Money Smarts Blog

As discussed yesterday, we laid out a retirement calculation for Bob, and concluded that he won’t have enough money to reach his desired gross income of $45k in today’s dollars.

What to do? Well either Bob can cut out a few lattes and spa treatments in retirement or he increases his annual contributions or he works a few more years or some combination of all three. The spreadsheet linked below, shows in the first tab named “increase contributions” that he would have to increase his contributions in today’s dollars from $10k to about $19k in order to meet his requirement of $45k in retirement. This amount of contribution probably isn’t realistic given that it’s a huge increase and if he has to double his contribution then he probably has to cut back a lot on his pre-retirement life which might affect his desired spending in retirement. For example if he can live on less money while working then he can live on less money on retirement.

The next two alternatives cover the options if he wants to work later or wants to reduce retirement income.

The second spreadsheet tab named “work longer” – Bob decides that that he can’t live without the lattes and spas either before or after retirement so the only other option is to work longer than age 60. In this case he need $1.1 million in today’s dollars to meet his requirements and has to work until the end of the year in which he turns 65 to fulfill this scenario.

In the last example named “compromise” – Bob says that he can cut some expenses so he will only require $40k in retirement, he will contribute $14k per year but still wants to retire by age 60 – in this case he will have a gross income of $40,690 upon retirement.

So to sum up, Bob can keep his $45k gross income requirement in retirement but he has to work an extra five years to age 65 or increase his contribution from $10k to $19k. Another solution is to work to age 60, increase his contribution to $14k and live on just over $40k in retirement.

Some future posts will deal with more realistic retirement scenarios. If there are two parties involved, Canada Pension Plan, OAS, pension income, and taxes then the scenario becomes a bit more complicated but it’s still relatively easy to calculate.

How to Predict the Future Part I

Retirement SpreadSheet

That’s right – predict the future! Ok, this method won’t help with lottery tickets, horse racing, stock prices or anything else that will make you rich quick, however it does apply to retirement planning, particularly with predicting the future values of your retirement income and retirement expenses which of course is all you need to calculate to predict your retirement. Planning your retirement is not as simple as tying your shoes but it’s not so complicated that you have to pay an advisor thousands of dollars to figure it out for you.

Everyone has heard all the scary stories about how you will need one million dollars to retire, or two million…or whatever. These numbers sound unreachable for someone who might only have a retirement portfolio of $100k (or no retirement portfolio for that matter) but it’s important to remember that these are future dollars. One million dollars in twenty years is the equivalent to $560,613 dollars right now assuming 3% inflation. This is admittedly still a large number but it’s a lot less than a million dollars.

In the past, to calculate my retirement scenario, I had assembled a complex retirement spreadsheet that involved using the future value of all contributions, withdrawals, taxes, income etc. This worked reasonably well except that it was complicated and didn’t lend itself to change very easily. One of the things I learned from Four Pillars of Investing was to calculate retirement scenarios using today’s dollars to greatly simplify things. The way this is accomplished is to subtract your estimated inflation rate from your estimated portfolio return to get a “real return” and to use today’s dollars for everything else such as portfolio contributions and anticipated withdrawals.

I’ve created a relatively simple retirement scenario in the spreadsheet below, which is for someone (Bob) who is turning 40 this year, has a $250k portfolio and contributes $10k per year. He desires $45k of gross income in retirement at age 60. His expected investment return is 7% but I will subtract 3% inflation to get a real return of 4%. We will also assume that he will get no other income other than from this portfolio and that contributions are made at the end of the year. He will retire at the end of the year in which he turns 60. The goal of this exercise is to determine if he is contributing enough to meet his goal of $45k (in today’s dollars) gross income in retirement. We will also use the “4% rule” which basically states that the initial annual withdrawal from a retirement portfolio should be 4% of the portfolio. This will be discussed in many future posts as it is a particular favourite subject of mine!

If you check out the spreadsheet you will note some interesting things. By age 60 his $250k portfolio has grown to $889k in today’s dollars. Twenty years from now that portfolio will actually be $1,654,516 in year 2027 dollars. This sounds like an incredible amount but it isn’t enough to meet the Bob’s requirement of $45k gross income in today’s dollars. I calculate the portfolio each year by multiplying the previous year value by 1.04 and adding the contribution to that.

