# Unveiling the Retirement Myth



## Jon Chevreau

I wrote about Jim Otar's new book of this title on Saturday and he reports on my blog he's getting so many download requests he has to start charging $4 now (it was free for a green unprintable version). Even today, the article is topping the most popular online hits at the Post so it's probably worth it's own thread here in the Retirement forum. There's also a video interview with him. You can find all this stuff at one place:

http://www.yourwealthadvisor.ca/apps/links/


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## FeeOnly.ca

Jon, thanks for doing the article & video. I'm a big fan Jim Otar's: "Zone Strategy". 

I'll try to keep the link above up-to-date with any videos and articles for easy access.

Below is Jim Otar's post in the Bogleheads Forum today:

http://www.bogleheads.org/forum/viewtopic.php?t=42110&mrr=1251030588


_Wow, I did not think I would get this much response. I am very pleased. Thank you for all your comments. 

Yes, the hosting server is congested somewhat due to the overwhelming response. I apologize for that, but there is not much I can do about it. Here are some hints: 

-Please download only once and save it on your computer. Then you can read it at anytime at your convenience. 

-Please enter your correct name and address and e mail, in case I have to contact you. Once the book is printed, I will purge all this information. I just need it in case of errata. 

-For those who are concerned about my business model: I truly appreciate your concern. However, you don't need to worry about me. I am very deep in the green zone, and the existence of these posts indicate that my "business" plan is working well. The only person who gets upset about these free downloads is my wife, but we have been together for 32 years and she is used to me by now (I hope). 

- I have gotten an overwhelming download response, so I changed the rules slightly: The green download is free until end of August 31st, or for the first 5,000 (OK maybe a little more than that) successful downloads. After that it will be for a great sum of $3.99. 

-It took me on and off 6 years to complete this book, I hope you all enjoy it. 

Over and out, 
Jim Otar_


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## Jon Chevreau

As I report in my blog today, Otar is overwhelmed with download requests around the world for the book. The Bogleheads discussion mentioned by Graham above is also worth perusing: 40 posts and growing.

http://network.nationalpost.com/np/...-downloads-of-his-controversial-new-book.aspx


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## CanadianCapitalist

Thanks for the Saturday article Jon. Fortunately, I beat the rush and downloaded the book. But it is a bit hard on the eyes to stare at the screen for long.


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## gwcanuck

I splurged on the $4 download. Worth every penny. I'm almost 100 pages in and so far most of what I thought about retirement savings has been turned upside down. And because Jim and I are engineers, it's written so I understand it!


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## Jon Chevreau

Part 2 of my video interview with Jim was published today. He looks at why near-retirees should strongly consider offloading risk to insurance companies (through annuities or new GMWB products like Manulife Income Plus & comparable products at Desjardins and Sun Life Financial)

http://www.financialpost.com/video/...l+Post&video=IA1nh9__uHgdiLt8mYwYazBjdJAMlKDS


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## spirit

*Question*

Great topic. Captures my feelings exactly. One question. Mr. Otar speaks about asset to return ratio on the video. Can someone explain? Thanks


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## JimOtar

The ratio is the "asset to withdrawal" ratio. If you have $100,000 and withdrawing $5,000 each year, indexed to CPI, then your asset to withdrawal ration is 20. ($100,000 / $5,000). It is the reciprocal of the initial withdrawal rate, in this case 5%.

In round numbers, for a 65-year old person, if your asset/withdrawal ratio is under 20, then you will likely run out of money -if you were to hold a portfolio- during retirement. The only sure way of having a lifelong income is purchasing a CPI- indexed life annuity.

Again in round numbers, for a 65-year person, if your asset/withdrawal ratio is over 30, then you do not need to buy any annuity, your portfolio is large enough to cover the three financial risks of retirement; longevity, market and inflation risks.

In between 20 and 30, you do need to export the risk - only as much as necessary- but still can hold some investment portfolio.


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## FrugalTrader

Hey Jim, just wanted to welcome you to the forum! I look forward to reading more of your postings.


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## FeeOnly.ca

> Hey Jim, just wanted to welcome you to the forum! I look forward to reading more of your postings.


Hi Jim, thanks for posting.

The ratio method is a very helpful and quick indicator of your Zone.

The notion of matching an essential-income shortfall with a CPI indexed life annuity (pension) and nonessential-income needs with products/investments that provide more flexibility (and potential upside) is a safe and inherently sensible approach.

IMO, this is even a great approach for Green Zone clients if they are unsure about their ability to invest according to strict mechanical rules. 

"Fear" and/or "Greed" can impact the way people behave at critical moments thus User-error is also a risk. From what I've seen, many people should export this risk as well.


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## spirit

*Factoring in taxes*

Thank you for explaining the ratio. It is a quick indicator of what can be withdrawn. In our case we have rrsp's and investments outside the rrsp's. When we withdraw money in retirement this ratio factors in taxes? Thanks


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## blonde

The entire 'ratio' thingie is lagging many many years...IOW, it is passe...Real-Passe.

FWF has discussed...fought...analyzed...provided anything and everything for any and every case available...to get at the 'rite' answer... SWR is the 'Best' for this day and age. KISS is the name of the 'Game'. 

Everybody's in Sales.

Check the threads at FWF re: SWR...and further indepth analysis are on the gummy site.

Why dicker or tinker with 'Success'?


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## steve41

People have to be aware, and I expect this would be explained in Jim's book, that these quick rules of thumb have to be taken with a grain of salt. The "asset to withdrawal ratio" (the "4% withdrawal rule" by another name) doesn't consider real life situations. If everyone was 65, of normal health, and lived in a vacuum (no expectation of entitlement income, no outstanding loans, no part time retirement income, no desire to pass on an estate, no expectation of a future capital gain such as selling the cottage, no anticipation of a future cash call or special expenditure), then these rules of thumb might have a use.

The fact is, our life is not that simple... our capital is taxed in very different ways, and age is very important. For instance, our "A2W ratio" has to be much lower prior to age 60 and age 65 to accommodate CPP&OAS bridging, and of course, as we approach 85 and beyond, the A2W approaches the number 1 (one) since in our final year we (hopefully) withdraw the last and final dollars from our retirement next egg.

The only number worth knowing is your burger quotient (BQ).... that lifestyle (after tax/after inflation) which if followed, will (just) see you out to a certain age. It requires some computation because it includes the effect of income tax, its effect on the different forms of capital (reg/nonreg/equity/tfsa), other discontinuous financial entities such as loans, future lump sum cash infusions, pensions, entitlements, etc... however, this is a calculation that everyone needs to do. 

It is your life and future well-being as well as your heir's... this is more important than applying a simplistic "4% withdrawal" or "asset to withdrawal ratio".

BTW... unless you are way up in the HNW stratosphere, if you expect your investment adviser to volunteer to do this, think again. This is an exercise you should be doing on your own.

A financial plan starts with your Visa bill(groceries/gas/etc) and works back from there. The industry wants you to be afraid of uncertainty... they would prefer that you stick to simplistic adages such "max your RRSP pre-retirement", 4% withdrawal rate post retirement, rather than getting involved with time-consuming analysis such as described above, which earns them no fee.

Cynically,

Steve


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## blonde

Steve, your post sounds like you know what you are talking about...How did THAT come about?

The aim for the retirement planning process is to make so much money... and _save_ so much money prior to retirement that it is impossible to spend it all in the 'golden-years'. There ain't no free-ride in this day and age...and it _will get better_ as we move forward. 

Never ever Trust a third party to provide a retirement plan in the best interest of the retiree. Everybody must Look After #1. Retirees are not exempt from the natural forces. How much Money is in the hands of the baby boomers? Is there an Opportunity? Yep, It is ALL about Money. 

Some of us are well aware how the Vulture-Systems are designed for the financial guru UCSers peddling their magic formulas, news-letters, books, secrets, oujia boards, recycled secrets, just to list a few...

Deja vue...same ole stuff...some things do not change...


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## 411guy

blonde said:


> Check the threads at FWF re: SWR...and further indepth analysis are on the gummy site.


FWF? SWR? "gummy site"? What are those?


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## steve41

FWR (financial webring forum) Canadian based financial forum

Gummy's website Lots of tools/info/spreadsheets... definitely a 'must see'.

