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Retirement
& You
I was attending a dinner party the other
night when I overheard a conversation between two gentlemen in
their mid thirties; "Joe, when do you think you'll be
able to retire"?, to which his friend replied jokingly;
" Well Fred at the rate I'm going I'll probably be working
up to the day I die".
I was tempted to go over and tell Joe that
in all likelihood, he's probably right!!!
The truth is that Canadians are getting
older, (35% of the Canadian population was born between 1947
& 1967) and living longer, a lot longer.
Currently very few of these people are
even remotely close to being able to support themselves, for
what may be a long retirement. Consider the following example:
Mr. & Mrs. Smith, Any
town, Canada
Facts:
- Couple, both 34 years of age, One child,
age 3 years old.
- House is worth $150,000; mortgage balance
$75,000.
- Plan to retire at age 55.
- Retirement hopefully will last 40 years.
- As a couple, during retirement, they
want to spend $50,000 per year, (in today's dollars). This
represents 55% of they're current combined incomes.
- Amount saved for retirement at this point
$8,500, all in their RRSP.
- Amount currently saving annually, $6000
per year or $500 per month.
Assume:
- Inflation averages 3% per year between
now and the end of retirement, (61 years from now).
- That CPP and Old Age Security, won't
be available for the Smiths's.
- The average annual return on your RRSP
invested money, until the end of retirement is 10%; on
non-RRSP money is 14%.
Results:
- The amount of savings the Smith's will
need to have accumulated in they're RRSP, by the time they
retire, in order to live out they're retirement as planned, is $1,846,126 .
The amount they'll actually have
at they're current savings pace is $413,684. A shortfall of $1,432,442.
I'M NOT JOKING!!!!
Let me walk you through a long term plan
that I would prescribe for the Smith's:
The Plan:
- The Smith's put $ 250 per month into
their RRSP; (this is half of the $500 that they're currently
putting in). They take the other $250 and use it to make the
monthly loan payment on a $50,000 investment loan, the proceeds
of which are invested outside the RRSP in foreign equity mutual
funds, (U.S., Europe, & Asia).
- The $250 per month loan payment is all
interest, therefore Mr. Smith can write off all $3000 on his
tax return, since interest on an investment loan is tax deductible.
This gives Mr. Smith a $3000 refund, (he's in the 50% marginal
tax bracket; he gets $1500 from the interest & $1500 from
the monthly RRSP).
- Every year Mr. Smith can either wait
until he gets the $3000 tax refund, and put it into next years
RRSP, Or he can go down to his bank in February and take
an RRSP loan for $6000, and put that into this years RRSP.
- He'll then get a $6000 tax refund, ($1500 from the interest and $4500 from the RRSP), and he can
use this refund to pay off the RRSP loan.
- Assume the Smiths do this every year
until retirement.
Results:
- At retirement the Smith's will have
$843,173 outside the RRSP, which they'll use for lump sum expenditures
during retirement, ie. boats, trips, condos, etc..
and
- Inside the RRSP the Smith's will have
$669,672, which they will use as they're income during retirement.
Total $1,512,845.
I bet Joe & Fred would envy the Smith's
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