# Confused about my numbers



## Russ (Mar 15, 2010)

I was fine with my retirement planning process until I visited a financial planner at my bank. 

Here's my situation:
My wife and I are both 64 years old.
Modest house: $250,000
Household income: $112,000 gross
I will receive max CPP (or very close to it)
No CPP for spouse
I assume OAS will be fully available for our lifetimes.
I have a defined benefit pension plan that will pay $16,000 per year, partially indexed, at age 65
Household investments of $450,000 composed of:
Registered investments: $260,000
TFSAs: $30,000
Non-Reg investments: $160,000 
Average annual after-tax spending: $50,000

The approximate allocation of the $450,000 is 45% equities, 45% bonds, 10% money market.

I am not a financial or mathematical genius, but I have at least average skills. My calculations indicate if I retire at 65 we can fully fund our current lifestyle from age 65 to age 95, leaving little more than the value of our house to our estate. I assumed a real rate of return of 3%.

The financial planner at the bank crunched the numbers and found that we could fund our current lifestyle from age 65 to 95 without depleting our $450,000 investments. He estimates we would generally consume our registered money but our non-registered would accumulate to $450,000 by age 95. He used 3% inflation and 4.8% return.

The difference between our results seems like a huge amount to me. And I would have thought a financial planner's numbers would be very conservative. 

Now I am questioning my own planning model. Any opinions or advice would be most appreciated.

Russ


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## MoneyGal (Apr 24, 2009)

The first question I have is what number did you say needed to be funded over your expected lifetime:

$50,000 after-tax and after CPP and OAS?

or $50,000 after tax but *reduced by* CPP and OAS?

Pretty different numbers.


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## Russ (Mar 15, 2010)

Moneygal:

My calculations are based on $50,000 after-tax income from all sources. I estimate the before tax amount to be about $62,000. OAS, CPP and DBPP total about $39,000, so our investments would have to generate the remaining $23,000 before tax income.


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## sprocket1200 (Aug 21, 2009)

trust yourself, not your banker. try the calculators at taxtips.ca to verify the results...

a fee only financial planner may be money well spent...


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## I'm Howard (Oct 13, 2010)

http://fiscalagents.com

I use this site do my planning

The Inflation Factor always amuses me, the basket of goods that comprise the CPI largely unaffect a retired Debt Free Senior.

I use 6% return, 2% Inflation, draw down of 4%.

I think you have too much equity allocation based upon your Net Worth?


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## MoneyGal (Apr 24, 2009)

Well, I don't want to start a calculator war. Can I simply say that I don't get the results that your advisor does? 

Also, I don't know how your calculations or your advisor's calculations were carried out. Specifically, I always worry that people are using linear rates of return (i.e., nice compounding of 4% or whatever every year with no downswings) - which is completely unrealistic. 

You may want to see if your local library has a copy of Pensionize Your Nest Egg, the book I co-wrote last year; which is intended to provide an overview of exactly this topic. (I hope that last paragraph was not overly commercial. Was it?)


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## steve41 (Apr 18, 2009)

OK... I came up real short. What I didn't perhaps understand is the $112K household income. Is this your combined gross salary? In which case I would want a retirement age (somewhere north of age 64) If you retired right now, then you are off by a country mile.


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## Russ (Mar 15, 2010)

Steve:

Our household income is $112,000 gross, but most of the growth to that level has been very recent. We have no debts. 

We live comfortably on $50,000 after tax and that is what we plan to continue to do. We really only need 50% of our current gross income, not 70% or more that some people use in their calculations.


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## steve41 (Apr 18, 2009)

OK.... question remains: are you retired? If so, forget the gross income, all I need to know is what is in reg/nonreg/tfsa and your cpp/oas entitlements.


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## Russ (Mar 15, 2010)

Steve:

I am not retired, but my planning is based on retiring at 65. That happens next year.

I may not retire then, but I'm trying to figure out when I can retire given our goal of $50,000 after -tax income.

I'm figuring annual CPP will be $10,000, OAS will be $6,000 each, and pension will be $16,000.


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## Four Pillars (Apr 5, 2009)

Russ said:


> I have a defined benefit pension plan that will pay $16,000 per year, partially indexed, at age 65


What does "partially indexed" mean?


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## MoneyGal (Apr 24, 2009)

It usually means either indexed with a cap, or indexed to a % of CPI.


