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| Adrian Mastracci, investment counsel at KCM Wealth Management, says “Most reasons to accumulate a personal nestegg eventually lead to the retirement patch." |
For immediate release
Vancouver, BC (April 13, 2004): Adrian Mastracci, investment counsel at Vancouver’s “fee-only” KCM Wealth Management comments on what it takes to make retirement dreams a reality.
Someone once said “you spend your whole life believing that you're on the right track, only to discover that you're on the wrong train.”
“Don't let that happen to your retirement dreams,” notes Mastracci, “There is always something you can do about which train you take to your chosen destination.”
“Most reasons to accumulate a personal nestegg eventually lead to the retirement patch,” remarks Mastracci, “Consequently, I’m often asked what size of nestegg will suffice to attain a particular retirement criteria.”
“Addressing such issues is a very beneficial exercise. Accumulating a personal nestegg involves the investment of capital with a particular rate of return over a period of time,” adds Mastracci.
“Unfortunately, time lost is the one element that cannot be recaptured without incurring added investment risks,” mentions Mastracci, “Hence, the earlier the exercise starts, the better the results are likely to be.”
Mastracci states, “The primary goals of retirement are to establish the stream of reliable income, safeguard the stream of income from the ravages of risks and distribute the remaining estate to their loved ones.”
“The first step is the math to estimate your particular size of nestegg to achieve the ballpark defined as your comfortable retirement,” points out Mastracci, “I call it the financial independence analysis.”
Let’s begin by summarizing the typical assumptions pertaining to three financial independence situations:
- Each situation is a couple where the female spouse is two years younger then the male.
- The analysis represents the desire to generate a gross annual income of $50,000; $75,000 or $100,000 for the couple’s lifetime, in today’s dollars, commencing at various ages as noted.
- The surviving spouse receives 75% of the desired income amount.
- Inflation is estimated at 3% per year for their lifetimes.
- Return on investment is 6% per year starting at retirement and continuing for their lifetimes.
- 75% of CPP entitlements and full OAS are received.
- 5 years are arbitrarily added to each normal life expectancy for planning purposes.
- The possibilities of inheritances and other windfalls are not considered.
- The calculations of capital do not leave a legacy, except for the principal residence.
“A word of caution about the figures that follow,” says Mastracci, “They are best looked upon as reasonable ballparks to aim at for the particular retirement criteria. My estimates are generally higher, typically by 5% to 20%, than other retirement calculators I’ve seen.”
“Extending life expectancy is one reason,” explains Mastracci, “I would rather be in the conservative camp when it comes to such estimates.”
“Retirement brings about a variety of unknowns,” continues Mastracci, “Some relevant ones are the adverse affects of rising inflation, the financial cost of taking care of personal health issues and the investment returns actually experienced.”
Accordingly, the estimated sizes of retirement nesteggs develop as follows:
Current
Ages |
Financial Worth (1) |
Income Requirements |
Nest egg Required (2) |
Return on Investment Required (3) |
|
|
|
|
|
| 35/33 |
$100,000 |
$50,000 @ 55 |
$1,575,000 |
10.20% |
|
|
$75,000 @ 55 |
$2,575,000 |
13.70% |
|
|
$100,000 @ 55 |
$3,600,000 |
15.90% |
|
|
|
|
|
| 50/48 |
$500,000 |
$50,000 @ 60 |
$975,000 |
4.70% |
|
|
$75,000 @ 60 |
$1,700,000 |
11.20% |
|
|
$100,000 @ 60 |
$2,425,000 |
15.50% |
|
|
|
|
|
| 65/63 |
Achieved |
$50,000 @ 65 |
$525,000 |
|
|
|
$75,000 @ 65 |
$975,000 |
|
|
|
$100,000 @ 65 |
$1,475,000 |
|
 |
|
|
|
|
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“Some of these numbers can be intimidating,” outlines Mastracci, “They are meant to stir discussion and thought about what’s important about retirement to you. That leads to shaping the assumptions that pertain to your specific situation.”
“Of course, the values of one’s financial assets, such as employer pensions, registered plans, personal portfolios or business values, are deducted from the required nestegg figures above to arrive at the net amount,” indicates Mastracci.
“The key variable that portfolios ought to focus on is the rate of return required to achieve one's financial independence given today's financial net worth,” suggests Mastracci, “Accordingly, asset mix decisions become very important in the retirement planning scenarios.”
“The financial independence analysis becomes part of a client’s investment policy statement so that a personal reference point is established,” concludes Mastracci, “Not to mention shaping the portfolio to achieve that personal return.”
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