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In the Feb/Mar 2007 issue of Money Sense magazine, Barbara Hawkins has written a very interesting article titled "Retirement Made Easy", #4 in a series. In the article, she explores and discussed some of the things that are of concern for those of us who have retired and those who are currently planning for retirement. (Covers just about everyone I guess. ) "How long will you live? What will the markets do? Retirement planning involves many unknowns, but this simple plan can let you enjoy today while protecting tomorrow"
As someone who has retired, (Almost seven years and counting) I am fortunate to have a modest company pension, and CPP, while my wife gets CPP & OAS. We have also managed to save a not insignificant amount in our RRSPs and non-registered accounts. Never the less, it is not the millions that are talked about in the media as being required to keep oneself in the "style to which we have become accustomed". We have been very comfortable thus far and I have always felt that we have enough in savings and income to meet our requirements, as long as we were not too extravagant. So in he back of my mind, there continues to lurk the "What if?" questions. What if we live to out mid to late 90s and need institutional care? Will we have the wherewithal to meet our needs? How much can we afford to splurge for a new vehicle or an extended holiday? Hawkins' article addresses these questions so is of more than passing interest to me.
It is not my intention here to paraphrase the article. It is a good read and worth the price of the magazine. (Some of her previous articles are archived on their web site also.) However, here are some of the key points she raises:
� For someone born today, life expectancy is an average 80 years. If you retire at age 65, you should plan to live for 15-20 years.
� Life expectancy to age 80 is only an average. Some people have to live much longer to keep the average up. If you have already made it to age 65, congratulations. You have a better than 50/50 chance of seeing 85. You also have a 50/50 chance of seeing more than 85 candles on you birthday cake. Maybe even 100!
� You will not likely be physically able to do at 85 what you can do at 65, so if your dreams of touring the world and golfing five times a week, it is time for a reality pill. Your requirements will change as you age, as will your income requirements. The lifestyle you fund in your early retirement will likely represent a heavier draw on your resources than later in your retirement.
Regardless, the essentials boil down to two possible scenarios. Expect to die early and burn through your savings with a lavish lifestyle. The risk of course is that you beat the odds and live to 100 and have to penny pinch for the last 20 -25 years to make ends meet.
The alternative is to expect to live to 100 and penny pinch to make sure you have the funds to get there in comfort. The risk of course is that you may shuffle off the mortal coil much earlier than expected, leaving a big estate and never having really enjoyed your retirement.
The odds of disappointment are equal in either scenario.
Hawkins suggests an alternative that might serve well in either scenario. To do the exercise, it is necessary to figure out exactly what you need to get by on. How much income do you need to cover the essentials. When I did this calculation, I included the usual (Shelter, clothing, food, medical etc., ) but I also made allowance for a few extras such as $5,000 annually for vehicle depreciation, $3,000 for traveling (holidays) plus allowances for charitable donations and lots of restaurant meals. It is all a matter of what you see as being "Must Haves".
Then what she recommends is to determine how much income you have after taxes. Take the amount of your pension income (Or anticipated income) and add to it a modest return on the capital you have invested. I used 5%. Then I plugged all that into my tax preparation software to come up with an after tax figure. From that I deducted the amount from my Must Have calculation. What was left represents the amount of income that is available to me to cover the "Nice to Haves" as Hawkins calls them.
Now, whatever portion of your retirement savings is required to cover the Must Haves, should be considered untouchable, at least for your early retirement. If the rate of return you have used is sustainable, the principal reserved will keep supplementing your income, and if it earns a bit more, will cover the cost of inflation.
The balance of your retirement savings is what you may consider dipping into to cover the Nice to Haves. Remember that it will still throw off the 5% income (+/-), so that money is there to cover the Nice to Haves before you have to touch the capital. Knowing that this portion of your capital could reasonably be used for the extras in your retirement, will alleviate some of the concerns you might otherwise have in spending those funds.
The key factors:
Don't underestimate your Must Haves.
Don't overestimate your income.
Don't put off enjoying your retirement during its early years. That is when you will be best able to do the things for which you have worked so hard.
PS: You may have asked how my calculations worked out? I am happy to say that our modest lifestyle Must Haves will be fully covered by our pension income with a small surplus. That means that we will not likely have to rely very much on our RRSPs and other investments to cover our anticipated must haves. So if I reserve a modest portion to cover unforeseen living expenses down the road, the balance of the capital is there to meet our Nice to Haves!
Oh, and something I had not given thought to until just now, we will have the proceeds from the eventual sale of our residence to help meet our shelter needs if we end up going into an assisted living facility in our old "old age".
I was driving past the Porsche dealer last Fall and there was this really neat bright yellow Cayman.....
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