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Unveiling the Retirement Myth

29K views 82 replies 22 participants last post by  Racer 
#1 ·
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/
 
#30 ·
Leslie when she says "Safe" means 0% probability of failure
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?
 
#78 ·
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?
 
#31 · (Edited)
"I would handle that using the 'under the mattress' method."

That is almost exactly what Jim Otar is calculating with his number. Not incidentally his number equals a rough above-average lifespan. He says a 65-yr old has a 30 number. So he can withdraw 1/30th. And the portfolio would last 30 years until age 95.

The only thing he requires of the portfolio is to earn enough to cover inflation.

"..a plan that provides a 90% chance (of failure) would be acceptable.. I also have the ability to tighten my belt." So I don't get it. Why are you looking for a magic number then? Did the numbers (from the link) not convince you? Here are some other paper:
1
2
3
 
#33 ·
I never said I was looking for a magic number. You must have me confused with someone else.

There are far too many significant variables outside of my control - if I can maximize everything available to me (RRSP, RESP and TFSA contributions), minimize non-deductible debt, take advantage of deductible debt then, given enough time, I will have sufficient assets to have a high likelihood of financial independence.

I don't think of it in terms of withdrawal rate. My primary goal is to put as much as I can away for retirement, invest it wisely, and adopt a long term view of not only my pre-retirement investing, but also post. I keep up the pressure now so that I'm better prepared should there be negative impacts in the future.

At this point in time, my wife and I are able to allocate more money to our investments on an annual basis than we expect our post retirement expenses to be. I know that not many people are fortunate enough to be in that position. One can almost think of it as "putting aside" 1 year's of retirement expenses now to be used in about 25 years time. The longer we can do that, coupled with what we already have, may allow us to retire on our terms barring major incidents.

For us, playing with these numbers is fun - but, at least at this point in time, they do not change our focus or approach. They are projections that, although based on sound assumptions, provide no collateral for what will happen down the road.
 
#32 · (Edited)
This is what I find so silly about the 'number'. I can run the same 65 yr-old as a 'die-broke at 95' subject with zero rate of growth and get a number of 20.4

I can run him again and receive the same ATI/BQ (about $24K) and come up with a 'number' of 8.3

The only difference between the two projections was that in one case he was paying down a 100K loan over 3 years, and in the other instance he was paying it down over 10 years.... exactly the same die-broke lifestyle (BQ) but vastly different 'numbers' (20.4 and 8.3)

Does anyone see what I am driving at?

10 year loan
3 year loan
 
#34 ·
Yes, you've used a similar example before. You also previously stated,

I could take two people with exactly the same situation... same savings (amt and type), same age, same entitlement situation and same size of loan. They could have completely different SWRs applicable.

How? Simple.... one has a loan with a 3 year amortization and the other with a 10 year. These 2 different loan payment levels put each individual's SWR strategy into different territories. (depending on the scale of the loan amounts they could be quite different)


How is that two people with exactly the same situation? The very fact that they affect the SWR so significantly tells you they aren't!

If I said:

I could take two people with exactly the same situation... same size of loan and amortization, same age, same entitlement situation and same size of savings. They could have completely different SWRs applicable.

How? Simple....one has all of their savings in 3 year bonds at 1.2% while the other has 30% in long term Real Return Bonds at 1.8% and 70% in ETFs that track major indices around the world. These 2 different savings structures put each individual's SWR strategy into different territories (depending on the proportion of the investment allocation they could be quite different).


They are not the same, and depending on other factors, they may not even be similar.
 
#35 ·
OK I could have changed my guy from two different loan strategies to two different CPP timing strategies... taking at 60 and taking at 65. The point is... here is someone with exactly the same age, financial assets, etc... except his "A2W number" can vary all over the map. The above example showed A2W values in one case 8, and the other case 20.

My number (the ATI/BQ) varied hardly at all. That's my point.... what is the significance of the A2W?

And more importantly... can a person get dangerously mislead by not understanding it correctly?
 
#57 ·
I've been busy so I am just catching up now. Thanks for posting the outputs for your two examples.

