Companion Advisor: Retirement
Calculating your retirement needs
for retirement makes good sense but it is important not to be discouraged
by big numbers. When you add up the total income you will need for your
retirement, you might be surprised. Remember, this number totals your
income needs over several years of retirement.
For example, if you currently earn $40,000 a year, over ten years you
will earn $400,000. Over 20 years you will earn $800,000, a big number.
And that doesn't include any pay raises you might receive. So, retirement
planning might involve big numbers but you don't need all that money tomorrow.
If you retired today
Calculating how much you will need for your retirement is good financial
planning. Some of your expenses will go down because your children are
grown and your mortgage might be paid off. Others will go up because you
may want to travel more. A good rule of thumb is that you will need 75
per cent of your current salary to live comfortably in retirement.
The first step is to find your current salary (or combined salaries if
both you and your spouse are working) in Table 1 (below) and then circle
the corresponding number in the right hand column. This number represents
75 per cent of your current salary.
Table 1: 75 per cent of current salary
per cent of
Cars, furniture, and chocolate bars were all cheaper 20 years ago because
inflation increases prices over the years. In the future, prices will probably
be higher than they are today. Take the amount represented as 75 per cent
of current salary from Table 1 and, on from the table below, find what the
corresponding dollar amount might be when you retire, assuming an inflation
rate of three per cent a year:
Table 2. Target Retirement Income
of current salary
The resulting amount from the chart above
is your Target Retirement Income. Keep in mind however that it may be more
or less than that, depending on your lifestyle. If you work part-time, receive
a company pension, or qualify for the Canada Pension Plan, that will supplement
your income. If you have no other sources of income, you will have to rely
on your savings.
Now, how many years will you be retired? If you retire at age 65, you can
expect to live about 15 years in retirement. Multiply your Target Retirement
Income by 15 to see your total amount of retirement funds needed.
Target Retirement Income X 15=$
Remember, this is the total amount you might need over all your retirement
years and it may be a big number. However, you might also have other sources
of income and if so, they will reduce your total retirement funds needed.
Also, you will not need all this money on the day you retire. Your investments
will continue to earn returns even after you retire as long as you don't
spend all your savings at once. So, even though it may be a big number,
with planning and good investments, it is possible to achieve. The most
important action you can take is to start saving even a small amount today.
The Canada Pension Plan and your present company pension plan (if you have
one) might fill part of the need. If you have a company pension, ask your
plan administrator what your benefits are expected to be when you retire.
The question is, "Where will the rest of my total retirement funds
come from?" The short answer is, "from you."
Table 3 gives you the amount you might have to invest, over various time
frames, at various rates of return. Find the amount of your total retirement
funds in the table and then see how much you would have to put away every
year (and at what rate of return) until your retirement. Remember, this
assumes you will have no other sources of income when you retire.
Total Retirement Funds Needed
Total retirement funds
Yearly investment, rate of return, and number of years until retirement
all work together to determine the value of your portfolio. You can put
away more each year, work longer and retire later, live more simply in retirement,
or make sure you are getting the maximum returns.
It's unlikely you will be able to save enough at a 6% rate of return to
fund your retirement. You will probably have to make your money grow at
a higher rate, and that means developing an investment program.
There are many ways to gather resources for retirement: savings accounts,
GICs, T-bills, stocks, and bonds are just a few, and the wise saver may
have some of each. How do they compare?
"Canadian Stocks, Bonds, Bills and Inflation: 1950-1987", a study
written by Dr. James Hatch and Dr. Robert White, compared various investments
over time. For one year periods within their time frame, stocks did not
provide significantly greater returns than bonds or T-bills. However, for
10-year periods, which included the 1987 stock market tumble, stocks outperformed
bonds and T-Bills in 29 of the 32 periods from 1950 to 1991.
If you want to go way back, historical U.S. average annual total returns
for the years from 1926 to 1996 are as follows:
Stocks (S&P 500 Index) +10.7%
Bonds (Long-Term US Government) +5.1%
Cash Reserves (US Treasury bills) +3.7%
Source: Vanguard Marketing Corporation
However, with higher returns come higher risks. Stocks and bonds can go
down as well as up. Notice that the returns given are for 10-year time periods.
Over the long term, stocks and bonds have outperformed fixed interest-rate
savings. However, there is no guarantee they will continue to do so every
year, year after year.
The most important point about planning for retirement is to start your
investment program now. It's like the old saying about planting trees:
"When is the best time to plant a tree? 25 Years ago. When is the second-best
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© 1997, Fiscal Agents Money Management Newsletter
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