Unveiling the Retirement Myth

27985 Views 82 Replies 22 Participants Last post by Racer, Feb 8, 2010

Jon Chevreau

Discussion Starter · Aug 24, 2009

I wrote about Jim Otar's new book of this title on Saturday and he reports on my blog he's getting so many download requests he has to start charging $4 now (it was free for a green unprintable version). Even today, the article is topping the most popular online hits at the Post so it's probably worth it's own thread here in the Retirement forum. There's also a video interview with him. You can find all this stuff at one place:

http://www.yourwealthadvisor.ca/apps/links/

61 - 80 of 83 Posts

Rickson9

· #61 · Sep 7, 2009

cannon_fodder said:
Judging or criticizing people because they haven't achieved what we think they should is not the best way to start. Patient guidance without condescension would be more appropriate.

Very good point!

Berubeland

· #62 · Sep 7, 2009

Some one famous said "Common sense is not common"

Spend less than you make seems like sound advice in retirement too. I know a few people who thought they had enough savings to make it in retirement and who find that they do not. They have had to tighten their bootstraps quite a bit.

Still financial advisors are not really on my list of favored people. When my mom had a brain tumor she cashed out her retirement plan at her work and put the money with a well respected company to manage it. He managed to lose over $100000 in a year. Now they manage their own and do just fine buying bank stocks and blue chip companies.

Anyways my parents are not really usual they both still work because it is boring for them if they don't. My dad feels useless if he's not doing something productive which for him is making money. I'm a lot more retired than they are

cannon_fodder

· #63 · Sep 7, 2009

FeeOnly.ca said:
In fact I don't know of anyone and who has sucessfuly proven you can accumulated assets using a diversified portfolio and retire with a inflation adjusted 4% income for 30 or 35 years.

I just want to make sure I understand your statement. Are you saying that, regardless of portfolio size or government handouts (e.g. OAS, CPP, GIS, Allowance) you're not aware of a person withdrawing 4% of their retirement portfolio for an extended period of time of 30-35 years?

Does that include people who choose not to withdraw 4% because they do not need that amount as they get older?

I wonder how many people even know people who have lived 30-35 years in retirement. I don't know any.

cannon_fodder

· #64 · Sep 7, 2009

leslie said:
Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math.

It wouldn't surprise me to see that in reality people just keep withdrawing money to cover their fixed expenses and don't adjust discretionary expenses to any great degree just because their investments had a good year. On the other hand, if their investments have hit a rough patch, then they probably tighten the belt.

Thus, they adjust as required, but not as desired, and do not take out a fixed percentage of their portfolio nor do they ignore the negative returns.

For some, they may invoke a process as you describe (squirrelling away additional gains so that they become part of the inevitable market downturn fund) or they don't touch them in the first place.

411guy

· #65 · Sep 8, 2009

steve41 said:
I can't remember the statistic, but I read somewhere that the percentage of Americans who had a written financial plan (numeric-cash flow) was just over single digits.

I get either really depressed or enthusiastic about the opportunity.

Time will tell.

It seems optimistic people tend to prepare retirement plans versus pessimistic people: " Only 15% of pessimists have completed a detailed income plan to help guide their finances in retirement, compared to almost twice as many optimists (27%). Pessimists were twice as likely (25% of pessimists, 12% of optimists) to invest with the goal of preserving money, and were willing to accept much lower returns. Optimists were more likely to invest with the aim of creating an equal balance of capital preservation and growth potential (39% of optimists, 25% of pessimists)."

http://finance.yahoo.com/news/Optimists-Make-Better-Plans-tsmf-2488166123.html?x=0

steve41

· #66 · Sep 8, 2009

What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables.

Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing
it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.

Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically

.

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cannon_fodder

· #67 · Sep 9, 2009

steve41 said:
What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables.

Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing
it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.

Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically.

I suspect, Steve, that it is that very complexity and lack of basic knowledge to deal with the issue which has led many people to put their heads in the sand with respect to this. Even in my generation (~20 years to retirement), never mind the one before me, I know of very, very few people who really plan for their retirement.

Do almost all of them contribute to an RRSP? Sure, but it rarely is within the context of a plan - it is ad hoc.

steve41

· #68 · Sep 10, 2009 (Edited)

My diagnosis is the lack of consistency. When you submit data using an annuity table or function key on a financial calculator, or enter your T4/T5 numbers into a T1 program, you will get the same answer each time you submit the same data.

Not so with the financial planning projection. There is a plethora of web calculators, spreadsheets, etc, each of which cover some aspect of the financial planning problem. They are all different (different coding, different levels of accuracy, etc) and for that reason we are confused and disappointed with the process, so we delegate it to a planner.

The problem is that the planner hasn't got an accurate or complete handle on our financial information... how our salary/pension might unfold over time, loans, non-financial info such as a future plan to say, downsize our home or sell our business, capital we might have in other financial institutions we haven't told him about, or our desire to ensure an estate to pass on,... most of the data required to source a comprehensive financial plan is locked in our own knowledge base, not in our adviser's.