I don't get what point you are trying to make... take 2 cases which are identical except in one significant area and point out that the A2W's aren't going to be the same during that period. I don't need a tool to tell me that - it should be obvious.

What would be perhaps more telling is like one of the other papers mentioned - determining "safe" A2W's based on the investment mix and forecasted growth rates.

One thing that the paper did not try to simulate was what would happen if one drastically changed the mix during the drawdown phase based on the stock market performance. Specifically, if the market has run up very high (greater than normal P/E ratios) and one expects it to return to the norm, what happens when one liquidates a healthy portion of assets and buy the inverse. And, the opposite like earlier this year - when the market is in an historically low evaluation period, liquidate fixed income portion to go overweight the equities. (Don't do this in a non-registered account otherwise the capital gains triggered could be extremely detrimental.)

Or, when interest rates are quite high, purchase annuities at that point in order to lock-in a higher income stream as opposed to living with a variable based one. Perhaps another paper has done that research.
 
#36 · (Edited)
Getting back to thread's subject...

"I keep up the pressure now so that I'm better prepared should there be negative impacts in the future." I think that quote from CannonFodder is a pretty good summary of where I believe people's attention should be concentrated.

All the posters above who claimed to find JimOtar's or Steve41's magic number helpful enough to spend $4, and important enough to argue it's finer points, are completely missing the big picture.... most probably because financial advisors and the media have brain washed them into thinking they 'need a plan'.

For Pete's sakes, the future is unknown. The way it will play out is NOT predicted by historical averages, or MonteCarlo simulations, or bootstrapping simulations. You cannot PLAN it.

To assume certain inputs that conveniently support your conclusions is misleading. Eg. JimOtar's assumption that investment returns will be only big enough to cover inflation, or Steve41's assumptions that tax rates upon RRSP withdrawal will be lower than the contribution rate, or nearly everyone's assumption that you should plan to die broke without needing capital at life's end.

Instead you should be doing WHAT YOU CAN every day of your life.
* Don't save 'what your plan says you should save'. Save whatever you can.
* Don't invest in safe (lower return) investments because your plan says you don't need your portfolio to grow. Invest in whatever you think will earn you the highest return (within your volatility tolerance).
* Don't spend $$ in retirement the magic number someone quoted. Spend what your investments earn - after reinvesting inflation and putting $$ aside for year's of poor returns.
 
#58 ·
Leslie,

This is almost exactly what I believe. I'm not saying everyone should subscribe to my thinking, but simply relating what mindset I operate under.

Thinking about it more, I would say that for a long time, maximizing my RRSP contributions (and RESP and now TFSA) falls under the "fixed expense" castegory for me. These are not discretionary expenses. They come first just like car payments, mortgage payments, utilities, etc.

It is much easier to "sacrifice" now to help reduce the chances of failure in the future, than it is to find oneself at 65 years of age and no way to earn income to supplement a retirement fund that has been depleted.

I can run numbers all day long through various calculators using reasonable assumptions and it shows that my wife and I will be in fantastic shape for our retirement years. But, that in no way changes my thinking that we must continue to put maximum effort and leverage the government programs provided to us through RRSP, RESP and TFSA.
 
#37 ·
If no one needs a plan, why did the term 'financial planning' or 'financial planner' get into the lexicon?

Surely, spending a modest amount of money on books or software to determine some general level of spending/budgeting/investing in order that we don't start sucking air at age 70 (running out too soon) or have our rotten kids inherit a gazillion dollars when we die, is not too much to ask... given the way we waste money on other frivolities.
 
#38 ·
Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented.

The answer is in my post above. No one needs to be told how. Common sense is all you need. Your assumption that we would be "sucking air at age 70" with "rottn kids" without them is preposterous. My parents weren't. Nor were their parents. Nor will I be.

This industry has created a need for its own services, a need that does not exist. You have been sold a bill of goods and your defense of your own need for it proves my point.
 
#59 ·
Garbage.... My folks had a set of tables (they were very common from what my Mom told me) These tables had three sections...