SWR -sustainable withdrawal rate


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## 411guy

Thanks!


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## heyjude

Just wanted to say "thank you" to Jim Otar. A huge amount of work went into this book and it was obviously a labour of love. As far as I am concerned, it is the most useful resource in preparing for retirement that I have found anywhere. I hope your sales go viral!

PS. It's become a hot topic over at the Early Retirement Forum too!


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## 411guy

heyjude said:


> PS. It's become a hot topic over at the Early Retirement Forum too!


Which specific forum would that be? If you can, please share the URL. Thanks.


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## 411guy

I am preparing for retirement and I have also found Jim's book very useful. If I were to rely solely on my financial advisor, I would never have encountered the princicples Jim is presenting.

I am most interested in SWR since outliving my retirement savings is my worst nightmare. I like the use of "aftcast" as it uses history as a model.

I just read today at the NYT ( http://www.nytimes.com/2009/08/29/your-money/individual-retirement-account-iras/29money.html?_r=1) another approach at arriving at a "safe" withdrawal rate:

*"What he concluded was that the overall market’s price-earnings ratio — taking the current price for the Standard & Poor’s 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal — was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 percent stocks and 40 percent bonds meant to last through 30 years of retirement. 

If the ratio was above 20, indicating that stocks were overvalued, than a 4.5 percent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 percent rate was safe, tested against every historical period for which data was available. And if it was under 12 — a level it almost got to earlier this year — a rate of 5.5 percent would work. 

The most recent figure was 17.67, which suggests a 5 percent withdrawal rate for current retirees. It had been above 20 until October 2008. 

Mr. Kitces gets his ratios from a set of data that the Yale professor Robert Shiller creates and stores on Yale’s Web site , at http://bit.ly/3gexz. I’ve provided a link to that data (Mr. Kitces uses column K in the Excel spreadsheet there) and to all of the other research in this column in the online version of this story." *

Does anybody have any other alternative approaches/guidelines to arriving at a SWR?


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## steve41

> Does anybody have any other alternative approaches/guidelines to arriving at a SWR?


Read my post upthread.

The problem with safe withdrawal rates is they apply to individuals living in a vacuum. I could take two people with exactly the same situation... same savings (amt and type), same age, same entitlement situation and same size of loan. They could have completely different SWRs applicable. 

How? Simple.... one has a loan with a 3 year amortization and the other with a 10 year. These 2 different loan payment levels put each individual's SWR strategy into different territories. (depending on the scale of the loan amounts they could be quite different)

The best strategy, IMHO is the After Tax Income (ATI) Monte Carlo. This differs from the normal MC in that it uses a fixed term 'die-broke' model rather than a fixed withdrawal rate model. The latter takes a withdrawal level and runs it out over a randomly varied rate regime, measuring the years at which the funds run out. The results tabulate the probability that your funds run out at various ages. The fixed term (ATI) model, rather than measuring years to run-out, measures net income... that after tax income (ATI) which, if sustained, will exactly run out at a particular age (95 or 100 say).

The reason I find this more sensible is that it relates exactly to lifestyle and the budgeting process, and it includes the effect of all other non-investment entities... loans, CPP, income tax, ... i.e it is much more inclusive that the simple 'level-withdrawal/investments-only' MC model.

It is far more meaningful to express... _"your sustainable lifestyle, probabilistically, varies between a high of X, low of Y and a median value of Z"_ This relates to something I can control (budget for) rather than the kind of meaningless... _"your funds may run out as early as age 69 or as late as 101"_ How does that relate to how my life (consumption of beer, groceries and gas) will unfold?

It takes a quantum increase in computing power (you couldn't do it with a spreadsheet), however with the speed of the present day PC, it is quite do-able.

You asked.


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## leslie

I shake my head at so many of the responses that indicate people are looking for a "just give me a number" type of answer. Come on! The future is unknown. There is no SAFE withdrawal rate.

* It's calculation assumes a 'die broke' scenario. But few of us will have family to provide the extra labour of medical support at the end of our life. We will need a reserve of capital. (Oh right, you conveniently assume the other taxpayers will cover that.)

* 'Safe' means 0% probability. See the Table 3. There is no scenario that gives 0% probability of running out in 30 years, much less the 45 years I will need. And look at the average growth in Table 5. Looking for 'safe' mean the average result is an increase in asset value only equal to 2 times, but accepting risk allows the average growth to be 8 times.

* To claim that data from "set of data that the Yale professor Robert Shiller ..." "was predictive enough to produce guidelines" ignores the same error that is implicit in stock-screening - DATA SNOOPING: 

_The biggest problem with this strategy lies in its basic premise, that back-testing proves something. Academics have given this issue the name 'data-snooping'. Given enough time, enough attempts, and enough imagination, almost any pattern can be teased out of any dataset. And there have been decades and decades of dredging done on the historical stock exchange database. Proponents of the efficient markets hypothesis argue that many of the predictable patterns that have been identified in financial markets may be due to simple chance (Reality Check by Park and Irwin 2009). The relationships simply do not exist outside of the specific data set analysed (e.g. in the future).​_
If you want a 'safe' withdrawal buy an annuity. Otherwise be prepared to cut back your expenses in recessions and wait to splurge after good markets, and reinvest the portion of income equal to the degredation of inflation.


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## steve41

I should have clarified that the 'die-broke' paradigm doesn't have to mean 'run out of capital'. It could just as easily have been... "pass on a prescribed estate (1/2 Million after tax say) and then have the capital just exhaust"

I don't know about you, but if went into an adviser and he said.... _"forget about the uncertainty regarding rates, taxes, details such as your loans, CPP status, a future capital gain... let's just get into picking an investment opportunity."_..., I would not be impressed. 

Many advisers look at inclusive cash flow financial planning as a nuisance. Too much data gathering. They (and the client in some cases) are just lazy... dredging up info on pension and CPP expectations, real estate details, loans, etc.... is a drag. It's much easier to get down to the nitty gritty... _"I've got a handle on a new 'can't miss' MF. How much can you afford to plunk in your RRSP this year?"_ (I am sure this doesn't happen all that much, but you get my drift)


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## Rickson9

So how do I figure out what my (retirement) number is?

PS: Did I do that right?

PPS: Just kidding.


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## steve41

> So how do I figure out what my (retirement) number is?


Simple. To determine your "number", you enter your assets... current savings (rsp/tfsa/nonreg) as well as your "career asset" (gross pay/pension and retirement age), future assets such as selling the cottage, downsizing your home, liabilities (loans), a 'how lucky do you feel?' (horizon age), and the amount you want your estate to net if you make it out that far (it could be zero).

Finally, pick one or more rate trajectories (hi/lo/average), sit back and wait.

The result will show how much you should be contributing (it may not be the RRSP or TFSA max BTW), how much you should be drawing down after retirement, and of course, your "number"... what lifestyle (after tax, after inflation) your plan will deliver year over year.

The only other "number"... the size of your nest egg at retirement... will get spit out as well, however I don't find that "number" particularly useful.


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## cannon_fodder

steve41 said:


> Simple. To determine your "number", you enter your assets... current savings (rsp/tfsa/nonreg) as well as your "career asset" (gross pay/pension and retirement age), future assets such as selling the cottage, downsizing your home, liabilities (loans), a 'how lucky do you feel?' (horizon age), and the amount you want your estate to net if you make it out that far (it could be zero).
> 
> Finally, pick one or more rate trajectories (hi/lo/average), sit back and wait.
> 
> The result will show how much you should be contributing (it may not be the RRSP or TFSA max BTW), how much you should be drawing down after retirement, and of course, your "number"... what lifestyle (after tax, after inflation) your plan will deliver year over year.
> 
> The only other "number"... the size of your nest egg at retirement... will get spit out as well, however I don't find that "number" particularly useful.


Steve,

Correct me if I am drawing the wrong conclusion based on your statement:

_The result will show how much you should be contributing (it may not be the RRSP or TFSA max BTW), how much you should be drawing down after retirement, and of course, your "number"... what lifestyle (after tax, after inflation) your plan will deliver year over year._

I'm inferring that your preferred strategy (implemented in your retail application) differs from most other tools or advisor methods in that you input what you have, and what you expect to earn/inherit + big ticket purchases/sales and your longevity, and it tells you how much you ATI you will receive and what value your estate will have when the scenarios have completed. Of course, it performs some sort of statistical analysis to support whatever number pops out, and how you should build up your assets and how you should draw them down.

