February 15, 2012, 5:00 am

We Must Force People To Save

by: The Financial Blogger    Category: My Plan to Retirement,RRSP
email this postEmail This Post Print This PostPrint This Post Post a CommentPost a Comment

 

 

forcingI’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

 

Pay yourself first

 

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.

 

The 10% rule applied

 

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.

 

The thing is that people don’t do this

 

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.

 

How I would do it

 

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!

 

How would you react if the Government did this?

 

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!

 

image credit

 

Similar Posts:

You Want More? Sign-up! ->
TFB VIP Newsletter


If you liked this articles, you might want to sign for my FULL RSS FEEDS. If you prefer to receive the posts in your email, subscribe CLICK HERE


Comments

So many people just don’t think ahead. Things can happen in life where we need to have savings. If you don’t then you’re going to really shoot yourself in the foot when the time comes to take out some extra cash.

Great advice!

Great post. The numbers do work out. I would like to see some people saving more as well. I think this is what the gov’t is trying to accomplish with the PRPP.

another thing people don’t appreciate or understand is how much of an impact taking money out can have on your savings. If you are using the 40 yr savings model, a withdrawl of say $30k for a brand new vehicle (you deserve it ;) ) at year 10 has a huge impact. So many people have all these “emergencies” that need dollars now. My buddy is going to mexico and I need to go too…. emergency! I need a new fancy watch…. emergency! lol

by: The Financial Blogger | February 15th, 2012 (11:32 am)

@Fit,
you are right about those emergencies (and also the fact that we SOOOO deserve it!). I think that forcing people to save would prevent some of the emergencies ;-)

I would be outraged at a plan like this. People should have control over their funds, for better or worse.

I would urge Mike from Maine to think again about the implications of his statement: Things can happen in life where we need to have savings.

Well, those savings are USELESS if they are locked up in some government-mandated plan I cannot access. What if a family member requires medical treatment which can only be obtained through private care requiring a certain expenditure?

The key weakness in this kind of fantasy is that you are effectively handing over control over the funds to the government — the same government which makes the laws governing how those funds are ultimately accessed. Who’s to say whether in 30 years, a cash-strapped government of the day won’t say, “Oh, well you have all these millionaires in the Forced-Asset-Savings-Plan, we’ll just tax withdrawals 5%, no one could object to taxing the wealthy.” And the next year 10%. etc. And there will be nothing you can do about it.

You don’t think it could happen? I’ll give you a simple example: have tax rates changed from the initiation of RRSPs to the current day? The fact is you have no idea how withdrawals will be handled 30 years from now.

No thanks. I want total control over my money, to do with as I please. To splurge, to save, to hoard, to waste — whatever. That’s my responsibility — not yours. Get your hands OUT of my wallet.

[and that doesn't even touch on the question, what happens to income generated within such an account? is it taxed? at what rate? etc]

That’s why the TFSA (for Canadians) has so much going for it: It’s optional. You can withdraw from it without penalty. The income in it is sheltered. The rules are clear and if the government changes them, you’ll have at least one tax year to take action.

I’d much rather have a $5k bump in the yearly TFSA limit than this crazy proposal.

by: The Financial Blogger | February 15th, 2012 (1:37 pm)

Hey Nate!

You know that the Government won’t be increasing taxes for fun, right? Yes, they have the power to increase taxation on RRSP (and add taxes to the TFSA if they want to) but those are very unpopular decision (obviously). So they will do it if THEY HAVE TOO. When the Government have to pull out more taxes? when they need more money to pay for the population.

And this is exactly where we are heading: too many people want the control of their cash because they want to spend. When they reach 65, 70, etc, they don’t have a single dollar saved. What do you think they do? They turn toward the Gov and ask for more money! And this is when this is going to happen that the Gov will turn around and get more money… from YOUR pocket and MINE.

Instead of having to pay even more for the poor (or for the people who don’t plan for their retirement), I rather have the Government forcing everybody to pay for their own retirement instead of having (once again) responsible people to pay for the rest.

The problem is not having you doing everything you want with your money if we both agree to let you die in the street when you grow old with no savings. But we both know it’s not going to end-up like this: The Grasshopper and the Ant :-)

The ant had a choice, he chose to save. I am with Nate on a lot of points. I would much rather have the limit for the TFSA boosted instead.

Many people need every little bit of money they make to make ends meet. They do not have the luxury of saving or spending frivolously. These are the people that the plan suggested would hurt.

It may benefit the people who don’t save because they want a new car but it will hurt the people who don’t save because they have 5 mouths to feed.

This is just a bit of a step too close to Big Brother for me. Let me have my money, I earned it and I can piss it away if I choose. Some people may abuse the current system but for the time being I do not know a better alternative.

The ant had a choice, he chose to save. I am with Nate on a lot of points. I would much rather have the limit for the TFSA boosted instead.

Many people need every little bit of money they make to make ends meet. They do not have the luxury of saving or spending frivolously. These are the people that the plan suggested would hurt.

It may benefit the people who don’t save because they want a new car but it will hurt the people who don’t save because they have 5 mouths to feed.

This is just a bit of a step too close to Big Brother for me. Let me have my money, I earned it and I can piss it away if I choose. Some people may abuse the current system but for the time being I do not know a better alternative.

I am not the one to come up with the ideal plan, but I do know that my money should be MY money.

Although I do not like the government making decisions for me, some people need that. I would only support it if they keep it separate from other government money. One of the problems of Social Security is treating it as a political football.

Yeah it’s one of those things that everyone knows that they need to do but don’t do it. I don’t have a problem with it. When I get a paycheck, I tithe 10%, save 15% and live on 75%. The reason why people can’t do that is because when they get a paycheck they work the opposite way. SPEND SPEND SPEND, save what I can, give if there is anything left.

I agree, I am terrified of the demographic bomb that is about to strike my generation. None of us vote, so we are screwed. I just wrote an article for CFB about a recent conversation I had in the staff room last week about this sort of topic. If we can’t teach a man to fish, let’s force him to fish (instead of giving fish after damn fish!).

My friends and cohort do not talk about retirement or saving plans. I was really surprised to see they’re not savings for their future. I am 22 year old and I already have an emergency fund and a retirement account. At this time I am introducing the idea of saving to my family members and friends to save. They love the idea! Thanks for the great post.

Charlotte @
http://thinkingreenhelps.blogspot.com/

Do you realize the extent of your last words?
” I would rather be forced to save than……”
This is where Idealism and Reality clash.
The way to hell is paved with good intentions.
Unfortunately it is these very well meaning ideas , that once in governmnent hands – turn into monstrous programs.
Nice idea – SCAREY implications!