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11/21/09
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What are your Retirement Planning assumptions and factors
Posted:
Oct 29, 2009 2:46 PM
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It seems that many of the articles never go into the details of a plan in what numbers/rates to use. The calculators are good but you get to set the numbers, rate of return etc, but these number make a huge difference. One % can be the difference between just making it and still having 1 million left over. Of course if everything works out well then you would self correct by spending it.
So what numbers do you use for your plan?
rate of return after retirement
rate of inflation
end of plan age
do you include value of residence in calculation or not
do you include CPP and OAS
My worst case plan for early retirement
rate of return after retirement - 5%
rate of inflation - 2%
end of plan age 90
do you include value of residence in calculation or not - No , that is buffer on disability
do you include CPP and OAS - yes to CPP no OAS
Factors- What factors should also be included?
parents- will financial help be required or are they self supporting or some inheritance
children- out of school and gainfully employed or will always be starving artist
travel- yes please or no retiring to best place on earth
House - retire with fully up to date or hasn't been worked on in 15 years ( how did you think we saved enough money to retire early)
Income- bare min could live on or there is a $5K buffer to save for big expenses
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Posts:
78
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11/21/09
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 29, 2009 3:38 PM
in response to: mountain2
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I author this kind of software and sell primarily to financial advisers. The end of plan they will generally set at 95.
Inflation 2% and rate of return 5% is pretty normal, although depending on how gungho or cautious they are, these can be all over the map.
Most planners will include the residence, and some will simulate downsizing the home in the future.
They all include CPP and OAS in the projections as well as GIS.
Some clients will project a 'die-broke' plan, others will stipulate a certain estate target. Many clients will plan for lump sum contingencies (a major expense such as a trip, or a new car every 3 years)
Those users who are life insurance oriented will include insurance premiums, death benefits, CSV....
Many users include the effect of real-estate (other than principal residence) and the capital gains implications. Ditto loans, RESPs....
Most importantly, savings are differentiated as to their tax component... it makes a big difference as to the nature of the capital (RRSP, non-reg, TFSA, real estate...)
It can get pretty involved.
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5
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11/21/09
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 29, 2009 6:14 PM
in response to: steves
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I am recently retired, and checked lots of sites for a spreadsheet to use for planning. I didn't find one that did what I wanted, so developed my own on excel, even though I'm not very computer literate. It has worked really well, and allows me to adjust the numbers to consider various scenarios. The key assumptions I made were:
1) inflation on cost of living at 3% per year on expenses
2) CPP to increase at 1.8% per year (I know this is a bit conservative, but when I checked with them and got the actual increase over the past 5 years, it was less than 2%)
3) OAS to increase at 3% per year
4) investments to average 4% growth per year (many of the investment books I read said that anything higher is not really realistic in the long term and could be overly optimistic. I think I'd rather be a bit conservative and have more money than I expected, rather than less)
5) a $10,000 trip every three years for my wife and I
6) replacement of our used car every 10 years at an average cost of $15,000
7) did not include our primary residence in the calculations, as we have to live somewhere, and this could be part of our estate left to our kids
8) tax calculations are included with a high degree of accuracy, including pension splitting with my wife
9) live to age 95 (my dad died at 92 and my mom is still living at 93) which may not occur, but at least I know our money will last til then
10) included a potential loss of $100,000 to ensure we will have enough, even if the market drops or we have unexpected health or other expenses, we'll still likely be ok
11) no life insurance, as I don't see a need for it at our age and I think we've got enough to last. Life insurance is quite expensive, and we won't likely need it to pay off estate taxes when we're gone.
We retired before the 2008 market drop, and were significantly affected by it, but are still ok. Our investments dropped by about 37%, but we have regained about half that, and with some patience, are hoping the market will rebound fully within the next 2 - 3 years.
I would be interested in any feedback or advice on the above assumptions.
Flanger
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Posts:
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 30, 2009 10:24 AM
in response to: mountain2
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Lange, I would think that 4% return and 3 % inflation would be very conservative, That's only 1% above inflation. Now I' planning to retire early so that rate of return would never work over 40 years. Even real return bonds earn 1.5- 1.9% so just less do 2% above inflation is somewhat guaranteed.
Even bank stocks the dividend % increase should match inflation over time.
I haven't looked at the tax impact yet in my plan other than could we live as a couple on $70,000 gross with dividends grossed up. Capital will be evenly split between wife and myself and even inside and out side of RRSP.
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 30, 2009 10:59 AM
in response to: mountain2
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- Value of house will be spent to pay for end-of-life care for first spouse to die. Keep out of other equations. Second spouse will use up the untouched portfolio, or leave to kids/
- Government payments to cover only the extra costs for healthcare. This cancels out two unknowns.
- Investment rate of returns will be the same as you got over the past 20 years. Only you know how good you are.
- Inflation seems reasonable at 2%.
- No need to predict age of death. Since you are early-retiring your investments will have to cover your growing expenses for tooo long for that assumption. You should plan to spend only the income.
- Consider your spendable income to be the result of:
Your investing rate of return
less income taxes (don't forget being caught by Minimum Tax)
less the rate of inflation (which you must reinvest so that future income keeps up with inflation)
less 1% or 2% allowance for the volatility of your returns. You put this aside from 'good' years in order to pay for your costs in the periodic 'bad' years.
equals what you can live on (only you know your living expenses)
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128
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 30, 2009 1:19 PM
in response to: mountain2
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So what numbers do you use for your plan?
rate of return after retirement - 8% but in my calculations I've put in 6% which is my return minus inflation
rate of inflation - 2% (but is not included in any of my calculations) I want to know how much money I'll have in today's dollars
end of plan age - 92
do you include value of residence in calculation or not - no
do you include CPP and OAS - no, I'll consider it a bonus
My worst case plan for early retirement
rate of return after retirement - 6%
rate of inflation - 2%
end of plan age 90 - 92
do you include value of residence in calculation or not - No, have to live somewhere, plus I plan on dying broke so this can be my kids inheritance
do you include CPP and OAS - no, I'll consider it a bonus - dejavu?
