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

This is a great year if you are self-employed or work for a small business. A number of new money-saving strategies are available to cut income taxes, medical costs, insurance costs and investment fees.
PPO BENEFITS EXPANDED - All U.S. short term medical plans now offer the option of utilizing a nationwide Preferred Provider Network (PPO) for discounts and claim processing. The PPO network is PHCS, recently listed as the highest rated private PPO plan by Consumer Reports Magazine (Oct. 2001). Previously this benefit was only available on more expensive permanent health plans but now is attached to the most affordable health insurance plans. This means that there is no longer any need to manually submit claims when using a participating provider. Claims are automatically submitted by the participating provider. This also means that members will receive a cash savings from their health plan even if total medical expenses do not ever reach the policy deductible. This is an optional feature; the policies still cover services from all medical providers nationwide and in Canada.
MSA INVESTMENT OPTIONS EXPANDED - Self-directed Medical Savings Account plans with balances over $1000 may now be invested in virtually any investment the same as a self-directed IRA account. There are literally thousands of investment possibilities for every plan participant. MSA health plans are now available in most states, but they are priced attractively to only about 40% of small businesses nationwide.
THE FIRST NO-FEE 401(k) PLANS - Thanks to the most recent tax law changes combined with the cost efficiency of Internet-based financial service providers, now any business can offer a 401(k) at no cost to either the employer or the plan participants. Even sole proprietors are eligible. In most cases small businesses with other types of retirement plans – especially SEP, SIMPLE, SARSEP – should now consider switching to a 401(k). These plans utilize entirely online account administration giving 24/7 access to your investment account.
Note that the term "no fee" means that there is no setup fee and no administration fee for a 401(k) plan itself. The plan participants may freely elect to place their money in some investments that have their own separate charges. Also, employers or individual plan participants may want to purchase supplemental financial planning services to help make better tax and retirement planning decisions when enrolling in a 401(k) plan.
IRS SUBSIDIZES SOME BENEFIT COSTS - The IRS offers a tax credit to low and modest income individuals who make retirement plan contributions. Also, businesses may claim a tax credit for the cost of setting up an employee retirement plan and educating employees on how to best utilize it.
MAXIMUM COST CAPPED FOR GUARANTEED ISSUE HEALTH PLANS - Most states have enacted laws that cap the maximum cost of a guaranteed issue small business health plan at 67% more than the cost for standard risks. To be eligible, a business must have a bona-fide payroll as evidenced by a copy of a state unemployment tax return. This can result in substantial savings if an employer with unhealthy members needs to switch health plans. This benefit is currently effective in 37 states.
LIBERALIZATION OF RETIREMENT PLANS - You can do more with your pension, 401(k) or IRA than ever before. The contribution limits are higher, loan provisions are easier, and withdrawal & rollover allowances are now more flexible. Whatever you want to do with your retirement plans, most likely there is now an easier way to get it done.