Am I unusual in thinking that I would want to drive the inputs differently? I have taken our current expenses and then eliminated, amended and added for what expenses will be in retirement. Thus, I need to construct a retirement scenario by which my income will meet or exceed that. To my way of thinking, this is one of the main inputs. A tool which tells me my anticipated ATI and how to get there doesn't help me if it is far away from my needed ATI. An output of an ATI that is too high means I might be able to enjoy life a little more now... an anticipated ATI that is too low, means I have to pull up my socks.

Or did I miss it somewhere where you stated you do actually put in a target ATI?

My thinking is along these lines. Provide the tool/advisor with:

1. What my ATI needs to be.
2. What assets I have now.
3. What assets I expect to accumulate.
4. What government handouts I expect to receive.
5. What inflation and growth rates I expect to see during the scenario.

I'd say I have a better chance to control my expenses, and adjusting them accordingly, than getting right the year I'm expected to leave this mortal coil. So, a tool tells me that I will 'die broke' at an age I choose doesn't make sense to me - perhaps I'm the only one. Now, I have no doubt that your tool could accept some extreme age, like 120 years, which would detail scenarios where your money would likely outlast you. 

I find your explanation contradictory when you say the important thing is the Burger Quotient yet that is not the number which drives your tool.


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## steve41

OK... let me uncomplicate things. (I wrote the program, but sometimes it confuses even me)

The program is essentially used as a one shot deterministic projection. You specify all the aforementioned... salary, RRSP, loans, horizon age (95 say) and a rate estimate and the program proceeds to find a constant after tax income (BQ) which will exactly run the capital out at that horizon age (or exactly deliver a prescribed net to estate).

It returns a single deterministic projection, a cash flow... monies flowing in, out and between the two main capital pools... (reg and non-reg) which forces an exact level ATI/BQ while running the capital out at that age 95.

That is the program as most users run it. Now for the montecarlo bit... 

The rate estimate, rather than a single number, can be, in fact, a continuum... a column of annual rates, which most users will keep constant over time. However, there is nothing to prevent that rate column to be randomly varied for each year.

This is what the monte carlo option does. It runs that single deterministic model multiple times, using a different randomly generated rate column, coming up with a different ATI/BQ each time.

Each time it runs, it keeps track of those ATI/BQ stats and displays them probabilistically (hi/lo/avg/med and a frequency distribution).

The montecarlo option takes a minute or more to run, because it is essentially running the program 100 or so times. What would take 2-3 seconds (the deterministic model) now takes a minute or two, and the only output is the ATI/BQ distribution. A normal deterministic run, which is what most users do, details all the cash flows, while the montecarlo run simply tabulates the ATI/BQ stats as a probability distribution.

Hope this makes sense.
_
To finalize the explanation, when I say a 'smooth constant ATI', you can contour that by having the ATI reduce to some % (75% say) after a certain age. This acknowledges the fact that some individuals may have a reduced lifestyle need in retirement._

Whew!


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## cannon_fodder

Thanks for the detailed response, Steve. I know you can't "sell" your product here, thus it can be difficult to explain your methodology while staying onside of the rules.

I think it would help me understand it better if I knew of an advisor who used the tool often and they could explain how they made use of it.

Maybe it isn't the best method, but for me, the driving force, or input, is that ATI/BQ. I provide that, and most of the other information, and then whatever tool should spit out if that chosen strategy is likely to work 19 times out of 20. If not, it should then tell me what I need to do differently in order to increase that likelihood to an acceptable level. 

An analogy to help explain my POV: I tell the travel agent where I want to go - the travel agent tells me what I need to do and how much I need to spend to make it happen. I don't go into the travel agent and tell them this is how much I have and when I can go, and look for them to tell me where I can go.

I also don't think the same way as Leslie when she says "Safe" means 0% probability of failure. I immediately think of public or private transportation, or walking alone at night in my fair city. I feel safe in almost all modes and venues where I live, yet there is definitely a greater than 0% probability that something could happen to me.

Off the top of my head, a plan that provides a 90% chance that my money won't run out before I hit 95 would be very acceptable. Based on family history, 95 would be quite a bit longer than my family members have experienced. And, I also know that I have the ability to tighten my belt strongly should something occur, while I'm also strong enough not to panic when things turn very sour like they did in the last 12 months.

I wouldn't be surprised if I end up growing more and more conservative as I enter and live through retirement. I envision amending periodically my strategy so as to increase the likelihood of not running out of money.


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## steve41

There is another calculation methodology the program uses. You specify all the same stuff as before... salary/pension contour, loans, horizon age, estate goal, etc, except you enter one more element... the desired ATI/BQ. What the program then does is determine the rate which will satisfy all those constraints.

So you can either...

-set the ATI/BQ and rate vector and determine when the capital will run out.
-set the rate and horizon age and solve for the ATI/BQ or
-set the horizon and ATI/BQ level and determine the rate


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## steve41

> Leslie when she says "Safe" means 0% probability of failure


I would handle that using the _'under the mattress'_ method... setting the entire rate vector to zero. A 51 yr old earning 90K, retiring at 65, with a 100K loan (6%, 10 year) and 200K in his "mattress RRSP" will see a $29,208 'die-broke-at-95' ATI. (Taxed in BC, 2% inflation, full OAS, CPP at 65)

At a 6% rate, the ATI/BQ is $45,257. Hmmm... I wonder, is the 16K extra beer and groceries worth the agro?


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## leslie

*"I would handle that using the 'under the mattress' method."*

That is almost exactly what Jim Otar is calculating with his number. Not incidentally his number equals a rough above-average lifespan. He says a 65-yr old has a 30 number. So he can withdraw 1/30th. And the portfolio would last 30 years until age 95.

The only thing he requires of the portfolio is to earn enough to cover inflation.

*"..a plan that provides a 90% chance (of failure) would be acceptable.. I also have the ability to tighten my belt."* So I don't get it. Why are you looking for a magic number then? Did the numbers (from the link) not convince you? Here are some other paper:
1 
2 
3


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## steve41

This is what I find so silly about the 'number'. I can run the same 65 yr-old as a 'die-broke at 95' subject with zero rate of growth and get a number of 20.4

I can run him again and receive the same ATI/BQ (about $24K) and come up with a 'number' of 8.3

The only difference between the two projections was that in one case he was paying down a 100K loan over 3 years, and in the other instance he was paying it down over 10 years.... exactly the same die-broke lifestyle (BQ) but vastly different 'numbers' (20.4 and 8.3)

Does anyone see what I am driving at?

10 year loan
3 year loan


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## cannon_fodder

leslie said:


> *"I would handle that using the 'under the mattress' method."*
> 
> That is almost exactly what Jim Otar is calculating with his number. Not incidentally his number equals a rough above-average lifespan. He says a 65-yr old has a 30 number. So he can withdraw 1/30th. And the portfolio would last 30 years until age 95.
> 
> The only thing he requires of the portfolio is to earn enough to cover inflation.
> 
> *"..a plan that provides a 90% chance (of failure) would be acceptable.. I also have the ability to tighten my belt."* So I don't get it. Why are you looking for a magic number then? Did the numbers (from the link) not convince you? Here are some other paper:
> 1
> 2
> 3


I never said I was looking for a magic number. You must have me confused with someone else. 

There are far too many significant variables outside of my control - if I can maximize everything available to me (RRSP, RESP and TFSA contributions), minimize non-deductible debt, take advantage of deductible debt then, given enough time, I will have sufficient assets to have a high likelihood of financial independence.

I don't think of it in terms of withdrawal rate. My primary goal is to put as much as I can away for retirement, invest it wisely, and adopt a long term view of not only my pre-retirement investing, but also post. I keep up the pressure now so that I'm better prepared should there be negative impacts in the future.