Factors- What factors should also be included?
parents- will financial help be required or are they self supporting or some inheritance - I believe our parents are financially sound
children- out of school and gainfully employed or will always be starving artist - if there not gainfully employed I'm not going to be supporting them
travel- hell yes
House - sell house in city and buy something nice on the water
Income- plan to have ~105k income
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Posts:
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 30, 2009 5:56 PM
in response to: mountain2
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Interesting- I went back and took out CPP and had to add $500K to make it work. Not sure if I will be that conservative.
Don't quite agree that for long term retirement that have to only live on return. Though I do see why your saying that. If I assume a higher rate of return that would be easy to do.
On investment return I think on average I've done well but would change investment focus even at 55 retirement. Be more focused on income and long term growth. I'm planning on having $100-200K above my worst case number so would be more aggresive with that.
As far as amount required will have to fine tune that as time and things fall into place. Not have two sets of property tax etc when sell house and move to cabin. Will try to live one year on that budget to see if any problems. Have to do some detailed calcs with two people each making $35 K what net would be in B.C..
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 30, 2009 8:17 PM
in response to: mountain2
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Interesting- I went back and took out CPP and had to add $500K to make it work.
Uh. You had better check your model. $500K is WAY too high. For a 60 yr old, eliminating his CPP would require him to add around $140K to his RRSP to make up the difference.
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 31, 2009 12:11 PM
in response to: lange
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Lange
I would love to get a copy of your spreadsheet. Is that possible ?
Thanks
Ashersy
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Posts:
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 31, 2009 6:08 PM
in response to: steves
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on the reply from Steves, I will check again but it was two people's CPP which should double effect plus the figure is not in today's dollars but in 2015 $. I did enter data in globe calculator with two people full CPP ( I've been there for years wife close ) and then with zero for CPP . Had to add $300k in todays $ to make it work. Which works with your figure but for two people.
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Posts:
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 31, 2009 6:57 PM
in response to: mountain2
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Yes, for a married couple with full CPP, they would need 150K each added to their RRSPs to replace the lost CPP. This gets them to identical after tax income levels.
i.e. $500K each in their RRSP with full CPP equates to $650K each with no CPP.
(Based on Ontario tax rates, both 60 years old, 6% return, 2% CPI, and dying broke at 95.)
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Re: What are your Retirement Planning assumptions and factors
Posted:
Oct 31, 2009 11:59 PM
in response to: lange
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Flanger,
That's quite an accomplishment to create such a spreadsheet - even if you are well skilled and experienced like steves.
The tax component alone was at least as complicated as everything else in my experience. (I, too, have created a spreadsheet for retirement planning purposes - although it isn't quite finished.)
Kudos to you... I wouldn't mind comparing some inputs/outputs into your spreadsheet to see if mine provides comparable results.
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Re: What are your Retirement Planning assumptions and factors
Posted:
Nov 4, 2009 11:11 PM
in response to: cfodder
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Ashersy and Cfodder, I can't send you my spreadsheet without taking time first to delete all the personal information and numbers on it, which isn't practical. It's not as complex as you may think, just based on excel format, and including all the categories you expect--income (pension, investments, CPP, OAS, etc.), expenses, extra periodic expenses like travel, new car, etc. All of these are adjusted for inflation, expected investment growth, etc. It's important to get the assumptions right, as they affect the bottom line significantly--see my post above for my assumptions as a possible starting point. Tax rates can be taken from doing a "dummy" tax return (using the free software available online) with your expected income, etc. Of course you can't predict the future changes in tax policy/rates, but at least having the spread sheet will enable you to update the information as changes occur, so you can see the impact on your bottom line finances.
Hope this helps a bit.
Flanger
Edited by: lange on Nov 4, 2009 11:14 PM
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Posts:
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Re: What are your Retirement Planning assumptions and factors
Posted:
Nov 9, 2009 12:25 PM
in response to: mountain2
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Flanger, I'm wondering is your investment return before or after inflation? If before that does seem low as only 1% above inflation. You can buy real return bonds that will give you a real return of 1.8% ish above inflation and that would almost double your real return.
If after inflation then its not high at all but higher than mine as on average plan to be more conservative after retirement. Out of RRSP dividend stocks. Inside of RRSP convertable bonds, REITs , foreign div stock growth.
Edited by: mountain2 on Nov 9, 2009 12:25 PM
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Posts:
78
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Re: What are your Retirement Planning assumptions and factors
Posted:
Nov 9, 2009 1:23 PM
in response to: mountain2
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"Tax rates can be taken from doing a "dummy" tax return (using the free software available online) with your expected income, etc. Of course you can't predict the future changes in tax policy/rates,"
Be aware that using a single tax rate can result in potentially erroneous results.
Tax is a formula/algorithm with a lot of complexity and it changes (sometimes drastically) over time. Not only are the brackets indexed to inflation, but major changes result from various types of capital coming into and out of play over time. The effect of registered, nonreg, dividends, capgains, tfsa, etc capital, can cause tax to take some pretty dramatic swings and roundabouts.
Spreadsheets are unable to handle the 'needs-based' math (recursion) necessary to do this type of planning justice.
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