work | SMART Financial literacy: How much will you need? Continued from page 6
will provide $20,000 more. Tat will leave $60,000 a year to be provided by your investment portfolio. How much capital will you require to meet that income objective? Start with the Investment Income calculator. All these income sources are taxable so assume the $5000 a month is coming from RRSP/ RRIF withdrawal. Te amount needed in the RRSP to start will be $1,232,258. Tat amount will preserve the capital and live off the earnings. You could plan to use up the capital through retirement. Starting at age 65, 30 years should be a safe bet. Te risk is you may live longer than age 95 but maybe you won’t care anymore. Te capital needed then reduces to $947,141. But don’t forget your “final expenses” and third trimester emergency fund (when the risks are also greater). Add $50,000 for those savings and you are still going to need a million dollars to provide the target income for thirty years. Te next question is how much consumption are you going
to need to forego now in order to support your target level of consumption after your END OF WORK? Tat, after all, is what this financial planning stuff is all about, fore-going some expenditure today so you have money after THE END OF WORK. Say you are 35 now; your savings so far have gone into TFSAs that now total $50,000 between you and your partner, a reasonable emergency fund. How much are you going to need to invest now in your private “pension” plan to provide the after tax net income you have decided is your definition of financial independence? Your spouse’s pension deductions are $200 a month, matched by employer, so call it $400 a month needed to match that for you who has no pension plan. You have been putting $400 a month into your TFSAs the past few years so this amount is affordable without giving up too much. As this is your pension we are talking about, you think you should be fairly conservative and use the “Conservative” asset allocation of only 25% equities and 75% in a “secure” fixed income bond fund, averaging a 6% annual return but with low volatility year to year; sort of like a set it and forget it approach. In 30 years your pension plan will be worth $391,703. WHOA! But I need a million! What are your choices? First,
that $400 a month into TFSAs was after tax; with tax sheltering in an RRSP, that $400 net would be $600 before tax. Ten the capital would be $587,554, better but still far short of you goal. Have another look at your asset allocation; consider the
“Balanced” approach of 50:50 with 8% average return target. Tat would provide $850,568. Getting more aggressive, with 75% equities, could get you to the ideal $1,247,526 amount. On the other hand, you are really not comfortable with 75% equities and want to go no further than the 50:50. You could
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add $100 to your monthly contribution, after all it is only $60 net after tax; you could find that in your budget. Now you can project $992,329, maybe close enough? And asset allocation or portfolio balance choices are not
cast in stone. It might be reasonable to go with the aggressive 75% equities while you are young and have a long horizon, with the idea of shifting the balance to 50% for the last ten years. Te whole point of this column is that you need to crunch
the numbers for yourself. Do not think you can pick a number out of the air (but $400 a month sounded like a lot!) Know what you will really need, then you can make the trade-offs between asset allocation or risk levels and making larger contributions. Tere is no guarantee that the $700 a month
before tax is going to reach your million dollar target. But putting in less in a more conservative mix is guaranteed to not achieve your target. You can decide to drive the old car longer, to remodel the house instead of buying bigger, cut back from dinner out once a week to once a month. And if you are already 40 and want to retire at 60, you will likely need to do all three and more. You can forgo some consumption now, or learn to like cat food when you’re 75. You choose. Fredrick Petrie, B. Comm. (Hons.), author of “THE END OF
WORK: financial planning for people with better things to do”, provides financial education at
www.navigatingfinance.com, reach him at
navigator@navigatingfinance.com or call (204) 298-2900. You can get started at
http://www.amazon.ca/END- WORK-Financial-Planning-People-ebook/dp/B00XCY0AJ2/
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