At this point in time, my wife and I are able to allocate more money to our investments on an annual basis than we expect our post retirement expenses to be. I know that not many people are fortunate enough to be in that position. One can almost think of it as "putting aside" 1 year's of retirement expenses now to be used in about 25 years time. The longer we can do that, coupled with what we already have, may allow us to retire on our terms barring major incidents. 

For us, playing with these numbers is fun - but, at least at this point in time, they do not change our focus or approach. They are projections that, although based on sound assumptions, provide no collateral for what will happen down the road.


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## cannon_fodder

steve41 said:


> This is what I find so silly about the 'number'. I can run the same 65 yr-old as a 'die-broke at 95' subject with zero rate of growth and get a number of 20.4
> 
> I can run him again and receive the same ATI/BQ (about $24K) and come up with a 'number' of 8.3
> 
> The only difference between the two projections was that in one case he was paying down a 100K loan over 3 years, and in the other instance he was paying it down over 10 years.... exactly the same die-broke lifestyle (BQ) but vastly different 'numbers' (20.4 and 8.3)
> 
> Does anyone see what I am driving at?
> 
> 10 year loan
> 3 year loan



Yes, you've used a similar example before. You also previously stated,

_I could take two people with exactly the same situation... same savings (amt and type), same age, same entitlement situation and same size of loan. They could have completely different SWRs applicable. 

How? Simple.... one has a loan with a 3 year amortization and the other with a 10 year. These 2 different loan payment levels put each individual's SWR strategy into different territories. (depending on the scale of the loan amounts they could be quite different)
_

How is that two people with exactly the same situation? The very fact that they affect the SWR so significantly tells you they aren't!

If I said:

I could take two people with exactly the same situation... same size of loan and amortization, same age, same entitlement situation and same size of savings. They could have completely different SWRs applicable. 

How? Simple....one has all of their savings in 3 year bonds at 1.2% while the other has 30% in long term Real Return Bonds at 1.8% and 70% in ETFs that track major indices around the world. These 2 different savings structures put each individual's SWR strategy into different territories (depending on the proportion of the investment allocation they could be quite different).


They are not the same, and depending on other factors, they may not even be similar.


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## steve41

OK I could have changed my guy from two different loan strategies to two different CPP timing strategies... taking at 60 and taking at 65. The point is... here is someone with exactly the same age, financial assets, etc... except his "A2W number" can vary all over the map. The above example showed A2W values in one case 8, and the other case 20. 

My number (the ATI/BQ) varied hardly at all. That's my point.... what is the significance of the A2W?

And more importantly... can a person get dangerously mislead by not understanding it correctly?


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## leslie

Getting back to thread's subject...

*"I keep up the pressure now so that I'm better prepared should there be negative impacts in the future."* I think that quote from CannonFodder is a pretty good summary of where I believe people's attention should be concentrated. 

All the posters above who claimed to find JimOtar's or Steve41's magic number helpful enough to spend $4, and important enough to argue it's finer points, are completely missing the big picture.... most probably because financial advisors and the media have brain washed them into thinking they 'need a plan'.

For Pete's sakes, the future is unknown. The way it will play out is NOT predicted by historical averages, or MonteCarlo simulations, or bootstrapping simulations. You cannot PLAN it.

To assume certain inputs that conveniently support your conclusions is misleading. Eg. JimOtar's assumption that investment returns will be only big enough to cover inflation, or Steve41's assumptions that tax rates upon RRSP withdrawal will be lower than the contribution rate, or nearly everyone's assumption that you should plan to die broke without needing capital at life's end.

Instead you should be doing WHAT YOU CAN every day of your life. 
* Don't save 'what your plan says you should save'. Save whatever you can. 
* Don't invest in safe (lower return) investments because your plan says you don't need your portfolio to grow. Invest in whatever you think will earn you the highest return (within your volatility tolerance).
* Don't spend $$ in retirement the magic number someone quoted. Spend what your investments earn - after reinvesting inflation and putting $$ aside for year's of poor returns.


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## steve41

If no one needs a plan, why did the term _'financial planning' _or _'financial planner'_ get into the lexicon?

Surely, spending a modest amount of money on books or software to determine some general level of spending/budgeting/investing in order that we don't start sucking air at age 70 (running out too soon) or have our rotten kids inherit a gazillion dollars when we die, is not too much to ask... given the way we waste money on other frivolities.


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## leslie

Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented.

The answer is in my post above. No one needs to be told how. Common sense is all you need. Your assumption that we would be "sucking air at age 70" with "rottn kids" without them is preposterous. My parents weren't. Nor were their parents. Nor will I be. 

This industry has created a need for its own services, a need that does not exist. You have been sold a bill of goods and your defense of your own need for it proves my point.


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## steve41

Garbage.... My folks had a set of tables (they were very common from what my Mom told me) These tables had three sections...

-mortgage/annuity
-sinking fund
-future value

Using these 3 tables, you could, based on what you had saved already and what you planned to continue to save until retirement... what you could look forward to in retirement. They were arranged by rate and length of term.

They taught the use of these tables in high school home economics!

Well before the computer even existed.


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## leslie

What you are referring to is simply the three finance equations that EVERYONE need to learn, but 99% refuse to. 

Mortgage/annuity = Present value of an Annuity
Sinking fund = Future value of an Annuity
Future value = Present value = Present value of a Dollar

An example of them is here. If you want to learn how to use them (the calculator version) see these directions.

You may remember the many times I have told people they need to own a financial calculator and know how these functions work. You may also remember that never, ever has any other poster reiterated that advice. In fact almost every time, the response has been, "We don't need to". Obviously you decided you did not have to.

The existence of these financial functions does not prove that financial advisors are useful. Since everyone can buy the calculator there is no necessity to even learn the equations behind the function, much less pay an advisor.

Learning basic math is part of what I call "common sense". You could have learned that common sense from your parents. You just proved they had it to share. When people refuse to learn what common sense dictates they must learn, it reflects badly on them, not on the need to use common sense instead of relying on 'advisors'.


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## steve41

> What you are referring to is simply the three finance equations that EVERYONE need to learn, but 99% refuse to.





> have brain washed them into thinking they 'need a plan'.



Which is it? no one needs a plan, or everyone needs to learn. Make up your mind.

Using a set of tables, which people did before the computer or calculator were invented, or using a fully inclusive computer model... there is a need out there for people to get a handle on where they are going, whether they are saving enough (or too much), and what kind of lifestyle will see them out to some age or enable them to ensure thay have an estate to pass on.

The plan is revisited every year depending on how their investments have fared, any new taxes or financial products that have been introduced, and any changes that may have cropped up as far as retirement goals, estimates of the markets, etc.

Things change, we adjust and we tweak our plan. If you are content to wing it, fine. Many don't.


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## leslie

But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds. 

E.g Everyday you make trade offs between spending money now (instant gratification) and retiring early (or going back to school, or buying that big boat LATER). The decision is not make according to some 'plan'. It is made according to which you think is more important at that specific time. You ask yourself "will spending this money make my happier?'. Or "will traveling in retirement make me happier?"

In other word you just do your best, knowing only the generality that you will need savings for retirement (etc). 

Learning basic math does not constitute a 'plan'. You do not 'run the numbers' through that math everytime you make a purchase (or decide not to). Nor do you do not need to run the numbers every year-end, because you already know that you did your best. 

I expanded on the math angle only because you showed you did not know what it was all about.


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## steve41

Along with the concept of financial planning, we find that some individuals 'budget'. No, they don't sit down every time they are about to go to the store and make a purchase, but at various times they (presumably) determine a budget to see whether they can afford a major purchase... can I buy a new car every three years? what should I plan to spend on a monthly scale such that I will be able to buy that new car, and still make it out to some reasonable age without sucking air.

Budgeting means striking a balance between spending and saving. If you choose to blindly plow ahead without any foreknowledge, fine... maybe you are blessed with scads of money... I'm not.

Using a calculator or a set of tables might suit some, however the world is much more complicated when you include the effect of income tax, bridging, inflation, partial retirement,... unfortunately, "common sense" doesn't always cut it. The mere fact that you are sitting at a computer and participating in this forum says you have access to more computational power than your parents could even dream about. Why not harness it in some small measure?


