Planning for Retirement

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Flights of Fancy
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Re: Planning for Retirement

Post by Flights of Fancy »

I calculated the required nest egg using an immediate pension annuity factor with a discount rate of 2% (Dodge's) and a 65-year-old man and woman.

The man needs $1.629M to purchase an annuity paying $120K for life.

The woman needs $1.890M to purchase the same annuity.

I used a no-arbitrage pricing model. Actual annuity quotes would be different.

I used the assumptions for healthy retirees from the Society of Actuaries life tables (the RP2000 values).

As I said earlier, I do not believe this is an appropriate way to calculate whether Canadians are saving "enough" because I am not aware of anyone advocating 100% annuitization at the moment of retirement as an optimal strategy.

In addition, changing the discount rate for future cash flows dramatically changes the output. For example, if I use a discount rate of 5% (instead of 2%), the amount needed by the woman decreases by $500K.
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Re: Planning for Retirement

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Flights of Fancy wrote:Where do you get the 6.3% annuity payout rate?
The linked calculator says 6.3% is an average annuity payout rate. That's probably a rough rule-of-thumb and, if based on the current life annuity environment, probably does not provide for indexing since indexed life annuities are relatively rare.

The draw for my 18-year indexed annuity PV calc starts at 7.19% draw in the first year and then rises. At the start of year-9 it's 11.61%. Remember that the payout rate looks abnormally high because it's a blend of principal and interest.
As I said earlier, I do not believe this is an appropriate way to calculate whether Canadians are saving "enough" because I am not aware of anyone advocating 100% annuitization at the moment of retirement as an optimal strategy.
They use a life annuity because that's comparable to a DB pension and is straightforward. Using any other payout scheme creates too many -- possibly infinite -- scenarios. I believe boomers will embrace annuities en masse because many/most lack the savings to generate the income they will need want from any other payout scheme. The two wild cards are 1) whether indexed-annuities become more available and 2) whether the big banks win permission to issue life annuities and sell them in-branch and online. We may not see 100% annuitization -- especially if there's a dearth of indexed product -- but I think many will substantially annuitize.

BTW, while I haven't read Dodge's paper, I suspect he used unisex life annuity factors, making it harder for us to duplicate what he did.
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Flights of Fancy
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Re: Planning for Retirement

Post by Flights of Fancy »

I just went and looked at Dodge's paper again. He must have used unisex AF and he assumed an indexed annuity. I have all those factors available and could run the calculations.

Actually, when I think about it, his discount rate is assumed to provide the real (not nominal) payout amounts. Also, in general terms, you can get the unisex rates by averaging the M and F rates. So, I provided (in essence) the inflation-adjusted rates for M and F. The unisex rate would be the average between those two.

There is no "rule of thumb" about average annuity payout rates. Annuity payouts depend on the age of the annuitant and their gender, as well as their health status and prevailing interest rates. There really is no "average" rate.
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Re: Planning for Retirement

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Flights of Fancy wrote:The unisex rate would be the average between those two.
I was wondering if that was the case, but reckoned it wasn't since women outnumber men at adult ages.
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Re: Planning for Retirement

Post by Flights of Fancy »

The unisex rates have equal weighting for men and women - survival probabilities are calculated for each gender including what number of men and women are expected to survive to each age. You don't need to "overweight" the female survival probabilities.
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Re: Planning for Retirement

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Flights of Fancy wrote:Where do you get the 6.3% annuity payout rate?
Half way between M/F from here.
http://www.ifid.ca/payout.htm
It is correct that this payout is not inflation-proofed but I don't think Dodge meant his number to be. The 4% payout level that is often quoted (includes inflation) is surely NOT sufficient to fund anywhere near 70% of pre-retirement income.

So I think Dodge's numbers are bogus. Maybe he MEANT to say that the 5% returns was the 'real' return (not nominal).
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Re: Planning for Retirement

Post by Flights of Fancy »

I don't have the Dodge report at home with me but I am pretty sure he said he used indexed annuities.

I'm still curious about the 6.3% "average" payout. What two figures are you averaging?
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Re: Planning for Retirement

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Edited after subsequent post

$616.55 plus 658.70 divided by 2. I see where you are not telling me I am wrong. Those are monthly payment numbers, so the yearly percentage is 7.6 %. Just change the calc of that cell in the spreadsheet. Using Dodge's 5% return, 2% inflation, 35 yr time span, and an annuity purchase that is NOT inflation adjusted you get 86% income replacement.