-mortgage/annuity
-sinking fund
-future value

Using these 3 tables, you could, based on what you had saved already and what you planned to continue to save until retirement... what you could look forward to in retirement. They were arranged by rate and length of term.

They taught the use of these tables in high school home economics!

Well before the computer even existed.
Common knowledge and common sense are sometimes oxymorons. One of the items I decry about our educational system today is that kids are taught about all manner of things like Canadian history and to not dangle participles - but, heaven forbid they should be educated on personal financial management.

And, even if people have been taught, does that mean that they only need that one lesson before they make it part of their day-to-day routine? When I was young, I used to exercise to look good for the summer season - now, I exercise as a lifestyle change because I need to and it is hopefully going to make my life healthier and better in the long run.

You might think that this subject, which appeals to one of people's most basic drivers (GREED), would be of keen interest to everyone. There certainly are enough avenues to learn more and get the help necessary. But, people have different passions at different phases in their lives. I believe that it is typical to find personal finance books in the bestsellers' lists of non-fiction works. Television is a hit and a lot of misses - for every show dedicated to it (whether it is Suze Orman or "'Till Debt Do Us Part") there are 5 or 10 "infomercials" about how you can get rich quickly and easily.

It is encouraging that they are sites like this, with people like yourselves, which are providing support to others not so well versed, or not as keen.

Personally, I try to help others so that they can improve their financial state of affairs. The biggest problem I have is finding how to ignite the passion within them. I know that once this becomes their priority then they will be more receptive to the positive changes necessary to reach their goals.

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.
 
#39 ·
Garbage.... My folks had a set of tables (they were very common from what my Mom told me) These tables had three sections...

-mortgage/annuity
-sinking fund
-future value

Using these 3 tables, you could, based on what you had saved already and what you planned to continue to save until retirement... what you could look forward to in retirement. They were arranged by rate and length of term.

They taught the use of these tables in high school home economics!

Well before the computer even existed.
 
#40 · (Edited)
What you are referring to is simply the three finance equations that EVERYONE need to learn, but 99% refuse to.

Mortgage/annuity = Present value of an Annuity
Sinking fund = Future value of an Annuity
Future value = Present value = Present value of a Dollar

An example of them is here. If you want to learn how to use them (the calculator version) see these directions.

You may remember the many times I have told people they need to own a financial calculator and know how these functions work. You may also remember that never, ever has any other poster reiterated that advice. In fact almost every time, the response has been, "We don't need to". Obviously you decided you did not have to.

The existence of these financial functions does not prove that financial advisors are useful. Since everyone can buy the calculator there is no necessity to even learn the equations behind the function, much less pay an advisor.

Learning basic math is part of what I call "common sense". You could have learned that common sense from your parents. You just proved they had it to share. When people refuse to learn what common sense dictates they must learn, it reflects badly on them, not on the need to use common sense instead of relying on 'advisors'.
 
#41 ·
What you are referring to is simply the three finance equations that EVERYONE need to learn, but 99% refuse to.
have brain washed them into thinking they 'need a plan'.

Which is it? no one needs a plan, or everyone needs to learn. Make up your mind.

Using a set of tables, which people did before the computer or calculator were invented, or using a fully inclusive computer model... there is a need out there for people to get a handle on where they are going, whether they are saving enough (or too much), and what kind of lifestyle will see them out to some age or enable them to ensure thay have an estate to pass on.

The plan is revisited every year depending on how their investments have fared, any new taxes or financial products that have been introduced, and any changes that may have cropped up as far as retirement goals, estimates of the markets, etc.

Things change, we adjust and we tweak our plan. If you are content to wing it, fine. Many don't.
 
#42 ·
But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds.

E.g Everyday you make trade offs between spending money now (instant gratification) and retiring early (or going back to school, or buying that big boat LATER). The decision is not make according to some 'plan'. It is made according to which you think is more important at that specific time. You ask yourself "will spending this money make my happier?'. Or "will traveling in retirement make me happier?"

In other word you just do your best, knowing only the generality that you will need savings for retirement (etc).

