What brought this on?
My wife is turning 50.
She’s the spring chicken in this couple. She is not taking it well.
I also thought getting old would take a lot longer. A few years back, I passed the 50-yard line (did you know fifty is only 14 in Scrabble?). So I started to really ponder about retirement? Will I have enough money? What even is enough? I have searched far and wide. My queries probably altered Google’s search algorithm temporarily. Now that you’re here, you get to benefit from my scientific, extensive analysis. Alright, it’s not that scientific, and it’s not the most comprehensive essay on the matter, but it’s personal. So there’s that.
First, I tried to eliminate the obvious. Dying would take away all the concerns about retiring without enough money, but I am healthy so far. Cross out. What else.
Marry rich. True, I am already married (not a complete show stopper, mind you) but old enough to know that the grass probably only gets greener when full of pesticides, herbicides, and a lot of expensive treatments. And then you may not even be able to walk on it with your bare feet! What’s the point of that? There is a cost to everything. Anyway, that train left the station; I married for love (which may have been obtuse in hindsight, but we’ll never know). Check. Move on.
Figuring it out
Actuaries, math whizzes who advise employers on their pension plans, answer the question. Simply multiply by 10.9 the gross salary you think you will earn on the eve of your retirement. For example, if I think I’m making $100,000 at the age of 64, I multiply that by 10.9. I get $1,090,000 (and at the same time, to my dismay, I’m nowhere near that right now).
With this million, according to the same aforementioned actuaries, I am assured that my lifestyle before and during retirement will be pretty much the same.
This is a fucking ambitious goal. Especially since most financial planners expect an inevitable drop in living standards. I have to save that much AND reduce my standards? Let’s keep researching, for sure.
Although it provides a good order of magnitude, this coefficient of 10.9 is a generic figure that does not consider any personal circumstances. It comes from a tool that employers use to assess the ability of their pension plans to meet the targets. This tool is not intended for financial planning purposes. Thank the Lord.
I keep reading.
Turns out, the 10.9 multiplier applies to a 45-year-old employee who is in a defined contribution pension scheme in which he and his employer each contribute the equivalent of 5% of the member’s gross salary. The multiplier will be higher for a younger worker, say the actuaries, because of higher retirement life expectancy and healthcare costs, whose annual inflation exceeds expected wage increases. These two factors increase financial requirements in retirement. That did not help a all.
Now I have questions.
First, what is included in this million and more? According to the expert I spoke to, a senior advisor on retirement solutions, that sum corresponds to an individual’s net worth, excluding primary residence and public pension schemes.
Then, how much money would I have to put aside each year to reach the million on my 65th birthday? The answer depends on assumptions about performance, the rising cost of living and rising wages. Even though I studied mathematics in university, that was ages ago. This is getting complicated.
Thankfully, there’s Excel. On second thought, let me just ask her…
Without giving details of the assumptions (something about intellectual property; really? You shouldn’t worry), she advances an annual savings rate equivalent to 16.5% of gross earnings from the age of 25 for 40 years until retirement. Girl, I am almost 55. This doesn’t help me.
Guessing to make me feel better, she says that the principal residence repayment of capital is excluded from the 16.5% effort. Moreover, the tax system in Canada allows 18% of income earned before tax to be used for retirement savings. In the U.S., it’s a set amount every year — $19,500 in 2021; that limit increases to $26,000 if you’re 50 or older. Employer contributions are on top of that limit. (Raise your hand, those who put in the total amount.)
A little bit of good news: employer pension contributions are included in the 16.5% saving effort. Before retirement, say I made $100,000, and I would contribute 5% of my gross salary to a pension. The employer would put the same amount on my behalf. If so, I would simply have to set aside 6.5% of my gross salary each year (16.5% — 5% employee pension contribution — 5% employer contribution = 6.5%), which I would prioritize to a 401k, RRSP or TFSA.
What happens if I don’t get to the million? The smarty-pants girl is now more reassuring. I have two options. First of all, I can work five more years, up to 70. I can also supplement my income when I retire (this is why I am writing here on Medium), perhaps do some consulting. She calls this “double-dipping.” When I retire, my old employer may like to retain my skills and therefore give me a contract. I will explore that; she says that I can significantly turn the tide on my savings situation in a short time, even if I did not keep up with the formulas above. Finally, something that applies to ME.
Some other hacks
There were literally thousands of calculators online to scare or reassure me. The final number they each came up with was a crapshoot based on MY assumptions of how things would go. The truth is, I am playing without a full deck here. Everyone is.
Project management is one of the skills I have developed over the years in my career. And one of the first things you learn is that a plan rarely services the first battle with the enemy (that’s a military reference). In reality, the only thing we can do is manage RISKS.
Then it came to me as I read the internet on this subject: all the advice is about landing a plane with instruments alone. You’re in the dark. All we can do is the best we can and manage the possible scenarios that could occur if one or more of our assumptions change.
Risk management is about making a list of what could happen, assessing how likely it is to occur, and what kind of impact it would have if it did. Then, most importantly, you try and mitigate (do something that will reduce the likelihood of it happening) or plan for a contingency (what will you do if it happens despite your best efforts or protection spells you may have tried to cast).
Here are the best tidbits of advice can help mitigate or respond to the risks of living a long time in retirement. After all, that’s the problem, living too long! I could circle back to my first thought about retirement planning here, but you now know how I feel about it.
Duh. I am now actively managing my money, savings and investments — much more than I did before.
I also learned from the multitude of calculators that my assumptions about how much money I needed were huge factors. Did I need a big house? Did I need to live in town? How many times and what sort of travel was I really going to do? How long would I live, and when would my health start affecting my lifestyle?
Postpone or ease up
I realize this is not the lot of everyone, but I have been self-employed or owned my own business for two-thirds of my career. I probably can continue doing some of that work on a part-time basis. And of course, if I am healthy, I don’t have to stop at 65. I can also go part-time. It’s not all or nothing anymore.
Know the numbers
We get stressed out with uncertainty. Just knowing how much you have, how much you will be able to take out at what age, and the tax implications can help you see more clearly. Someone once told me to “know the rules,” which would allow me to navigate complex situations (nothing related to this, but it also applies).
They say life is too short. The challenge of retirement then is how to spend time without spending money.