Do you ever remember having conversations with a financial professional or maybe even with your parents where they told you “if you start today and invest $50 a week you will be a millionaire by the time you become 65?” Growing up with a Financial Planner as a Father this was regular dinner time conversation for me (I joke… but only a little). The goal was always that you needed to hit $1 million in liquid cash because if you hit that you would have a successful retirement. But why $1 million? Why not $900,000 or $1.1 million for that matter? The truth is that it was just a nice round number that felt safe to people and especially professionals. So does that hold true for today as well? Maybe not…
First of all I always feel that it is a bit dangerous to assume that we can set a one size fits all rule because as human beings… it just doesn’t work that way. The traditional wisdom that led somewhat to the “Million Dollar Rule” was that if you take an income rate of 4.5% your portfolio will generate a $45,000 per year income and that should last for the rest of your life. Are you beginning to see any problems with this? To start with, $45,000 per year used to go a lot further than it does today and I can safely say that for most of my clients it would not meet their expectations for what their ideal retirement would look like. If you take into consideration the historical inflation rate, to replace the purchasing power of $45,000 in 1980, you would need to generate an income of about $133,000 per year today. If we consider your million dollar portfolio now, you are talking about a drawdown rate of over 13% and I don’t need to do the math to tell that your financial plan will likely not work out that well.
So if a million dollars is no longer enough… how much do you need to retire comfortably? The honest answer is that it depends. What we really need to know is how do you want to live in retirement? Will you travel the world and visit all of the world’s continents? Are you more of a home body and prefer to stay closer to home where your family is? Depending on how you want to live ultimately can help us to figure out the math of how much you will need. Not sure how you want to live in retirement? Good news… you’re not alone. Especially for those of you who are still a ways off from that date then it can be very difficult to know how much you will want to do during those years and what it will cost. Unless you have a specific idea for what you want for your retirement, I would assume that you are going to spend at least 100% of your working after tax income. You will have a lot more time on your hands in retirement which means a lot more opportunity to spend money. We go through a more formal approach to determining your true retirement income goal when we work with our clients but if you are looking for a quick rule, this is a good place to start. Let’s look at someone who is making $85,000 per year right now with no pension but will receive CPP and OAS at 65.
Earning $85,000 per year in income means that in Manitoba you will take home approximately $62,176 after tax. Your CPP and OAS will pay you about $18,000 per year after tax if you are collecting the maximums. This means that you will need to generate an additional $44,176 per year after tax from other sources in order to meet your current working income. Now for simple math we will assume the 4.5% withdrawal rate again in order to determine how much money you should have at the beginning of your retirement and to no surprise based on the numbers above we get a total of just above $981,000 needed. So does this meant that if you have a $85,000 income and save a $1 million retirement portfolio then you will be good for retirement? Maybe not.
I can’t stress enough to you that there are no rules that define exactly what you need to do to achieve success. Sure, there are common methods and approaches that will work for a broad range of people but the devil is always in the details. Where a million dollars could be the dream retirement for some, it could be a nightmare for others and everywhere in between. What is important to know is that we can determine what the right number is for you, or make reasonable assumptions which will get us close, and then define a personal plan that will make sense for you. The earlier that this is done the better, but it’s also never too late to take this step. Don’t let old financial planning rules of thumb define how you are going to live!
-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.