HOW LONG WILL MY MONEY LAST

First Published in the Balanced Report Fall 1991
This is the central question of retirement planning. When people come to see us, that is what they are asking us to answer for them. The question is usually phrased as. "Can I afford to retire? When can I afford to retire? How much income will I have at retirement? Will inflation cause me to have to work longer or reduce my standard of living?" Very simply you want to know, will you have enough. This is no different than planning a trip. You need to try to figure how much money you need. How much cash / travelers cheques, will you need for the journey? When you have figured that out you will probably still take along some credit cards just in case you miscalculated. We feel more comfortable with a safety cushion in case we run out of money. At retirement most people want to know that their pensions and investment portfolio will provide an adequate income. Their capital is their safety cushion and they usually prefer to leave it intact.

The difference between retirement and a vacation is that you don't have to worry about the price of your purchases increasing between the beginning of your vacation and the end of it. But, you sure do in retirement. If you spend too much on your vacation you can always earn more to pay for it. In retirement you are unable to earn more income, in most cases. A person retiring today at 65 years of age can expect to live an average of 22 years, or age 87 based on current mortality tables. This is one third of your life and the figure is improving all the time. With that length of time in retirement, perhaps longer if you retire earlier, inflation becomes a serious matter to consider. At 5% inflation it will take three times as much monthly income in twenty two years to provide the same purchasing power it did the year you retired.

In order to answer the question how long will my money last it now becomes a little more complicated as we need to factor in an assumed rate of inflation. Most Financial Planners that I talk to like to use a figure of 5% in their forecasts. Any assumption under 4% is in my opinion irresponsible. Over a long period of time such as retirement, you can expect that some periods will be higher than others but it will level out over time. It is my experience that many people will experience a fair amount of inflation in their expenditures in the early years of retirement. This is because they are now traveling more or making a major purchase such as recreational vehicle or equipment to enjoy their retirement. But as they get over 80 years of age they start to spend less. So inflation of expenses is greater in the first ten yours of retirement and less after.

You then need to factor in the various pensions that you and your spouse may be eligible to receive. Many people now retire prior to age 65 and elect to receive a reduced Canada Pension in order to start collecting earlier. Old Age Security does not start until age 65 so you will have to factor in that extra cash flow requirement for a few years. If the spouse is a few years younger and you both want to retire at the same time you may have to plan for this additional income by drawing extra from your investments until the spouse's pensions begins. The point being that there will be about five or six different income streams to factor into the calculation because of the different starting times.

After many years of paying taxes some pensioners are now loosing their Old Age Security benefits. If you have net income greater than $50,850.00 you will lose some of your benefits. Sad as this is, it needs to be factored into your retirement plans. There are a few interesting financial planning activities that help to deal with this problem. Sometimes this claw back can be avoided for awhile by letting your RRSP's accumulate a little longer.

Fortunately we have developed a computer program to accurately calculate all of the various income streams, inflation, growth, etc. This programme will tell when you can retire, how much you will have each month in today's dollars and if it will run out. Using this key information has enabled many of our clients to make their retirement decisions easier. It has also helped some of our older clients who came through the depression and are afraid to spend. Knowing that your money will last gives you the freedom to enjoy yourself in retirement. But, you need to plan, calculate and save if you want to get there in comfort.

Copyright 2004 – www.money-software.com

Talking About Money

With Jim Larranaga

(ARA) - Only one quarter of Americans age 35 and older have amassed $100,000 or more for retirement, according to the Employee Benefit Research Institute's 2000 Retirement Confidence Survey. What's more, the previous year's survey found that 20 percent of "forty-something" workers haven't even begun saving for retirement. If you're among them, you might be in for an unpleasant surprise when you leave your job.

Calculate What You'll Need

Most experts say you'll need 70 percent to 80 percent of your pre-retirement income after you stop working. Given today's life expectancies, you could easily live 20 years beyond retirement. Seeing just how much money you'll need in retirement may give you a few gray hairs, but it can also motivate you to start saving - and fast.

When it comes to saving for retirement, the sooner the richer. The table below shows that for every $100,000 in your retirement nest egg, you'd have to save $2,114 a year for 20 years. Wait just five years to start saving and your annual contribution jumps to $3,598. (That's 70 percent more.)

Savings Goal

How Much to Save Each Year (in a tax-deferred investment with an 8 percent rate of return)

_________________5 yrs______10 yrs_______15 yrs________20 yrs$100,000________$16,944_____$6,805_______$3,598________$2,114$250,000_________42,360______17,013_______8,995_________5,284$500,000_________84,720______34,026_______17,989________10,568$750,000_________127,080_____51,039_______26,984________15,852

The American Savings Education Council reports that those who have calculated how much they'll need in retirement are more likely to save for their goal. And, they tend to save larger amounts. Fortunately, there are a number of tax-favored ways to set aside retirement funds.

Invest Wisely

Employer-sponsored retirement plans, such as 401(k)s, provide one of the best places to squirrel away your savings. You won't have to pay taxes on the money you contribute until withdrawal during retirement.* Plus, the contributions don't count toward your current taxable income. Try to chip in the maximum amount allowed, particularly if your employer matches all or part of your contribution, which helps your money grow even faster.

Traditional and Roth IRAs can also offer tax advantages. With a traditional IRA, you may be eligible to deduct contributions, depending on whether you participate in an employer-sponsored plan and your income. Whether you can deduct contributions or not, your money grows tax-deferred until withdrawal at retirement. Contributions to a Roth IRA are never deductible. But they offer a real plus - tax-free (yes, you read that right) withdrawals at retirement as long as you meet all the requirements.

Tighten Your Money Belt

Cutting unnecessary expenses can help you pare down your debt and boost your savings. Creating a budget may help. List your expenses, starting with the most essential. Make retirement saving a priority. Finally, consider paring the expenses over which you have some control, such as entertainment. You don't have to live like a monk, but I'm sure you can find ways to cut down discretionary spending.

Lengthen Your Timeline

Time equals money when it comes to saving for retirement, so staying in the game for a few extra years can help you stay ahead. Remaining on the job allows your investments more time to grow and may boost your Social Security benefits.

Remember - it's never too late to start building that nest egg.

* Withdrawals prior to age 59 1/2 may be subject to a 10 percent penalty.

Jim Larranaga is Executive Vice President of Priority Publications, a Minneapolis-based publisher of financial newsletters.

Courtesy ARA Content, www.ARAcontent.com; e-mail: info@ARAcontent.com