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Lawrence Ian Geller.
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Most of the people who I know are proud of the amount that they have saved. By age 45 many have managed to save an average 5% per year of their gross annual incomes, most of this in R.R.S.P.'s and/or pension plans. At best, this will equate to 2 1/2 years of their current incomes when they eventually retire. (Real Dollars - Assuming income increases at 5% per annum with a real interest rate of 3% over inflation. Assuming tax deferred principal and interest.)

By 65, if they rely entirely on their R.R.S.P.'s and pension plans (with the increased contribution limits), the situation may have improved to the point where they have saved (including interest on capital) 9 years of their ultimate incomes.

So, if interest income can now be relied upon to remain relatively low, their savings will not be enough to assure a comfortable retirement. There are several reasons for this:

  1. retirement is occurring, whether through mandatory or voluntary retirement, at much earlier ages (less than 65). With less time to save and more years to spend the proceeds more funds will be needed in reserve;
  2. retiring at younger ages, in better health, more retirees will want to have "active retirements". This will include travel, sports, food and entertainment. Few will retire to "homes" until physical assistance is required. This "continuation of lifestyle" can be relied upon to have a cost in excess of many people's current expectations;
  3. governments will be less willing to subsidize "independent" retirees and the income test will be such that few will qualify for either tax breaks or governmental pensions if they have saved throughout their working lives. Medical insurance, old age supplements, possibly even C.P.P. benefits will be reduced for these individuals meaning that they will have to entirely rely on their own retirement savings to provide retirement lifestyle;
  4. with lower interest rates actuarial assumptions will probably require that the income from monthly payout annuities be reduced. Even RRIF's will be affected, due solely to lower interest rates. People who saved on the assumption that they would always earn a return on their investments of at least 10% will find that their incomes are less than they need;

So what can we do to assure that we will have enough retirement income? The first thing is to begin to determine what our retirement needs will actually be. We have to assume that we will want to continue to do the things which we enjoy now.

I know a number of older retirees. They are still involved in sports. Some take bicycle tours, others ski and sail, still others take trips which they put off during their working lives. A trip to the east or Australia is seldom less expensive for a retiree than for anyone else. Often retirees, with time on their hands, want to do the things that they have never before been able to do. All of this takes money.

  1. How much will you need? For every $10,000 per year that you would need today (in 1992 dollars and before tax), at 5% inflation you will need the following amounts, per year, when you retire:

    Years to Retirement

    Indexing of $10,000 at 5%

    5 years

    $ 12,155

    10 years

    $ 16,289

    15 years

    $ 20,789

    20 years

    $ 26,533

    25 years

    $ 33,864

    30 years

    $ 43,219

    35 years

    $ 55,160

    40 years

    $ 70,400

  2. How much will you have to have saved to produce that annual income? At an 8% interest rate, drawing down a combination of principal and interest, you will need (approximately) the following amounts for every $10,000 per year that you need to maintain your lifestyle for the rest of your life (from table 1, above):

    Age at Retirement Required to create $10,000 per year at 8% interest

    60 years

    $ 116,710 65

    65 years

    $ 110,668

    71 years

    $ 99,562

  3. (the income will not, however, be inflation indexed)

    The second thing is to determine what the final value of our current retirement savings strategy will be. For example, as at August 1, 1992 the best long-term interest rate that we can find is 8%, so we have assumed that as an average return from now to retirement.
  4. At present how much have you saved in RRSP's and pension plans? For every $10,000 saved in a tax sheltered plan the following table will tell you the future value at the time that you plan to retire:

    Years to Retirement

    Indexing of $10,000 at 5%

    5 years

    $ 14,693

    10 years

    $ 21,589

    15 years

    $ 31,722

    20 years

    $ 46,610

    25 years

    $ 68,485

    30 years

    $ 100,627

    35 years

    $ 147,853

    40 years

    $ 217,245

  5. How much are you saving each year towards retirement?

    Years to Retirement

    Growth of $1,200 / year at 8%

    5 years

    $ 7,341

    10 years


    15 years


    20 years


    25 years


    30 years


    35 years


    40 years


Now it will be relatively easy to see whether you are on target and how much you will have to save to assure that you will have a comfortable and enjoyable retirement, provided that our assumptions are correct. To do this:

  1. look at table 1, above. How much do you need today to live? Does this include the payment of mortgages or other debts which will be paid off before you retire? If so, how much will you really need when you do retire? (Don't underestimate this amount, it would be terrible to have too little income for the rest of your life!);
  2. look at table 2, above. Multiply the amount required per $10,000 per year by the number of $10,000 units that you just determined that you would need;
  3. look at table 3, above. How much will your current savings grow to by the time that you retire?
  4. look at table 4, above. How much are you saving each year? Add the future value of these annual savings (from the table) to the number you arrived at in 3, above. If you have a shortfall, how much more will you have to save per year?

When you are planning for retirement, there are a few additional items which you should remember:

  1. any ongoing liabilities or monthly commitments should be added to your income plan. Forgetting about mortgage payments, children's educational requirements, etc. might cause a real shortfall in income;
  2. are there any special requirements that you will want to consider? Do you want to contribute to your grandchildren's education's? Do you want to buy a retirement home in a different location from your current residence? Do you want to make provisions for inflation? Do you want to make provisions for retirement homes or communities? What about health care?
  3. are you currently paying income taxes on a deferred tax year basis? Do you have enough saved to pay the taxman?

Most importantly, don't put off your planning. Even if you don't feel comfortable with the concept that you will, eventually, have to retire, recognize that it is inevitable and begin to plan now. The more time that your savings have to grow, the less you will have to save each month to accomplish your goals.

And, after all, it is your ongoing comfort that you are planning for.

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