value. I plan on using the equity on my house to the maximum. Instead of selling and making a profit, I rather re-mortgage my house once in a while to create assets instead.
Speaking of which, many of you probably know by now that I am doing a Smith Manoeuvre. I setup an HELOC when I first bought my house last November and I started the manoeuvre in February. Therefore, my mortgage is slowly becoming tax deductible and the investment should grow enough to cover for the amount of my mortgage much faster. I will write more about my whole Smith Manoeuvre plan in another post. For now, let just say that I started investing now so I can have a good 600K from the Smith Manoeuvre strategy (or even more!) at the age of 55.
I am also doing minor changes to my property in order to increase its value. I planted some trees and a cedar edge to make my backyard more intimate. We also add a lot of flowers to add up in colors. I am looking at renovating my basement. I would like to get rid of the carpet and put wooden floor. I also have the possibility to make a third bathroom. However, these projects are not scheduled this year as my wife will be on maternity leaves and we will see our cash flow decreasing for a while.
My employer is helping me with my retirement plan by offering a generous pension plan. If I manage to work 30 years for them, I will get a really nice pension for the rest of my life. Also, I have the opportunity to buy the company stocks from my pay cheque. The employer is adding 25% of my contribution in my account. I contribute to this plan to the maximum of my capacity. Chances of having bank stock crashes by 25% are minimal these days. This is why I do not mind concentrating my investment in the financial industry for the time being.
As my pension plan is grabbing all my RRSP (IRA) contribution, I donâ€™t have much left to invest in my RRSP account. However, I use my year end bonus to contribute to my RRSPâ€™s. This year, I am planning to put only 1K in my RRSP and keep the rest to cover our new babyâ€™s expenses. That amount will cover the minimum payment from my HBP (Home Buying Plan).For the years after, I should be able to put around 3K. I do not think I will be allowed to invest more money into my RRSP as the equivalence factor from my pension plan will reduce my contribution limit. Still, 2-3K a year can get me close to another 300K in RRSP at the age of 55. Not so bad considering that Iâ€™ll have a pension plan on top of that!
So this part resumes where I am and what I am doing to become a wealthy retired guy on the beach. Next time, Iâ€™ll write about my other projects I have in mind. I strongly believe in getting multiple sources of income to achieve my goal. What about you? Do you have any plan, do you have anything put in place? I am curious to get your ideas and strategies about this topic.Google+ Comments: 2 Read More
Before I start, I do have to mention that my post ” Am I Waking Up or Am I Falling Into a Bigger Dream? ” is feature in the 110th Carnival of Personal Finance hosted by Fat Pitchs Financials. This carnival is well hosted with clear layout and categories. Congratulation to Fat Pitcher
Retirement. This word evokes several feelings inside each of us. We have the classic thoughts of driving our dream car (bright red M3 in my case!) over a sunny highway along
I thought I would give where I am at so you can understand where I want to go with my plan. I am 25 and my wife is 26. We already are lucky parents of a 2 years old boy and expecting an addition to our family by the end of the month. We are making in the range from 60K to 100K combined incomes. We recently bought a house for 255K but surely worth 285K by now. Three properties are presently for sale on my street, they are all asking a little bit more than 300K, so I take 285K as a conservative price. Since we had to liquidate most of our registered and non registered assets to buy our piece of paradise, we have left about 8K in non registered and 10K in registered investments.
We donâ€™t have many debts besides our mortgage, a personal loan and money owed to relatives. The personal loan was used to buy a car and to finance a part of our cash down on our property. I really wanted to have 25% cash down so I could setup an HELOC and start a Smith Manoeuvre. We use our credit cards for every single purchase. However, we have a golden rule to pay the bill at the end of the month, no matter whatâ€™s written in the envelope. It requires more discipline but it will surely pay some good trips with all the points we are making on these cards! Our net worth is established somewhere from 60K to 100K as well. The reason why I am not making exact figures is the following: you are not my banker so you do not need to know the full truth. The range will give you a good idea of where are we at right now and should be sufficient to establish my retirement goals in this series.
Income wise, we might run into a bit of a struggle as my wife will be on maternity leave for the next year. Her income will drop to 70% for the first 20 weeks and then will go down to 50% for the next 32 weeks. Barely enough to pay my internet access so I can continue blogging! We plan on decreasing our life style level for the time being. In addition to that, having two small kids at home will not encourage us to spend much money in activities outside the house. We will surely too busy feeding them or sleeping whenever we have a chance!
I also have a solid pension plan. If I happen to work there long enough (considering that our generation is supposed to switch jobs every 5 years or so), I will get 2% of my last 5 years average salary per year worked for my employer. Therefore, I should get a pretty decent income without counting on my RRSP (IRA for our
So this is basically my financial situation for now. Do not be shy to ask any questions as I am preparing the next post of this series. Cheers!Google+ Comments: 2 Read More
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