Learning basic math does not constitute a 'plan'. You do not 'run the numbers' through that math everytime you make a purchase (or decide not to). Nor do you do not need to run the numbers every year-end, because you already know that you did your best.

I expanded on the math angle only because you showed you did not know what it was all about.
 
#43 ·
Along with the concept of financial planning, we find that some individuals 'budget'. No, they don't sit down every time they are about to go to the store and make a purchase, but at various times they (presumably) determine a budget to see whether they can afford a major purchase... can I buy a new car every three years? what should I plan to spend on a monthly scale such that I will be able to buy that new car, and still make it out to some reasonable age without sucking air.

Budgeting means striking a balance between spending and saving. If you choose to blindly plow ahead without any foreknowledge, fine... maybe you are blessed with scads of money... I'm not.

Using a calculator or a set of tables might suit some, however the world is much more complicated when you include the effect of income tax, bridging, inflation, partial retirement,... unfortunately, "common sense" doesn't always cut it. The mere fact that you are sitting at a computer and participating in this forum says you have access to more computational power than your parents could even dream about. Why not harness it in some small measure?
 
#44 · (Edited)
Leslie above said: Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented.

Up until the late 1980's people saved using Savings Bonds & GICs and retired using life annuities or a Defined Benefit Pension Plan (aka: a Life Annuity). Investing as we know it today simply was not available to the masses until very recently.

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.

Leslie, do you know even a single person you can hold up as an example that proves it would be sucessful startegy?

In the distribution phase any amount of loss might become a permanent loss.
The efficient frontier, asset allocation, frequent rebalancing, asset dedication, diversification, the concept of "long-term" and Monte Carlo don't and can't work in a distribution portfolio as you might want to believe.

In a distribution portfolio you will be Lucky or Unlucky in the early years of retirement. The sequence of those returns is what matters and will determine the longevity of the portfolio. People need to hedge the risk of being Unlucky.


http://www.yourwealthadvisor.ca/zonestrategy.htm
 
#63 ·
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.
 
#45 ·
Leslie says above: But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds.

Really! IMO, “Failing to plan is planning to fail”
 
#46 ·
I totally agree that planning is necessary for financial success. Not necessarily to get wealthy but to be mortgage/debt free with savings for retirement. I have friends who have earned exactly the same as I have for the last 30 years and have so much debt and no savings that I don't know how they will ever retire. They really have no clue how to plan and get ahead as evidenced by the choices they've made all these years. They think they're going to retire in 5 years but haven't given any thought that retirement income will be substantially less that their working incomes. They can barely manage now so I shudder to think what will happen when they do retire.
 
#47 ·
Below are two a clips from pages 454 & 456 of Jim's new book.

Quote:

"The zone strategy tells you exactly whether your portfolio will be accumulating or decumulating during the distribution stage.

• If you are in the green zone, your portfolio will be accumulating. If you are lucky, it will accumulate at a steeper rate, otherwise it will accumulate at a slower rate.
• If you are in the red zone, your portfolio will be decumulating. If you are lucky, it will last a little longer, otherwise it will deplete sooner.
• If you are in the gray zone, your portfolio may be accumulating or decumulating, depending on your luck.


Export or Retain the Risk:

There are three financial risks of retirement: longevity risk, market risk, and inflation risk. When you buy a life annuity with payments indexed to CPI, you are in effect exporting these risks to the insurance company. Keep in mind that the insurance company is a for–profit organization; transferring risk to them costs you money. For example, if you are buying a life annuity, you have to part with your capital permanently.
By definition, if you are in the green zone, then your portfolio has sufficient reserves to cover the longevity, market and inflation risks. For you, the volatility of returns is the deciding factor, which can be handled with proper asset allocation and diversification. You do not need to export these risks to an insurance company. Only if you want to feel extra safe, you can export risks partially or fully, and you will still have money left to invest.

