Sunday, 30 July 2017

Do I have enough to retire?

For many people who spent a working lifetime accumulating wealth in order to retire to the sunset, the decumulating phase represents a major challenge. Is the $1 million or $2 million that I had saved enough to last me during retirement? What if the stock market collapses like it did back during the credit crisis in 2008 and my portfolio decline more than 30 percent?

Based on the Trinity study by three professors and earlier work by William Bengen CFP, and Larry Bierwirth, using historical stock, bonds and inflation data, they have determined a safe withdrawal rate as a percentage of your initial investment. By withdrawing 4% each year, plus adjustment for inflation the following year, the portfolio can last more than 33 years or more regardless of the stock performance. Mind you, they have been some significant market correction during the time periods used for the studies, including 1929-1931, 1937-1941, and 1973-1974. In each instances, through proper  asset allocation of equity and fixed income, the portfolio had withstood the test of times. Moreover, the stock market has proven time and time again that it always recovers after a major decline.

Too often, many people, myself included, are preoccupied with thinking if we have saved enough to retire. Consider the following points to determine your retirement income:

1)      Using the Trinity study, and assuming your retirement period is 30 years, if you have accumulated $1 million by the time you retire, you can withdraw $40,000 per year. If you have saved $0.5 million, withdraw $20,000.

2)      Government pension, i.e. CPP (Canada)  – maximum approx. $13,000 per year (2017) X 2.

3)      Old Age Pension –maximum amount approx. $ 7,000 per year (2017) X 2.

4)      Defined Benefit (DB) pension plan – if applicable

5)      Part-time work

Assuming $0 for DB and no income from part-time work total pretax income of $80,000 from 1) to 3) should be more than sufficient for a couple in their 60s to last until 90 years of age.  Note that items 1-3 are also adjusted for inflation. Remember, when you are retired, you should not have to be concerned about paying down your mortgage or saving for your education costs. Lastly, when you are retired, you do not have to worry about having to save for retirement again. In fact, various studies have concluded that retired couple live comfortably on less than $50,000 per year.  The major disclaimer is on health costs. I thank God for living in Canada, which has one of the best and affordable health care system in the world.

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