Consistency is knowing you can enter the same data set (including tax based data) into a single program/process and obtain exactly the same results each time. After all, the rules (compound interest, inflation, CPP/OAS/GIS, taxation, RRIF and LIF minimums and maximums...) are all stipulated and cast in stone, so why shouldn't there be a single consistent result?

Granted, there needs to be some general rules... such as to always max/invest in your RRSP first, draw down your non-rrsp capital first.... but once the main parameters (rates, inflation, etc), are set, then there is nothing to prevent the same consistency you would get from using say, a QuickTax, TaxWiz or CanTax to prepare your T1.

Just my two cents.

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SlightlyMad

· #69 · Sep 11, 2009

DIY financial planning: No model of retirement fits everyone; this isn't a condom. Would you want a 200 question survey regarding your financial desires and dreams to ensure that it encompassed all possible outcomes? Even then, it probably misses some subtle cases about remitances to families living overseas, and other complicated issues (how does it deal with my second versus third wife) ...

One can do their best job, become educated on the rules and regulations, understand the math cold, do their best job in modeling the Monte Carlo simulation of how investment results have worked over time, generate the list of probable outcomes, and *still* be 3-4 standard deviations off from where they expect to be. For example, I've only modeled four outcomes and have used no stochastic methods for fluctuating investment returns (sd = 0, for now, in my model), even after the huge downturn, and it's a nice feeling to know that the *average* consistent return will yield a comfortable retirement. And the longer I continue to work (I am findependent), the more fun retirement will be. But I still feel vaguely uneasy about having returns that lie in the -2SD range for a significant period of time, and what that means for when I start eating cat food.

So, even I go to my CFP to talk this stuff over and generate more parameters for my personal model, which has made a zillion assumptions about my lifestyle and choices. And for people who are not whizzes with numbers/computers, how the hell are you ever going to expect them to come up with a model that predicts this stuff?

A lot of people in earlier generations didn't have this problem because they had really good pension plans, some social security and saved for a rainy day and had lower life expectancies. My grandparents had a *LOT* of money saved for the end game, and they lived in comfort before they passed away. My parents and inlaws are also sitting quite comfortably, but with knowing the length of their potential survival, I can see that this downturn has scared them a bit as to how the money might run out.

Generation X is the first generation that will have longer to live and a lot less to live on, and the assumption that "everything will work out all right in the end" for us isn't necessarily true as demographics change and policies that we take as for granted may not be there in 30 years. I know there is a high probability that I'll be okay, but I keep hanging around here (and educating myself on financial planning) to remove the lingering doubts.

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leslie

· #70 · Sep 12, 2009

I don't think there has been any poster in this thread that assumed "everything will work out all right in the end". All of us, in our different ways, have said to expect bad things to happen and be prepared.

steve41

· #71 · Sep 12, 2009

A financial plan is not cast in stone, it is a continual exercise. Retirement age, rate expectations, to sell the cottage or not, leave an estate or not..... these are revisited every time something significant (external or internal) happens. As for 200 questions, I don't know about that many variables, but surely a dozen or so would not be that onerous. This is, after all, your future... are you going to be drinking imported beer, no-name beer, or no beer at all. Granted, when you are just starting out, DIY planning doesn't seem that important... you are busy raising kids, building a career, buying a house. My observation is that the mid-to-late career individuals engage in this stuff mostly.

Financial planning... tailoring your lifestyle as it is influenced by non-investment elements... tax, loans, real estate, salary/pension, CPP/OAS... is best done by you alone, at your leisure. Investment planning, depending how much you follow/understand the markets and risk, may best be farmed out to an investment adviser.

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Maple_Leaf

· #72 · Sep 12, 2009

Maximum sustainable lifestyle

steve41 said:
What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables.

Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing
it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.

Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically.

Steve41, your posts resonate with me. For the last couple of years I have been planning my required savings for a maximum sustainable lifestyle. Basically, income can either be consumed now or saved for later consumption. My approach has been, on an annual basis, to estimate how much to save in order to maximize my consumption yet minimize its variability over time, since I don't like big changes in lifestyle from year to year. In other words plan for the highest sustainable lifestyle over a lifetime.

Similarly, a retiree would be interested in estimating how much to withdraw from savings annually in order to maximize consumption yet minimize its variability over time. Isn't this the fundamental financial planning question? Once you know the answer you move on to budgeting your "operational" expenses and investment planning for your "capital" expenditures.

411guy

· #73 · Sep 13, 2009 (Edited)

steve41 said:
A financial plan is not cast in stone, it is a continual exercise. Retirement age, rate expectations, to sell the cottage or not, leave an estate or not..... these are revisited every time something significant (external or internal) happens. As for 200 questions, I don't know about that many variables, but surely a dozen or so would not be that onerous. This is, after all, your future... are you going to be drinking imported beer, no-name beer, or no beer at all. Granted, when you are just starting out, DIY planning doesn't seem that important... you are busy raising kids, building a career, buying a house. My observation is that the mid-to-late career individuals engage in this stuff mostly.

Financial planning... tailoring your lifestyle as it is influenced by non-investment elements... tax, loans, real estate, salary/pension, CPP/OAS... is best done by you alone, at your leisure. Investment planning, depending how much you follow/understand the markets and risk, may best be farmed out to an investment adviser.