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## Russ (Mar 15, 2010)

I visited the link provided by Howard and tried a couple of the calculators. They produce approximately the same result I get, although they indicate I am slightly under-funded right now. By the end of this year the gap will be insignificant.

So I think the report produced by the financial advisor at the bank may have an incorrect assumption. I'm going to ask him to check his inputs again. 

Four Pillars:

My pension will be adjusted according to a calculation based on the prior year-over-year CPI change "if the plan can afford it". I don't want to assume full indexing in these circumstances. The plan uses the term "partially indexed".


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## Eclectic12 (Oct 20, 2010)

Russ said:


> I visited the link provided by Howard and tried a couple of the calculators. They produce approximately the same result I get, although they indicate I am slightly under-funded right now. By the end of this year the gap will be insignificant.
> 
> So I think the report produced by the financial advisor at the bank may have an incorrect assumption. I'm going to ask him to check his inputs again.
> 
> ...


It is good to find out more from the financial advisor. I can remember when the bank online calculator said that on an annual salary of $22K, I needed $7.5 million to "a good lifestyle" at retirement. I did not bother to try to figure out what extras were being added.

As for the DB pension partial indexing, the "if the plan can afford it" is a new one for me. All of the db plans I've either participated in or had access to the details said that the partially indexed meant year-over-year CPI change to a set maximum percentage.


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## steve41 (Apr 18, 2009)

OK... based on you working just this year, grossing $112K, your db pension indexed at 1.5%, inflation at 3%, rate of growth 4.8%, splitting your assets 50-50, I come up with a combined ATI of $52.8K out to age 95.

As with all these plans, I whip them off quickly, so check for errors...

Mrs confused
Mr confused

See last page of 'Mr-confused' for summary.

Fixed Mr-confused to include house. 3:38PM


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## Russ (Mar 15, 2010)

Wow, Steve. That's a pretty sophisticated program you have. It will take me a while to get my arms around it. 

A quick view of your model tells me my unsophisticated model is closer to correct than the model used by the financial advisor. Of course any model is only as good as the data fed into it, and I have asked the financial advisor to review the inputs and inderlying assumptions.

Thanks for taking the time to prepare the reports. I hadn't expected that. Very generous indeed.


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## fred123 (May 8, 2010)

Fine tuning the CPP amount / working beyond age 65 / delaying CPP beyond age 65.

You mentioned you were at or close to the CPP max. and you were considering working beyond age 65. 

The 2010 CPP max was $11,210/yr. The Jan 1, 2011 CPI increase is 1.7%.
There are other CPP variables that you should be aware of (if you aren't already).
If you delay taking your CPP beyond age 65, the CPP amount increases. Up until 2010, the amount of the increase was .5% per month beyond age 65.
This amount will be increased to 0.7% per month for each month that the pension is taken after an individual’s 65th birthday, up to age 70. This would be done over a period of three years, starting in 2011. 
So after 2013, the maximum increase at age 70 is 60 months x .7% = 42%.
The low earnings dropout is also changing from 15% to 17% by 2014.


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## andrewf (Mar 1, 2010)

Russ said:


> Wow, Steve. That's a pretty sophisticated program you have. It will take me a while to get my arms around it.
> 
> A quick view of your model tells me my unsophisticated model is closer to correct than the model used by the financial advisor. Of course any model is only as good as the data fed into it, and I have asked the financial advisor to review the inputs and inderlying assumptions.
> 
> Thanks for taking the time to prepare the reports. I hadn't expected that. Very generous indeed.


There's some other things to consider. The model steve uses is stylized, and assumes no sequence of returns risk, where you might get a 15% return one year, -30% the next, etc. The geometric mean return might be 5% (one assumption), but assuming that your return will be exactly 5% a year every year is another assumption, and one which we know is not realistic.

The other assumption you want to watch out for is the 'die-broke-at-85' assumption. What if you live to 100? What if you die next year? Your plan should be robust over all those eventualities. Unless you plan on offing yourself at 85 when your cash runs out.


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## steve41 (Apr 18, 2009)

RRIFmetic allows you to set any rate scenario you choose, varying over time, randomized (montecarlo-ed), you can even apply a known timeseries such as the S&P500. A single rate (or hi-med-lo) is commonly used, but more sophisticated rate application can be implemented as well.


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