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By Rob Carrick
The Globe and Mail
Report on Business
Tuesday, February 27, 2007 |
The way the stock markets have performed in the past few years, your RRSP account should be smoking hot.
Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says, "My numbers are conservative. They could be 5 to 15 per cent higher than those you get from those online calculators you find on financial websites. "
Enjoy the feeling, and then come back to reality. Strong returns over a couple of years tell you exactly nothing how about how well your registered retirement savings plan is faring. The real question you need to answer is this: Are you accumulating enough money to live decently after you retire?
One way to answer this question is to look at the amount of money you'll need in your RRSP to generate a good income. The next step is to compare that amount to what you've already saved and assess whether you're heading to an RRSP shortfall.
Say you're 40 years old and your spouse is 38. You want to retire at age 65 and you expect to live to age 88. For annual retirement income equivalent to $50,000 in today's dollars, you and your spouse would need to have a combined $1.3-million in your RRSPs when you retire.
Gulp. Now you see why it's a good idea to do the sort of retirement savings reality check like we're going to perform right here.
We'll use some numbers provided by Adrian Mastracci, portfolio manager at the Vancouver financial advice firm KCM Wealth Management, who warns that he has been very conservative. He said his numbers could be 5 to 15 per cent higher than those you get from those online calculators you find on financial websites.
You'll see this conservatism in the assumptions that Mr. Mastracci used to build his numbers. For example, he used investment returns of 6 per cent, which is probably about half or less of what you've seen in the past few years. He also added five years to standard life expectancies, and he has used an annual inflation rate of 2.5 per cent. That compares to the 1.2-per-cent rate of inflation last month.
Old Age Security and the Canada Pension Plan have been factored in, but the numbers reflect only 75 per cent of the full CPP benefit. This is to account for the fact that some people get only partial CPP, or none at all. No company pension plans were included.
The numbers show that the younger you are, the more you'll need to pack away in your RRSP. Here are some quick examples:
- A couple made up of a 60- and 58-year-old would need $360,000 combined for an annual income of $30,000 in retirement, $780,000 for an income of $50,000 and $1.4-million for an income of $80,000.
- A 50- and 48-year-old would need $450,000 combined for an income of $30,000, $980,000 for an income of $50,000 and $1.8-million for an income of $80,000.
- A 40- and 38-year-old would need $580,000 combined for an income of $30,000, $1.3-million for an income of $50,000 and $2.3-million for an income of $80,000.
Blame inflation for the greater savings requirements faced by younger people. "Most people don't really comprehend the effect of inflation," Mr. Mastracci said. "That's what makes these numbers so large."
Here's an example from Mr. Mastracci's numbers. A 50-year-old who wants an income equivalent to $50,000 in today's dollars when she retires in 15 years would need to draw $72,400 in 2022, assuming a 2.5-per-cent inflation rate. If inflation were to average 2 per cent, that number would fall to $67,300; if inflation kicked up to 3 per cent, the amount would rise to $77,900.
If that sounds staggering, just wait. When our 50-year-old turns 75, it will cost $92,700 just to get what $50,000 buys today, assuming that 2.5-per-cent inflation rate. At age 85, this person would need $118,700.
Let's say you don't account for inflation in building up your retirement savings. In a sense, there's a crumb of logic behind this because your expenses may decline as you age and partly offset increases in the cost of living. Still, you'd be living dangerously because inflation is like a negative rate of return on your income. Example: $50,000 in annual income reduced by 2.5 per cent annually over 15 years would effectively leave you with $34,200.
The point of looking at numbers like these is to get you thinking beyond annual rates of return in evaluating how your RRSP is doing. Returns are important, but so is ensuring that you're shovelling enough money into your RRSP to benefit from those returns.
If you're not, you've probably got time. Mr. Mastracci said that with 15 years to go until retirement, you still have ample time to build up your savings if you direct all available resources into an RRSP.
"A 15-year window before the magic retirement date is probably a safe region," he said. "You may have to make some choice about things like how many dinners out you have, but it can be done."
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