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## FeeOnly.ca

Leslie above said: _Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented._

Up until the late 1980's people saved using Savings Bonds & GICs and retired using life annuities or a Defined Benefit Pension Plan (aka: a Life Annuity). Investing as we know it today simply was not available to the masses until very recently.

In fact I don't know of anyone and who has sucessfuly proven you can accumulated assets using a diversified portfolio and retire with a inflation adjusted 4% income for 30 or 35 years. 

Leslie, do you know even a single person you can hold up as an example that proves it would be sucessful startegy?

In the distribution phase any amount of loss might become a permanent loss.
The efficient frontier, asset allocation, frequent rebalancing, asset dedication, diversification, the concept of "long-term" and Monte Carlo don't and can't work in a distribution portfolio as you might want to believe. 

In a distribution portfolio you will be Lucky or Unlucky in the early years of retirement. The sequence of those returns is what matters and will determine the longevity of the portfolio. People need to hedge the risk of being Unlucky.


http://www.yourwealthadvisor.ca/zonestrategy.htm


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## FeeOnly.ca

Leslie says above: _But you are missing the point. There is no need to plan anything in order to save. There is no need to plan anything in order to invest. There is no need to plan anything in order to draw down funds. _

Really! IMO, “Failing to plan is planning to fail”


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## Maltese

I totally agree that planning is necessary for financial success. Not necessarily to get wealthy but to be mortgage/debt free with savings for retirement. I have friends who have earned exactly the same as I have for the last 30 years and have so much debt and no savings that I don't know how they will ever retire. They really have no clue how to plan and get ahead as evidenced by the choices they've made all these years. They think they're going to retire in 5 years but haven't given any thought that retirement income will be substantially less that their working incomes. They can barely manage now so I shudder to think what will happen when they do retire.


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## FeeOnly.ca

Below are two a clips from pages 454 & 456 of Jim's new book.

Quote:

"The zone strategy tells you exactly whether your portfolio will be accumulating or decumulating during the distribution stage.

• If you are in the green zone, your portfolio will be accumulating. If you are lucky, it will accumulate at a steeper rate, otherwise it will accumulate at a slower rate.
• If you are in the red zone, your portfolio will be decumulating. If you are lucky, it will last a little longer, otherwise it will deplete sooner.
• If you are in the gray zone, your portfolio may be accumulating or decumulating, depending on your luck.


Export or Retain the Risk:

There are three financial risks of retirement: longevity risk, market risk, and inflation risk. When you buy a life annuity with payments indexed to CPI, you are in effect exporting these risks to the insurance company. Keep in mind that the insurance company is a for–profit organization; transferring risk to them costs you money. For example, if you are buying a life annuity, you have to part with your capital permanently.
By definition, if you are in the green zone, then your portfolio has sufficient reserves to cover the longevity, market and inflation risks. For you, the volatility of returns is the deciding factor, which can be handled with proper asset allocation and diversification. You do not need to export these risks to an insurance company. Only if you want to feel extra safe, you can export risks partially or fully, and you will still have money left to invest.

However, in the gray and red zones you have no choice. Your investment portfolio does not have sufficient reserves to cover longevity, market and inflation risks. For you, the sequence of returns is the deciding factor and that cannot be fixed within the investment portfolio. In the gray zone, you need to allot part of your assets to annuities. In the red zone, your entire assets are used to purchase annuities"

End Quote


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## leslie

The belief that *"planning is necessary ... to be mortgage/debt free"* is wrong. Common sense everyone is born with, and does not require any advisor, tells you to save up FIRST to pay for what you want. Therefore you do not go into debt in the first place.

The offshoot of this error is thinking that you can 'afford' to make certain purchases NOW, because your budget says you will have saved the money by some LATER date. In effect budgets PROMOTE spending before the cash has been saved. 

There is no motivation to save 'because of a budget' commitment. There is no emotional gratification from budgeting. You save because you really, really WANT that new car. The more you want it, the more expenses you are willing to cut. 
------------------------
Regarding whether you are *"lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio"*. There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return. 

Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math. 

The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.

Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.
----------------------

If the OP of this thread really wanted to help people, he would tell them about another time-value-of-money calculation that is NOT on any calculators I know of --- the PRESENT VALUE OF A GROWING ANNUITY. This calculates the nest egg you require to fund an annuity of retirement payments that grow with inflation. Put it into an Excel spreadsheet so that you can solve for any of its variables: 

expected after tax investment returns % (less what you reserve for loss years)
the portfolio balance at the start
the inflation rate you expect
the starting value of the draw for living expenses (not including taxes).


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## Maltese

Leslie, not everyone has the common sense to plan. When I speak of planning I am not referring to having a financial planner create a formal plan. I'm speaking about the individual having a plan in her head on how to get from A (mortgage/debt) to B (mortgage/debt free). This just doesn't happen without conscious thought and effort. 

Many people just don't do it as evidenced by my firends. I've always been the oddball out because I saved and planned for my future. My friends and I don't make the high incomes that many on this forum do but we do make enough to live comfortably and put some away. I've had financial targets and saved to meet them but they never had financial goals and even in their 50s have large mortgages and no savings. 

Whether the plan is in one's head or on paper it is still a plan and a road map to get achieve the established goal.


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## leslie

Your friend does not need a plan. Your friend needs to stop spending money. Simple. But 'how to get out of debt' is not the topic of this thread.


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## steve41

I can remember many, many years ago... I think it was 1st or second year algebra. It was a module on finite series. We went through all the time value of money derivations to the point we could derive them on our own (PV, Sinking fund, FV, annuity...). It was rigorous, but once you understood it, it was pretty trivial.

At the end of the module, our prof showed us how to derive the formula for an indexed annuity. That was pretty hairy, but the punchline he delivered went along these lines...._" All the math we have just slogged through is pretty much useless... none of these formulae relate to the real world. For instance... why should we derive a financial plan and assume that the interest rate is going to be constant? (as we get older, we grow more risk averse and our rate expectation goes down) or why should pmt levels stay constant? Might it not be better to design an annuity which has a higher pmt (adjusted for inflation) in the first 10 years to account for the fact that our lifestyle requirements may take a dip in our latter years? or surely these investment cash flows don't exist in a vacuum. You will need more income in the years prior to 60/65 before your CPP/OAS kick in, or before your loan is paid off... fixed payment (inflation adjusted) annuities don't allow for that. Or how about a planned-for sale of your cottage 10 years out?"_

The time value of money algebra is fine for teaching someone compound interest... the general implications of saving for retirement and subsequently living off the proceeds, but as practical, real life tools, they just don't cut it.

Now for the coupe de grace... Income Tax. The only element which has meaning (to me anyway) is the amount of cash (after tax) available to purchase beer, groceries and gas (as well as the occasional car every 5 years say)

The above-mentioned math will not solve that problem for the principal reason that the income tax formula is not linear... it is a complex calculation involving discrete tax brackets (indexed to inflation) age credits, loan interest deductibility, dividend tax credits.... it is a nightmare. 

Why is it a nightmare, given that many of us still do our T1 by hand, you ask? Simple... the tax formula was designed to work from the top down, whereas for the purpose of financial planning, we need to start at the bottom (net income) and drive the T1 backwards. The simple question... _"how much should I draw from my RRSP such that I net (after tax) exactly $30,000?"_... sounds easy, but it isn't. Now throw in the reality that tax on our RRSP withdrawal doesn't live in a vacuum... we are taxed on investment growth on capital outside of our RRSP, maybe even at the dividend rate. We are receiving additional taxable income from CPP, a pension, an annuity. This is absolutely impossible to solve with even the most convoluted set of time-value-of-money formulae.

Thankfully, there is a way to solve these kinds of problems... recursion math. The way you would solve that simple 'how much to draw from my RRSP to return $30K after tax?' question can be done by hand. You simply continually shovel RRSP withdrawals into a T1 program until you get close to the answer. It can be time consuming... trial and erroring 10 , 20, 100 times until the exact $30K drops out, but it is do-able.

Before the modern day computer arrived, this would have been the way to solve the 'reverse tax' problem, but now, the computer allows us to solve the 'needs-based' (after tax driven) tax accurate financial planning problem quickly and easily. The bad news, is that spreadsheets are not sufficiently fast or flexible, however using a procedural language (C++, Basic, Fortran, ...) _will_ solve the problem and allow it to converge in a reasonable (several seconds) period of time.

