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The Companion Advisor: Retirement Planning
Calculating your retirement needs

Planning 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

Current Salary 75 per cent of
Current Salary
$25,000 $18,750
$30,000 $22,500
$35,000 $26,250
$40,000 $30,000
$50,000 $37,500
$60,000 $45,000
$70,000 $52,500
$80,000 $60,000
$90,000 $67,500


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

75 per cent
of current salary
In 10 Years In 15 Years In 20 Years
$18,750 $25,198 $29,212 $33,864
$22,500 $30,238 $35,055 $40,638
$26,250 $35,278 $40,898 $47,410
$30,000 $40,317 $46,740 $54,183
$37,500 $50,397 $58,425 $67,729
$45,000 $60,476 $70,110 $81,275
$52,500 $70,555 $81,795 $94,821
$60,000 $80,635 $93,478 $108,367
$67,500 $90,714 $105,165 $121,913

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

Yearly Saving Required 2000 4000 6000 8000 10000
6% Return:
10 yrs 26360 52720 79080 105440 131800
15 yrs 46560 93120 139680 186240 232800
20 yrs 73580 147160 220740 294320 367900
10% Return:
10 yrs 31880 63760 95640 127520 159400
15 yrs 63540 127080 190620 254160 317700
20 yrs 114540 229080 343620 458160 572700
14% Return:
10 yrs 38680 77360 116040 154720 193400
15 yrs 87680 175360 263040 350720 438400
20 yrs 182060 364120 546180 728240 910300

Total retirement funds needed

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 time? Today".

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© 1997, Fiscal Agents Money Management Newsletter
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