However, in the gray and red zones you have no choice. Your investment portfolio does not have sufficient reserves to cover longevity, market and inflation risks. For you, the sequence of returns is the deciding factor and that cannot be fixed within the investment portfolio. In the gray zone, you need to allot part of your assets to annuities. In the red zone, your entire assets are used to purchase annuities"

End Quote
 
#48 · (Edited)
The belief that "planning is necessary ... to be mortgage/debt free" is wrong. Common sense everyone is born with, and does not require any advisor, tells you to save up FIRST to pay for what you want. Therefore you do not go into debt in the first place.

The offshoot of this error is thinking that you can 'afford' to make certain purchases NOW, because your budget says you will have saved the money by some LATER date. In effect budgets PROMOTE spending before the cash has been saved.

There is no motivation to save 'because of a budget' commitment. There is no emotional gratification from budgeting. You save because you really, really WANT that new car. The more you want it, the more expenses you are willing to cut.
------------------------
Regarding whether you are "lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio". There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return.

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.

The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.

Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.
----------------------

If the OP of this thread really wanted to help people, he would tell them about another time-value-of-money calculation that is NOT on any calculators I know of --- the PRESENT VALUE OF A GROWING ANNUITY. This calculates the nest egg you require to fund an annuity of retirement payments that grow with inflation. Put it into an Excel spreadsheet so that you can solve for any of its variables:

expected after tax investment returns % (less what you reserve for loss years)
the portfolio balance at the start
the inflation rate you expect
the starting value of the draw for living expenses (not including taxes).
 
#55 · (Edited)
The conclusion of my comments that you quoted provide the answer to your objection.
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.

The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.

Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.
------------

Maybe you remember that there was a big market crash last year. I survived just fine by doing the above - living off what I had put aside for loss years. I cut back all my discretionary expenses - no big deal. My portfolio has now recovered to the Jan08 level, and it is above the inflation adjusted balance I started retirement with.

No need for planning. No need for advisors. Just common sense - doing the best I can each and every year.
----------------

Regarding annuities, you assume my position is 'against them'. Not at all. Once you reach the age where your cohort is dying at a good clip, they start to offer good value because you capitalize on the value left behind by those who die --- and I expect to long longer than the average. I think they are of value to everyone, no matter the size of your portfolio, to cover your necessary costs. The only people I would exempt would be home-owners with a revenue suite. Because RE works much the same way as an annuity.

But there is no value to annuities when you retire early (me). Not enough people are dying for them to give you a better rate than bonds.
 
#49 ·
Leslie, not everyone has the common sense to plan. When I speak of planning I am not referring to having a financial planner create a formal plan. I'm speaking about the individual having a plan in her head on how to get from A (mortgage/debt) to B (mortgage/debt free). This just doesn't happen without conscious thought and effort.

Many people just don't do it as evidenced by my firends. I've always been the oddball out because I saved and planned for my future. My friends and I don't make the high incomes that many on this forum do but we do make enough to live comfortably and put some away. I've had financial targets and saved to meet them but they never had financial goals and even in their 50s have large mortgages and no savings.

Whether the plan is in one's head or on paper it is still a plan and a road map to get achieve the established goal.
 
#51 · (Edited)
I can remember many, many years ago... I think it was 1st or second year algebra. It was a module on finite series. We went through all the time value of money derivations to the point we could derive them on our own (PV, Sinking fund, FV, annuity...). It was rigorous, but once you understood it, it was pretty trivial.

At the end of the module, our prof showed us how to derive the formula for an indexed annuity. That was pretty hairy, but the punchline he delivered went along these lines...." All the math we have just slogged through is pretty much useless... none of these formulae relate to the real world. For instance... why should we derive a financial plan and assume that the interest rate is going to be constant? (as we get older, we grow more risk averse and our rate expectation goes down) or why should pmt levels stay constant? Might it not be better to design an annuity which has a higher pmt (adjusted for inflation) in the first 10 years to account for the fact that our lifestyle requirements may take a dip in our latter years? or surely these investment cash flows don't exist in a vacuum. You will need more income in the years prior to 60/65 before your CPP/OAS kick in, or before your loan is paid off... fixed payment (inflation adjusted) annuities don't allow for that. Or how about a planned-for sale of your cottage 10 years out?"