Sorry to ramble on like this, but is is kind of my life's (well the last 15 years anyway) work. I get sort of passionate about it.


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## heyjude

411guy said:


> Which specific forum would that be? If you can, please share the URL. Thanks.


As requested, the link to the Otar discussion on the Early Retirement Forum:

http://www.early-retirement.org/forums/f28/otar-unveiling-the-retirement-myth-45922.html


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## 411guy

Thanks!


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## FeeOnly.ca

leslie replied: _"Regarding whether you are "lucky or unlucky in the early years of retirement ... will determine the longevity of the portfolio". There is an assumption behind that position - that withdrawals are a set dollar value (or inflation adjusted set $). As a result you get the same, but reversed, effect as Dollar-Cost-Averaging. A set $$ taken from a portfolio after it has lost value hurts more (as a percent of it) than the same $$ withdrawn when its value was higher.

But that assumption is not true in the common sense behavior I exampled above (that does not need any planning or advisor or modelling). Your withdrawal is relative to the portfolio's gains - it reduces the net % return."_

end quote.

Nonsense. Withdrawals during retirement are based on actual need, not market returns.
If you depend on that income to pay bills you can't defer withdrawals until you get better returns or decrease withdrawals to some arbitrary amount in keeping with the returns of the past year. What do you do if the market falls by 40 or 50% all at once, or goes sideways for 10 years? 

Distribution income planning is about planning & designing a safe and reliable inflaton adjusted income for life. If you are in the Red or Grey Zones you cannot afford to finance the time-value of fluctuations. Your only relaible and safe option is to export risk to an insurance company.

http://www.yourwealthadvisor.ca/app...772426-offloading-risk-to-insurance-companies

http://www.yourwealthadvisor.ca/apps/links/


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## leslie

The conclusion of my comments that you quoted provide the answer to your objection.


leslie said:


> Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math.
> 
> The reverse dollar-cost-averaging effect does not play out. Not from the draws for living expenses nor the funding for years of investment losses.
> 
> Another way to draw funds that does not result in the reverse-dollar-cost-averaging effect is to again draw relative to what was earned. But calculate the year's maximum draw as the average of the past (say) 5 years returns (after inflation reinvestment). Again, no plan, no advisor, simple.


------------

Maybe you remember that there was a big market crash last year. I survived just fine by doing the above - living off what I had put aside for loss years. I cut back all my discretionary expenses - no big deal. My portfolio has now recovered to the Jan08 level, and it is above the inflation adjusted balance I started retirement with.

No need for planning. No need for advisors. Just common sense - doing the best I can each and every year.
----------------

Regarding annuities, you assume my position is 'against them'. Not at all. Once you reach the age where your cohort is dying at a good clip, they start to offer good value because you capitalize on the value left behind by those who die --- and I expect to long longer than the average. I think they are of value to everyone, no matter the size of your portfolio, to cover your necessary costs. The only people I would exempt would be home-owners with a revenue suite. Because RE works much the same way as an annuity.

But there is no value to annuities when you retire early (me). Not enough people are dying for them to give you a better rate than bonds.


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## steve41

I think the sad truth is that Leslie ("the luddite") is in the definite majority. I can't remember the statistic, but I read somewhere that the percentage of Americans who had a written financial plan (numeric-cash flow) was just over single digits.

I get either really depressed or enthusiastic about the opportunity.

Time will tell.


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## cannon_fodder

steve41 said:


> OK I could have changed my guy from two different loan strategies to two different CPP timing strategies... taking at 60 and taking at 65. The point is... here is someone with exactly the same age, financial assets, etc... except his "A2W number" can vary all over the map. The above example showed A2W values in one case 8, and the other case 20.
> 
> My number (the ATI/BQ) varied hardly at all. That's my point.... what is the significance of the A2W?
> 
> And more importantly... can a person get dangerously mislead by not understanding it correctly?


I've been busy so I am just catching up now. Thanks for posting the outputs for your two examples.

I don't get what point you are trying to make... take 2 cases which are identical except in one significant area and point out that the A2W's aren't going to be the same during that period. I don't need a tool to tell me that - it should be obvious.

What would be perhaps more telling is like one of the other papers mentioned - determining "safe" A2W's based on the investment mix and forecasted growth rates. 

One thing that the paper did not try to simulate was what would happen if one drastically changed the mix during the drawdown phase based on the stock market performance. Specifically, if the market has run up very high (greater than normal P/E ratios) and one expects it to return to the norm, what happens when one liquidates a healthy portion of assets and buy the inverse. And, the opposite like earlier this year - when the market is in an historically low evaluation period, liquidate fixed income portion to go overweight the equities. (Don't do this in a non-registered account otherwise the capital gains triggered could be extremely detrimental.)

Or, when interest rates are quite high, purchase annuities at that point in order to lock-in a higher income stream as opposed to living with a variable based one. Perhaps another paper has done that research.


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## cannon_fodder

leslie said:


> Getting back to thread's subject...
> 
> *"I keep up the pressure now so that I'm better prepared should there be negative impacts in the future."* I think that quote from CannonFodder is a pretty good summary of where I believe people's attention should be concentrated.
> 
> All the posters above who claimed to find JimOtar's or Steve41's magic number helpful enough to spend $4, and important enough to argue it's finer points, are completely missing the big picture.... most probably because financial advisors and the media have brain washed them into thinking they 'need a plan'.
> 
> For Pete's sakes, the future is unknown. The way it will play out is NOT predicted by historical averages, or MonteCarlo simulations, or bootstrapping simulations. You cannot PLAN it.
> 
> To assume certain inputs that conveniently support your conclusions is misleading. Eg. JimOtar's assumption that investment returns will be only big enough to cover inflation, or Steve41's assumptions that tax rates upon RRSP withdrawal will be lower than the contribution rate, or nearly everyone's assumption that you should plan to die broke without needing capital at life's end.
> 
> Instead you should be doing WHAT YOU CAN every day of your life.
> * Don't save 'what your plan says you should save'. Save whatever you can.
> * Don't invest in safe (lower return) investments because your plan says you don't need your portfolio to grow. Invest in whatever you think will earn you the highest return (within your volatility tolerance).
> * Don't spend $$ in retirement the magic number someone quoted. Spend what your investments earn - after reinvesting inflation and putting $$ aside for year's of poor returns.


Leslie,

This is almost exactly what I believe. I'm not saying everyone should subscribe to my thinking, but simply relating what mindset I operate under.

Thinking about it more, I would say that for a long time, maximizing my RRSP contributions (and RESP and now TFSA) falls under the "fixed expense" castegory for me. These are not discretionary expenses. They come first just like car payments, mortgage payments, utilities, etc.

It is much easier to "sacrifice" now to help reduce the chances of failure in the future, than it is to find oneself at 65 years of age and no way to earn income to supplement a retirement fund that has been depleted.

I can run numbers all day long through various calculators using reasonable assumptions and it shows that my wife and I will be in fantastic shape for our retirement years. But, that in no way changes my thinking that we must continue to put maximum effort and leverage the government programs provided to us through RRSP, RESP and TFSA.


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## cannon_fodder

leslie said:


> Instead ask yourself "how did people save, invest, and retire for the hundred's of years BEFORE the terms 'financial planning' was invented.
> 
> The answer is in my post above. No one needs to be told how. Common sense is all you need. Your assumption that we would be "sucking air at age 70" with "rottn kids" without them is preposterous. My parents weren't. Nor were their parents. Nor will I be.
> 
> This industry has created a need for its own services, a need that does not exist. You have been sold a bill of goods and your defense of your own need for it proves my point.





steve41 said:


> Garbage.... My folks had a set of tables (they were very common from what my Mom told me) These tables had three sections...
> 
> -mortgage/annuity
> -sinking fund
> -future value
> 
> Using these 3 tables, you could, based on what you had saved already and what you planned to continue to save until retirement... what you could look forward to in retirement. They were arranged by rate and length of term.
> 
> They taught the use of these tables in high school home economics!
> 
> Well before the computer even existed.


