﻿ How to Predict the Future Part 2

# How to Predict the Future Part 2

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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

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1 WB

A recent actuarial study concluded that the 60 to 80% of pre-retirement income often recommended by financial advisers in order to maintain a similar standard of living, is in error, and that 50% is more like it. Bob may well find that only \$40,000 is required, and that the amount of capital required to achieve it is less.

For what it is worth, I tend to use 5% payout, as opposed to 4%

2 FourPillars

WB – you’ll notice that I didn’t even mention Bob’s income. I’ll agree that most people need less than 60-80% but it’s really up to the individual. I’m more a fan of a cost-based analysis to determine how much you should save rather than a simple percentage of pre-retirement income.

I’ll be posting more detailed analysis on the this topic – one of the things I’ve been thinking about is that the 4% rule may not be that relevant to most Canadians who retire early since we will have government income kicking in at age 60-65.

Mike

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