The time value of money algebra is fine for teaching someone compound interest... the general implications of saving for retirement and subsequently living off the proceeds, but as practical, real life tools, they just don't cut it.

Now for the coupe de grace... Income Tax. The only element which has meaning (to me anyway) is the amount of cash (after tax) available to purchase beer, groceries and gas (as well as the occasional car every 5 years say)

The above-mentioned math will not solve that problem for the principal reason that the income tax formula is not linear... it is a complex calculation involving discrete tax brackets (indexed to inflation) age credits, loan interest deductibility, dividend tax credits.... it is a nightmare.

Why is it a nightmare, given that many of us still do our T1 by hand, you ask? Simple... the tax formula was designed to work from the top down, whereas for the purpose of financial planning, we need to start at the bottom (net income) and drive the T1 backwards. The simple question... "how much should I draw from my RRSP such that I net (after tax) exactly $30,000?"... sounds easy, but it isn't. Now throw in the reality that tax on our RRSP withdrawal doesn't live in a vacuum... we are taxed on investment growth on capital outside of our RRSP, maybe even at the dividend rate. We are receiving additional taxable income from CPP, a pension, an annuity. This is absolutely impossible to solve with even the most convoluted set of time-value-of-money formulae.

Thankfully, there is a way to solve these kinds of problems... recursion math. The way you would solve that simple 'how much to draw from my RRSP to return $30K after tax?' question can be done by hand. You simply continually shovel RRSP withdrawals into a T1 program until you get close to the answer. It can be time consuming... trial and erroring 10 , 20, 100 times until the exact $30K drops out, but it is do-able.

Before the modern day computer arrived, this would have been the way to solve the 'reverse tax' problem, but now, the computer allows us to solve the 'needs-based' (after tax driven) tax accurate financial planning problem quickly and easily. The bad news, is that spreadsheets are not sufficiently fast or flexible, however using a procedural language (C++, Basic, Fortran, ...) will solve the problem and allow it to converge in a reasonable (several seconds) period of time.

Sorry to ramble on like this, but is is kind of my life's (well the last 15 years anyway) work. I get sort of passionate about it.
 
#74 ·
...

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!
 
#54 · (Edited)
leslie replied: "Regarding whether you are "lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio". There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return."


end quote.

Nonsense. Withdrawals during retirement are based on actual need, not market returns.
If you depend on that income to pay bills you can't defer withdrawals until you get better returns or decrease withdrawals to some arbitrary amount in keeping with the returns of the past year. What do you do if the market falls by 40 or 50% all at once, or goes sideways for 10 years?

Distribution income planning is about planning & designing a safe and reliable inflaton adjusted income for life. If you are in the Red or Grey Zones you cannot afford to finance the time-value of fluctuations. Your only relaible and safe option is to export risk to an insurance company.

http://www.yourwealthadvisor.ca/app...772426-offloading-risk-to-insurance-companies

http://www.yourwealthadvisor.ca/apps/links/
 
#56 ·
I think the sad truth is that Leslie ("the luddite":)) is in the definite majority. 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.
 
#65 ·
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
 
#60 · (Edited)
I once tried to construct a book which could be of general use and was comprised of several hundred tables. I used my program to generate the tables. I soon discovered after observing many disparate financial plans, that hardly any of these tables would be of the slightest use. Everyone is in their own complex financial universe.... retired/not, pensions (various types), savings (reg/nonreg/equity), loans (of various complexions) expectation of a future capital gain (downsizing home, selling cottage, inheritance), different income targets (buying a new car every five years...), estate goals (die broke, specifying an estate level on death).... it goes on.

Trying to make even the most remotely useful set of tables was a complete non-starter. I am afraid that the only way (other than using the good old "common sense" dartboard) is a single inclusive program which allows you to specify all the above variables in one integrated number crunch. (rather than running separate disconnected spreadsheet illustrators)

The point I was trying to make about the A2W ratio was exactly the same as my experience... I determined that two identical situations (paying off a loan in 3 rather than 10 years) gave two completely disparate A2Ws... 8 and 20.
 
#62 ·
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 :cool:
 
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