By Adrian Mastracci, KCM Wealth Management
Special to the Financial Independence Hub
“My 2016 leadoff sage advice to investors.”
I recommend turning over a new money leaf for 2016, the earlier the better.
If you have but one mission on your plate, make it the discovery of your “retirement number.”
That retirement number is the estimate of how much capital is required to realize your retirement goals: no doubt, the most important calculation for the vast majority of investors.
However, very few investors have anything that resembles it.
Occasionally, I see one that is woefully out of date.
Put aside your preoccupations with performance and picking best investments.
Rather, focus on what you have to do to achieve your goals.
Three major phases of life
Say your life span is near 100 years.
Now loosely divide up your century this way:
- Up to age 30 – pursue your education.
- Age 30 to 65 – accumulate your retirement nest egg.
- Age 65 to 100 – spend it, enjoy it and, perhaps, pass it on.
2016 presents an opportune time to zoom in on your retirement’s big picture.
The critical key is to ballpark the family’s retirement needs.
First estimate your particular retirement number, then regularly freshen it with an update.
It serves you well as a guide throughout the long accumulation and spending journey.
While you’re at it, sketch out some “what if” scenarios.
Then set your investing plan to comfortably turn needs into realities.
Sample retirement number
Let’s delve into approximating a sample retirement number, also known as the retirement projection.
First, some facts for those retiring in 2016:
- Maximum 2016 CPP benefit at age 65 is now about $12,950 per spouse.
- Similarly, maximum 2016 OAS benefit at age 65 is nearly $6,930 per spouse.
- Delaying receipt of CPP/OAS up to age 70 increases both benefits.
- OAS clawback for 2016 starts at net income of $73,760 for each spouse.
A couple could receive maximum CPP/OAS benefits near $39,760 at age 65.
You are responsible to provide everything above your family’s CPP/OAS benefits.
Adding regular savings to your investing plan is a must to reach those retirement goals.
Let’s mull over some family retirement assumptions:
- Say your objective is $65,000 annual pre-tax income, in today’s dollars, starting at age 65.
- Life expectancy is taken to age 90 for both spouses.
- Inflation averages 2% per year and investing return is 5% per year.
- There is no employer pension and no estate is left to beneficiaries.
- The couple receives 75% of the total CPP/OAS government benefits.
- The home value is over and above the capital needs and inheritances are ignored.
- Investing losses and health costs are not significant during retirement.
- No savings are added to the nest egg during retirement.
This family needs capital in the $780,000 range to provide the balance of retirement income.
Every investor is wise to approximate such a sample retirement number, or projection.
The capital pool typically consists of an assortment of your cash, savings, RRSPs, RRIFs and TFSAs, plus taxable accounts, employer pensions, income real estate, cottages and businesses.
Start paying close attention to your family’s retirement number at least 15 to 20 years before retiring. Use that ballpark to calculate how much you need to save and the investing return to reach your goal.
A periodic update of your retirement number, say every three to five years, helps freshen your road map. I approximate every client’s retirement number before commencing to invest.
May your discovery mission 2016 be prosperous.
Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.