As you can see at the bottom of the sheet, 4% of $845k is only $35,575 which falls far short of Bob’s expected gross income.

Tomorrow we will look at a couple of solutions for Bob so he can achieve his goals.

How to Predict the Future Part II

Retirement I

Ever get a traffic ticket and just paid the full fine and accepted the points? If you wanted to try fighting or reducing the ticket, there’s always been the option of booking a court case and showing up and either pleading down the ticket with the assistant DA or actually going to trial and hope the cop doesn’t show up. Both of these methods can be successful but they can take up a lot of time and be somewhat stressful – especially if you’ve never been on trial before.

Well my wife got a ticket last year and decided to take advantage of the City of Toronto Court Services process in which you can “plead guilty with an explanation” and basically plead down the ticket with the assistant DA. Actually the cop who gave her the ticket told her to go and plead it down.

According to the website it sounds like a quick easy process, but in practice she showed up and got a number (you have to line up to get the number first). The room was hot and crowded. After about a one hour wait she talked to the customer service rep. Then she went into another room (through security) and waited longer to talk to the assistant DA. Once that talk was over she waited some more and then got a sheet from the assistant DA with the new deal – then she went back to the first room and got another number and waited to pay – this was a different line so it didn’t take long.

Bottom line is that she was there about 2.5 hours, got the ticket reduced from $110 to $80 but she paid $20 for parking so net savings (not counting gas & lunch) was $10. The two points were removed which apparently is the main thing. I’m not sure if two demerit points has any effect on your insurance but I guess if you keep getting them then your insurance will go up.

Tip #1- If you are doing this and are going to the downtown Toronto court then go before nine in order to get the early bird parking which is only $10. It gets crowded later in the day as well so earlier is better

Tip #2 – Don’t bring your young child with you (if you have one).

Tip #3 – Since you have to go through security, don’t bring any knives or Swiss army knife key chains.

Please note!

To get a $25 bonus with a new ING account then use the referral code 33089336S1.  This is also called the  orange key code.

To the guy with the accent and his two curvy henchmen:

To begin with I’d like to thank you for entering, and shaking up, the Canadian banking industry. When I first heard about you, in 1997, I thought “what a great idea” and was happy to open an account with you. I was delighted to refer friends and family to you, and the referral bonuses you offered were a cherry on top of the sundae.

People were reluctant to bank with an entirely Internet based bank. I understood that concern, and did my best to reassure them that you wouldn’t run away with their money in the middle of the night (and you haven’t). Showing them that you are FDIC insured, just like the big banks went a long way to reassuring them. The fact that you offered higher interest rates on your SAVINGS ACCOUNT then the big banks offered for GICs went a long way to getting them to switch.

I was working down in the US in 2000 and evangelized you south of the border too.

As a banking revolutionary, I salute you. Unfortunately you seem to have recently lost the fire in your belly.

When PC Financial opened its doors, I was suspicious at first. I assumed that their higher rates would be mere teasers and expected within a couple of months for them to drop below yours. I was perplexed when months went by and they stayed higher than ING Direct. Your commercials kept playing, telling us to keep our money and get paid top interest, but they started to ring false in the face of the ongoing interest rate disparity.

In December of 2006 I applied to you for an un-mortgage. Being self-employed, I expected that it might be a little tougher to arrange, but we’d been together for so long, I expected it would happen one way or another. In the end your representative turned me away completely (not even offering a mortgage with a high down-payment or higher interest rates, just a refusal to do business with me). That same week both PC Financial and Scotiabank offered me mortgages.

You’ve changed man. You used to be about turning the bank industry on it heads and connecting with the littler guy. You streamlined your operations and passed the savings on to us. Now you’re turning your back on us, at exactly the time PC Financial is welcoming us with open arms.

My last GIC at ING direct came due in May, and after moving the money from it, there’s a sad 56 cents sitting in my ING Direct account. I hope the winter that has fallen on the orange giant thaws, and on that day I’ll happily return (although sadly you’ll have to outdo PC Financial now, when before all you had to do was match them to keep me).

Please let all the drained accounts sitting with pennies in them be the sparks that re-ignites your belly fire. Become what you were in 1997 again: charge into battle again. For your shareholders, yes, but for us little guys too!