One of the most common questions I get asked is “How much do I need to save for retirement?” The answer ultimately depends on your lifestyle as some people can live happily ever after on much less than others. Ultimately this question leads us down the path that the best way to find out how much you will need for your family would be to draw up a financial plan which determines exactly how much you will need. At this point we often hear the statement “I hope it’s not too late” to which we respond, “it’s never too late to start planning, but the earlier you start the better.” Recently I read an article by a Portfolio Manager I follow named Ben Carlson which presented another interesting question. How long does it take to save up for retirement? What may come as a surprise to some is that depending on when you start in history, the length of time needed is different.
In the article, Carlson refers to a book written by William Bernstein titled “Rational Expectations.” In his book, Bernstein refers to the amount of money needed to retire as the liability matching portfolio or LMP. Simply put, the LMP is the amount of money you need to retire. In the book Bernstein studies how long it would take an individual to save up their LMP, using a set of common variables and only changing one thing, the date in which they started working and saving. What was interesting in the study is that depending on what year you started, it would have taken you anywhere from 19 to 40 years to save up enough money to retire. That is a huge gap and admittedly much larger than I would have expected. So, what contributed to the difference? Frankly, luck of the draw of when they started and how the market performed during that period. In the case of the individuals who started working in 1980, they saw a market boom of 18% per year to 1999 and gained a huge advantage over people who had started working in previous years.
Bringing this closer to home, Millennials have not been as lucky. In the last 15 years we have experienced two of the worst economic crises in the last 100 years. This has contributed to the net worth of millennials being behind where there their parent’s generation was at the same time in their careers. So, for any millennials reading this, you now have a legitimate rebuttal for your parents when they point out how financially irresponsible millennials are… Ok so that is partially true. One of the other side effects of witnessing and experiencing the financial crisis is that even though millennials tend to be good savers (that’s right Baby Boomers), where millennials have allocated their money has been towards safer investment assets like GIC’s. Because of this, the wealth gap between the generations has also come from smaller growth of assets which has likely had trickle down effects into other more commonly owned asset classes including real estate. So, what does this all mean for your future and when you should start saving for your retirement?
The unfortunate truth is that there is simply no way to accurately predict when an economic downturn will happen or how long they will last. As I have discussed many times in the past in these articles, those who try to time the market inevitably end up hurting themselves even more. However, what I can say with absolute certainty is that the sooner you start to execute on your financial plan the more likely that you will achieve your goals sooner. Also, for my fellow millennials, it is time to get educated on the different types of investments and learn what risks you are comfortable with taking on. The unintended risk of not earning enough in your investments is very real and if you want to ensure that you are able to live a lifestyle beyond what your parents were able to achieve, now is the time. Of course, all of our advisors at Endeavour Wealth Management would be happy to discuss this with you.
-Grant White, CIM®, CFP®
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.