You have articulated effectively what I believe. I am a late career individual and have started seriously planning for my retirement (as opposed to following conventional wisdom) within the last 5 years.

I have crafted my financial plan (not cast in stone), but I do have an investment adviser. My relationship with my adviser is defined by: "trust, but confirm". His value comes with his organization's investment research resources and his experience dealing with retired clients, thus understanding on a practical level what works and what doesn't.

I do also now read lots of retirement documents ("Unveiling the Retirement Myth" being one of them) and ask questions on forums like this one. This way, I consider other perspectives and not only my adviser's perspective. The journey is ongoing......

refutor

· #74 · Sep 14, 2009

steve41 said:
...

or before your loan is paid off...

...

for anyone who is retiring in the next 10 years...do not have any debt when you go on a fixed income...my parents are retiring in the next 10 years and like others have said, having debt throws all those graphs and expectations off. if you didn't like being on a budget when you were working, you definitely won't like it once there isn't a paycheque coming in every 2 weeks. cut out the debt now!

cannon_fodder

· #75 · Sep 19, 2009

I was speaking with a young gentleman (late 20's) at work the other day. I fear his attitude towards retirement planning is all too common.

We were lamenting the fact that, in spite of our company showing an increase in net income (i.e. we are actually profitable), no one would be getting a raise for the foreseeable future.

Through our discussion I discovered he was not receiving free money from our company. Our employer will contribute 3% of your compensation (salary + bonuses + commissions) to a company-sponsored defined contribution plan. You don't even have to opt in for that one I believe. In addition, you can contribute even more and the company will match the first 2% of your compensation.

Thus, if you put in 2%, the company kicks in another 5%. But, you have to go through the onerous task of signing a document in order to get hundreds (or even thousands) of dollars in RRSP contributions for free each and every year.

Where else can you get a guaranteed 100% return on your after tax money?

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sprocket1200

· #76 · Oct 19, 2009

no debt and missing the free money? people are still missing these? let me guess, real estate is going to take care of all my dreams. it has to, i saw it on tv!! (do people still have those?)

cannon_fodder

· #77 · Oct 20, 2009

sprocket1200 said:
no debt and missing the free money? people are still missing these? let me guess, real estate is going to take care of all my dreams. it has to, i saw it on tv!! (do people still have those?)

No - he still lives at home with his mother...

cannon_fodder

· #78 · Dec 4, 2009

steve41 said:
I would handle that using the 'under the mattress' method... setting the entire rate vector to zero. A 51 yr old earning 90K, retiring at 65, with a 100K loan (6%, 10 year) and 200K in his "mattress RRSP" will see a $29,208 'die-broke-at-95' ATI. (Taxed in BC, 2% inflation, full OAS, CPP at 65)

At a 6% rate, the ATI/BQ is $45,257. Hmmm... I wonder, is the 16K extra beer and groceries worth the agro?

Steve,

I must not be seeing all of the details. Just in my head, if a BC individual retires at 65 with full CPP and OAS (about $18,500) and $200k in an RRSP that doesn't grow at all and inflation is 2% his RRSP will be depleted in less than 20 years if he needs $29k ATI.

Am I missing something?

cannon_fodder

· #79 · Dec 4, 2009

There has been a lot of debate in this thread about how much assets you need or how fast you can withdraw down when hitting retirement.

What I am interested in is what people are projecting for their required ATI upon retirement in today's dollars.

I'm working with $42k ATI for my wife and I consisting of:

Housing
..........Property Tax.................................................$3,600
..........Insurance.....................................................$500
..........Improvements/Maintenance/Furniture, etc..........$2,800

Auto
..........Gasoline.......................................................$2,500
..........Insurance.....................................................$1,200
..........Maintenance.................................................$1,800
.........."Replacement Car Fund"..................................$3,600

Utilities/Telco
..........Internet/Cable...............................................$1,800
..........Cellphones....................................................$1,000
..........Water Tank Rental..........................................$250
..........NatGas/Water/Hydro.......................................$3,000

Entertainment/Leisure
..........Vacation......................................................$6,000
..........Movies/Restaurants/Theatre............................$1,800
..........Gifts............................................................$2,000

Essentials
..........Food...........................................................$3,600
..........Clothes........................................................$1,200
..........Toiletries/Cleaning Supplies..............................$600
..........Hair/Makeup..................................................$900
..........Charitable Giving............................................$500

I then added 10% to be safe since there might be items I've forgotten or surprises that could occur.

We are planning to be debt free and live in Canada (perhaps BC as opposed to Ontario where we've been for most of our lives).

I'd be interested in any areas I've completely forgotten or understated and what you are using for your income requirements.

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steve41

· #80 · Dec 4, 2009

Sorry, all I did was run those parameters under a 6% rate assumption and a 0% rate assumption. I lost the original file, so I recreated it using those same numbers. Here are the two stripped down plans as a 2 page pdf.... worth the agro? It essentially says that putting all your retirement nest egg 'under your mattress' delivers a $29K lifestyle whereas a 6% market return would deliver a $45K lifestyle.

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