I just read that report. Here is the link so everyone can stop relying on second hand reports of what it said.
http://www.cdhowe.org/pdf/ebrief_95.pdf

There are so many problems with the paper I am not even going to start. Basically it's objective is to get more taxpayers' money going to rich people.
Last edited by MaxFax on 20 Mar 2010 15:24, edited 3 times in total.
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Re: Planning for Retirement

Post by steves »

I may have brought this up before, but whenever you get into the issue of 'saving enough' we almost always assume a salary which grows at the rate of inflation. It doesn't. An individual's salary increases (sometimes significantly) at a higher rate than inflation. Career advancement, merit raises.... whatever you call it, when you incorporate this effect into the lifetime saving/spending model... the % saving statistic/rule of thumb becomes virtually meaningless. When just starting out, your SP (savings %) is real low, even zero. Until you reach mid career, your mortgage is paid off, etc... then you should consider obsessing about this kind of stuff.

In other words.... if you are 35-40 and haven't saved much in your rrsp, don't fret. Once you have your career sorted out, then you can start to think about this stuff. Just my two cents.
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Flights of Fancy
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Re: Planning for Retirement

Post by Flights of Fancy »

MaxFax: I didn't say you were wrong! I was curious about your method, though. I also wonder why you don't simply use an average of the ILY, not the payout numbers.

BruceCohen: upon reflection, perhaps it makes sense to suggest the benchmark for sufficient retirement savings is an annuity yield at age 65 - because that is the measure of truly sustainable income. However, I am not sure that boomers will flock to annuities (unless they are the variable kind, to which they've already flocked) as you suggest. If they do, however, the annuity puzzle is finally solved...

Steves: the Dodge report assumes wage growth of 3% annualized and inflation of 2%. While I take your point about savings, I'm not sure I concur. Speaking as someone in the described cohort...
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Re: Planning for Retirement

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steves wrote:...In other words.... if you are 35-40 and haven't saved much in your rrsp, don't fret. Once you have your career sorted out, then you can start to think about this stuff. Just my two cents.
IOW zero savings at 45 and $1 miilion by age 60. I think it is fairly typical of a high tech career.
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Re: Planning for Retirement

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Ball park question - from 55 till wifes death I will have a $28,800 non indexed DB pension. Not including cpp, oas how much do I need to put aside to provide indexing to this at a 4% inflation rate? Amount put aside will grow at real after tax return of 1 - 1.5%
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Planning for Retirement

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BRIAN5000 wrote:Ball park question - from 55 till wifes death I will have a $28,800 non indexed DB pension. Not including cpp, oas how much do I need to put aside to provide indexing to this at a 4% inflation rate? Amount put aside will grow at real after tax return of 1 - 1.5%
Am I missing something? If your extra savings are only earning 1 - 1.5%, how can they cope with 4% inflation?
Regards,
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Re: Planning for Retirement

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Am I missing something? If your extra savings are only earning 1 - 1.5%, how can they cope with 4% inflation?
After tax and inflation earn 1 - 1.5% that may be to high.
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Re: Planning for Retirement

Post by steves »

I dont know what this tells you, but if you were 55 and your db pension was indexed, your die-broke-at-95 lifestyle would come in at 46489 instead of 37790 if it werent. Based on a current RRSP of $500K, fully retired, full CPP and OAS, 6% rate, 4% inflation.

In order to compensate for the lack of indexing, you would need to rob a bank to the tune of 280K in order to make the current unindexed pension equivalent. Tax is a consideration, so the actual size of your current RRSP, etc would change this.
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Re: Planning for Retirement

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Pickles wrote:
She said that one of the most important things potential retirees should consider is the importance of a strong group of potential helpers in case things go wrong, especially with one's health. When we get older, friends, family and neighbours are who we rely on to fill in the health care gaps (mowing our lawn when we are unable to, sending in the odd meal when the cook is sick, driving us to appointments, etc.).

My concern with your scenario was that you've both had recent health scares and here you were headed to a new community for your retirement where you may not have those connections. Your answer indicated that you have thought about this, albeit with a slightly different perspective, and believe that both medical and cultural supports will be better down south. Good enough but remember, the more you get actively involved in your neighbourhood and with community groups, churches, etc., the more chance you will have to develop that circle of potential helpers (and help others in return-- that's the whole point). So, when you move, don't leave it up to your wife to make the contacts --- help out! It's also a great way to start to feel at home and it keeps you engaged and healthy.

I believe as you do, that she is right, unfortunately when you emigrate, all your old friends stay behind, however, we have been fortunate that we have been able to bring 2 of our children over and both live in Alberta - it means a great deal to us. My skillset is quite specialized but that will not stop me from taking up voluntering or getting involved in community affairs - I have never had time in the past and I would love to give back and will hopefully in the process make new friends.
Re: part time employment
Honestly, I do not know to expect after retiring, I will have worked full time for 42 years when I retire and my life and my work have been one and the same thing at times - I expect it to leave a void that I will have to work hard to fill. There is a place in Kenya in Africa that could use my knowledge and experience on a month a year basis. I suspect that there might be others if I look hard enough. I would like to continue to do things that are challenging, it has been my experience that when I feel uncomfortable doing something new, that it has been a growth experience for me and I would not like to lose that. My natural inclination is to stay with the familiar and comfortable and I need to be careful of that. I expect to be asked to help out from time to time at my old work -I have not made up my mind as what I will decide.
Others have offered you good advice as I knew they would. Keep reading and planning. You've made an excellent beginning.
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Pickles
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Re: Planning for Retirement