Common knowledge and common sense are sometimes oxymorons. One of the items I decry about our educational system today is that kids are taught about all manner of things like Canadian history and to not dangle participles - but, heaven forbid they should be educated on personal financial management.

And, even if people have been taught, does that mean that they only need that one lesson before they make it part of their day-to-day routine? When I was young, I used to exercise to look good for the summer season - now, I exercise as a lifestyle change because I need to and it is hopefully going to make my life healthier and better in the long run.

You might think that this subject, which appeals to one of people's most basic drivers (GREED), would be of keen interest to everyone. There certainly are enough avenues to learn more and get the help necessary. But, people have different passions at different phases in their lives. I believe that it is typical to find personal finance books in the bestsellers' lists of non-fiction works. Television is a hit and a lot of misses - for every show dedicated to it (whether it is Suze Orman or "'Till Debt Do Us Part") there are 5 or 10 "infomercials" about how you can get rich quickly and easily.

It is encouraging that they are sites like this, with people like yourselves, which are providing support to others not so well versed, or not as keen. 

Personally, I try to help others so that they can improve their financial state of affairs. The biggest problem I have is finding how to ignite the passion within them. I know that once this becomes their priority then they will be more receptive to the positive changes necessary to reach their goals.

Judging or criticizing people because they haven't achieved what we think they should is not the best way to start. Patient guidance without condescension would be more appropriate.


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## steve41

I once tried to construct a book which could be of general use and was comprised of several hundred tables. I used my program to generate the tables. I soon discovered after observing many disparate financial plans, that hardly any of these tables would be of the slightest use. Everyone is in their own complex financial universe.... retired/not, pensions (various types), savings (reg/nonreg/equity), loans (of various complexions) expectation of a future capital gain (downsizing home, selling cottage, inheritance), different income targets (buying a new car every five years...), estate goals (die broke, specifying an estate level on death).... it goes on.

Trying to make even the most remotely useful set of tables was a complete non-starter. I am afraid that the only way (other than using the good old "common sense" dartboard) is a single inclusive program which allows you to specify all the above variables in one integrated number crunch. (rather than running separate disconnected spreadsheet illustrators)

The point I was trying to make about the A2W ratio was exactly the same as my experience... I determined that two identical situations (paying off a loan in 3 rather than 10 years) gave two completely disparate A2Ws... 8 and 20.


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## Rickson9

cannon_fodder said:


> Judging or criticizing people because they haven't achieved what we think they should is not the best way to start. Patient guidance without condescension would be more appropriate.


Very good point!


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## Berubeland

Some one famous said "Common sense is not common"

Spend less than you make seems like sound advice in retirement too. I know a few people who thought they had enough savings to make it in retirement and who find that they do not. They have had to tighten their bootstraps quite a bit. 

Still financial advisors are not really on my list of favored people. When my mom had a brain tumor she cashed out her retirement plan at her work and put the money with a well respected company to manage it. He managed to lose over $100000 in a year. Now they manage their own and do just fine buying bank stocks and blue chip companies. 

Anyways my parents are not really usual they both still work because it is boring for them if they don't. My dad feels useless if he's not doing something productive which for him is making money. I'm a lot more retired than they are


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## cannon_fodder

FeeOnly.ca said:


> In fact I don't know of anyone and who has sucessfuly proven you can accumulated assets using a diversified portfolio and retire with a inflation adjusted 4% income for 30 or 35 years.


I just want to make sure I understand your statement. Are you saying that, regardless of portfolio size or government handouts (e.g. OAS, CPP, GIS, Allowance) you're not aware of a person withdrawing 4% of their retirement portfolio for an extended period of time of 30-35 years?

Does that include people who choose not to withdraw 4% because they do not need that amount as they get older?

I wonder how many people even know people who have lived 30-35 years in retirement. I don't know any.


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## cannon_fodder

leslie said:


> Look back and you will see I stipulated you have to set aside (say) 2% (as well as reinvesting inflation) in anticipation of the bad years. In those bad years you live off the accumulated immergency fund. E.g. I average a loss year in every five. So after putting aside 4 years of 2% I have 8% to live off for (say) 2 years until the market recovers. So again this mechanism reduces the net % return you plug into simple math.


It wouldn't surprise me to see that in reality people just keep withdrawing money to cover their fixed expenses and don't adjust discretionary expenses to any great degree just because their investments had a good year. On the other hand, if their investments have hit a rough patch, then they probably tighten the belt.

Thus, they adjust as required, but not as desired, and do not take out a fixed percentage of their portfolio nor do they ignore the negative returns.

For some, they may invoke a process as you describe (squirrelling away additional gains so that they become part of the inevitable market downturn fund) or they don't touch them in the first place.


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## 411guy

steve41 said:


> I can't remember the statistic, but I read somewhere that the percentage of Americans who had a written financial plan (numeric-cash flow) was just over single digits.
> 
> I get either really depressed or enthusiastic about the opportunity.
> 
> Time will tell.


It seems optimistic people tend to prepare retirement plans versus pessimistic people: *" Only 15% of pessimists have completed a detailed income plan to help guide their finances in retirement, compared to almost twice as many optimists (27%). Pessimists were twice as likely (25% of pessimists, 12% of optimists) to invest with the goal of preserving money, and were willing to accept much lower returns. Optimists were more likely to invest with the aim of creating an equal balance of capital preservation and growth potential (39% of optimists, 25% of pessimists)." *

http://finance.yahoo.com/news/Optimists-Make-Better-Plans-tsmf-2488166123.html?x=0


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## steve41

What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables. 

Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing 
it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.

Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically.


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## cannon_fodder

steve41 said:


> What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables.
> 
> Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing
> it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.
> 
> Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically.


I suspect, Steve, that it is that very complexity and lack of basic knowledge to deal with the issue which has led many people to put their heads in the sand with respect to this. Even in my generation (~20 years to retirement), never mind the one before me, I know of very, very few people who really plan for their retirement.

Do almost all of them contribute to an RRSP? Sure, but it rarely is within the context of a plan - it is ad hoc.


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## steve41

My diagnosis is the lack of consistency. When you submit data using an annuity table or function key on a financial calculator, or enter your T4/T5 numbers into a T1 program, you will get the same answer each time you submit the same data.

Not so with the financial planning projection. There is a plethora of web calculators, spreadsheets, etc, each of which cover some aspect of the financial planning problem. They are all different (different coding, different levels of accuracy, etc) and for that reason we are confused and disappointed with the process, so we delegate it to a planner. 

The problem is that the planner hasn't got an accurate or complete handle on our financial information... how our salary/pension might unfold over time, loans, non-financial info such as a future plan to say, downsize our home or sell our business, capital we might have in other financial institutions we haven't told him about, or our desire to ensure an estate to pass on,... most of the data required to source a comprehensive financial plan is locked in our own knowledge base, not in our adviser's.

Consistency is knowing you can enter the same data set (including tax based data) into a single program/process and obtain exactly the same results each time. After all, the rules (compound interest, inflation, CPP/OAS/GIS, taxation, RRIF and LIF minimums and maximums...) are all stipulated and cast in stone, so why shouldn't there be a single consistent result?

Granted, there needs to be some general rules... such as to always max/invest in your RRSP first, draw down your non-rrsp capital first.... but once the main parameters (rates, inflation, etc), are set, then there is nothing to prevent the same consistency you would get from using say, a QuickTax, TaxWiz or CanTax to prepare your T1.

Just my two cents.


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## SlightlyMad

DIY financial planning: No model of retirement fits everyone; this isn't a condom. Would you want a 200 question survey regarding your financial desires and dreams to ensure that it encompassed all possible outcomes? Even then, it probably misses some subtle cases about remitances to families living overseas, and other complicated issues (how does it deal with my second versus third wife) ... 

One can do their best job, become educated on the rules and regulations, understand the math cold, do their best job in modeling the Monte Carlo simulation of how investment results have worked over time, generate the list of probable outcomes, and *still* be 3-4 standard deviations off from where they expect to be. For example, I've only modeled four outcomes and have used no stochastic methods for fluctuating investment returns (sd = 0, for now, in my model), even after the huge downturn, and it's a nice feeling to know that the *average* consistent return will yield a comfortable retirement. And the longer I continue to work (I am findependent), the more fun retirement will be. But I still feel vaguely uneasy about having returns that lie in the -2SD range for a significant period of time, and what that means for when I start eating cat food. 