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Honestly, I do not know to expect after retiring, I will have worked full time for 42 years when I retire and my life and my work have been one and the same thing at times - I expect it to leave a void that I will have to work hard to fill.
There is an author I recommend in my retirement workshops: Alan Roadburg. He specializes in helping people prepare for the non-financial aspects of retirement. One or two of his books, (written in the early 1980s) may be available from the public library (they are in Toronto) and -- from those i have read -- they all cover much the same ideas so if you can get your hands on one, that's enough. For example, "Life After Teaching" and "Life After Policing" are essentially the same book with some survey results from teachers and police, respectively, compiled and analyzed. So you could be an engineer or a high level manager and either book would be relevant to you as well. Some copies of the original "Re-tire -- With A Dash" are still in print. Seehttp://tinyurl.com/retireroadburg.

His books are an easy read (Wealthy Barber-style, which I found annoying, but ignored) and have very useful exercises that will help you deal successfully the above issue you raise.

It sounds like you are making headway on the financial aspects of retirement; now is the time to start planning how to make the next 1/3 of your life happy, fulfilling and meaningful.

Good luck!
Regards,
Pickles
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Re:

Post by OhGreatGuru »

Its hard for me to predict what my marginal tax bracket will be. I could potentially retire in 24 years with 64% of my income. So if I saved up to replace, say, the other 35% I figure I would be in the same bracket. And that bracket's tax rate could have gone up....so a tfsa might be the best option.
You don't necessarily have to replace 100% of your income. The planning figure of 65-70% is commonly used as a planning target. (And before you guys jump all over me about the validity of that guideline, it is a guideline for statistical averages, not a hard and fast rule for individual cases) This will provide about the same disposable income in retirement when you consider that you are no longer paying: pension contributions; CPP; EI; union dues; commuting costs, etc. And you are eligible for pension income tax credits, and probably in a lower tax bracket in retirement. And since most people plan to retire mortgage-free, a major monthly cost should be removed from your expenses.

Assuming you intend to stay in public service, you can pretty much ignore David Dodge's comments, since you have a DB pension plan.
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Re: Planning for Retirement

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Hello I'm new to the forum. I am considering whether or not to commute my maxed out Hydro One Pension amount after 35 years on the plan and have an investment advisor manage the funds. If I go this route I am inclined to take an option that provides for a partial pension of around $1000 / month, and enables me to retain my benefits. My concern is that it appears to me that I would need to net 10% annually on our $538,222 net commuted amount to equal the Hydro pension for the first 7 years , and not draw down the commuted amount. After age 65 the pension amount does drop somewhat. Has anyone any thoughts on commuting vrs taking full pension in light of the present / future uncertainties .Thanks
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Flights of Fancy
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Re: Planning for Retirement

Post by Flights of Fancy »

You transfer all the longevity risk from the corporate balance sheet to your own. You also take on sequence of returns risk. And inflation risk.
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Re: Planning for Retirement

Post by Shakespeare »

With a government-guaranteed pension, it is usually better to leave the pension in place, rather than taking the commuted amount.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: Planning for Retirement

Post by DavidR »

Hello fundseeker and welcome to FWF.
I've dug up a few old threads for you, where some of the considerations have been discussed.
http://www.financialwisdomforum.org/for ... 0&t=110909
http://www.financialwisdomforum.org/for ... 0&t=109357
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Re: Planning for Retirement

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is-there-any-point-in-saving
According to Horner (Table 4.3), half of single-earner two-parent families have earnings below $40,000 per year. And even if they're not saving at all, they're saving enough. When they retire, Canada Pension Plan, Old Age Security and Guaranteed Income Supplement will provide a higher standard of living than they enjoy at present.
What's all the fuss about?

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adrian2
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Re: Planning for Retirement

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Just a reminder, a single-earner in a family of 4, with an income under $40k in Ontario, can be in a marginal tax bracket of 70%.
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Re: Planning for Retirement

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adrian2 wrote:Just a reminder, a single-earner in a family of 4, with an income under $40k in Ontario, can be in a marginal tax bracket of 70%.
And rrsp tax arbitrage works great for those people. Sadly, I fell for the "carryover cap losses can be deducted from cap gains" lie and it didn't work :evil:.

But as far as the original article, I wonder if counting on CPP/OAS/GIS is such a great idea. I'm going to try to have most of my money in TFSA's at 65 and have a feeling I'm going to get screwed again. Or at least I won't be able to stick it to the rich taxpayer.

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