So, even I go to my CFP to talk this stuff over and generate more parameters for my personal model, which has made a zillion assumptions about my lifestyle and choices. And for people who are not whizzes with numbers/computers, how the hell are you ever going to expect them to come up with a model that predicts this stuff?

A lot of people in earlier generations didn't have this problem because they had really good pension plans, some social security and saved for a rainy day and had lower life expectancies. My grandparents had a *LOT* of money saved for the end game, and they lived in comfort before they passed away. My parents and inlaws are also sitting quite comfortably, but with knowing the length of their potential survival, I can see that this downturn has scared them a bit as to how the money might run out.

Generation X is the first generation that will have longer to live and a lot less to live on, and the assumption that "everything will work out all right in the end" for us isn't necessarily true as demographics change and policies that we take as for granted may not be there in 30 years. I know there is a high probability that I'll be okay, but I keep hanging around here (and educating myself on financial planning) to remove the lingering doubts.


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## leslie

I don't think there has been any poster in this thread that assumed "*everything will work out all right in the end*". All of us, in our different ways, have said to expect bad things to happen and be prepared.


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## steve41

A financial plan is not cast in stone, it is a continual exercise. Retirement age, rate expectations, to sell the cottage or not, leave an estate or not..... these are revisited every time something significant (external or internal) happens. As for 200 questions, I don't know about that many variables, but surely a dozen or so would not be that onerous. This is, after all, your future... are you going to be drinking imported beer, no-name beer, or no beer at all. Granted, when you are just starting out, DIY planning doesn't seem that important... you are busy raising kids, building a career, buying a house. My observation is that the mid-to-late career individuals engage in this stuff mostly.

Financial planning... tailoring your lifestyle as it is influenced by non-investment elements... tax, loans, real estate, salary/pension, CPP/OAS... is best done by you alone, at your leisure. Investment planning, depending how much you follow/understand the markets and risk, may best be farmed out to an investment adviser.


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## Maple_Leaf

*Maximum sustainable lifestyle*



steve41 said:


> What I can't figure out is that years ago, before investments were taxed and there was no CPP nor OAS, Some individuals actually used compound interest tables to get a handle on how much they should be saving, and, if they saved at a particular rate, how much retirement income they might derive from those savings. People actually did that, believe it or not. Markets were uncertain then as now, and yet they still muddled through using future value, sinking fund and annuity tables.
> 
> Nowadays, it seems that people don't plan... they leave it to their "financial adviser". They seem to have relinquished any thought of doing
> it themselves. Granted, things are a bit more complicated... those simple compound interest tables have become unusable... tax has become a much more complex issue with RRSP tax deductions, tax on investment growth of non-reg capital, the discontinuous effect of entitlement income, loan interest deductibility, etc... but, nothing has changed in the sense that rates of interest/market growth are as unpredictable as ever.
> 
> Why do we seem to be avoiding DIY financial planning... a simple schedule of savings and withdrawals based on an estimation of rates so as to ensure a smooth, sustainable lifestyle out to a certain age? said he rhetorically.


Steve41, your posts resonate with me. For the last couple of years I have been planning my required savings for a maximum sustainable lifestyle. Basically, income can either be consumed now or saved for later consumption. My approach has been, on an annual basis, to estimate how much to save in order to maximize my consumption yet minimize its variability over time, since I don't like big changes in lifestyle from year to year. In other words plan for the highest sustainable lifestyle over a lifetime.

Similarly, a retiree would be interested in estimating how much to withdraw from savings annually in order to maximize consumption yet minimize its variability over time. Isn't this the fundamental financial planning question? Once you know the answer you move on to budgeting your "operational" expenses and investment planning for your "capital" expenditures.


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## 411guy

steve41 said:


> A financial plan is not cast in stone, it is a continual exercise. Retirement age, rate expectations, to sell the cottage or not, leave an estate or not..... these are revisited every time something significant (external or internal) happens. As for 200 questions, I don't know about that many variables, but surely a dozen or so would not be that onerous. This is, after all, your future... are you going to be drinking imported beer, no-name beer, or no beer at all. Granted, when you are just starting out, DIY planning doesn't seem that important... you are busy raising kids, building a career, buying a house. My observation is that the mid-to-late career individuals engage in this stuff mostly.
> 
> Financial planning... tailoring your lifestyle as it is influenced by non-investment elements... tax, loans, real estate, salary/pension, CPP/OAS... is best done by you alone, at your leisure. Investment planning, depending how much you follow/understand the markets and risk, may best be farmed out to an investment adviser.


You have articulated effectively what I believe. I am a late career individual and have started seriously planning for my retirement (as opposed to following conventional wisdom) within the last 5 years. 

I have crafted my financial plan (not cast in stone), but I do have an investment adviser. My relationship with my adviser is defined by: "trust, but confirm". His value comes with his organization's investment research resources and his experience dealing with retired clients, thus understanding on a practical level what works and what doesn't.

I do also now read lots of retirement documents ("Unveiling the Retirement Myth" being one of them) and ask questions on forums like this one. This way, I consider other perspectives and not only my adviser's perspective. The journey is ongoing......


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## refutor

steve41 said:


> ...
> 
> or before your loan is paid off...
> 
> ...


for anyone who is retiring in the next 10 years...do not have any debt when you go on a fixed income...my parents are retiring in the next 10 years and like others have said, having debt throws all those graphs and expectations off. if you didn't like being on a budget when you were working, you definitely won't like it once there isn't a paycheque coming in every 2 weeks. cut out the debt now!


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## cannon_fodder

I was speaking with a young gentleman (late 20's) at work the other day. I fear his attitude towards retirement planning is all too common.

We were lamenting the fact that, in spite of our company showing an increase in net income (i.e. we are actually profitable), no one would be getting a raise for the foreseeable future.

Through our discussion I discovered he was not receiving free money from our company. Our employer will contribute 3% of your compensation (salary + bonuses + commissions) to a company-sponsored defined contribution plan. You don't even have to opt in for that one I believe. In addition, you can contribute even more and the company will match the first 2% of your compensation.

Thus, if you put in 2%, the company kicks in another 5%. But, you have to go through the onerous task of signing a document in order to get hundreds (or even thousands) of dollars in RRSP contributions for free each and every year.

Where else can you get a guaranteed 100% return on your after tax money?


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## sprocket1200

no debt and missing the free money? people are still missing these? let me guess, real estate is going to take care of all my dreams. it has to, i saw it on tv!! (do people still have those?)


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## cannon_fodder

sprocket1200 said:


> no debt and missing the free money? people are still missing these? let me guess, real estate is going to take care of all my dreams. it has to, i saw it on tv!! (do people still have those?)


No - he still lives at home with his mother...


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## cannon_fodder

steve41 said:


> I would handle that using the _'under the mattress'_ method... setting the entire rate vector to zero. A 51 yr old earning 90K, retiring at 65, with a 100K loan (6%, 10 year) and 200K in his "mattress RRSP" will see a $29,208 'die-broke-at-95' ATI. (Taxed in BC, 2% inflation, full OAS, CPP at 65)
> 
> At a 6% rate, the ATI/BQ is $45,257. Hmmm... I wonder, is the 16K extra beer and groceries worth the agro?


Steve,

I must not be seeing all of the details. Just in my head, if a BC individual retires at 65 with full CPP and OAS (about $18,500) and $200k in an RRSP that doesn't grow at all and inflation is 2% his RRSP will be depleted in less than 20 years if he needs $29k ATI. 

Am I missing something?


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## cannon_fodder

There has been a lot of debate in this thread about how much assets you need or how fast you can withdraw down when hitting retirement.

What I am interested in is what people are projecting for their required ATI upon retirement in today's dollars.

I'm working with $42k ATI for my wife and I consisting of:

Housing
..........Property Tax.................................................$3,600
..........Insurance.....................................................$500
..........Improvements/Maintenance/Furniture, etc..........$2,800

Auto
..........Gasoline.......................................................$2,500
..........Insurance.....................................................$1,200
..........Maintenance.................................................$1,800
.........."Replacement Car Fund"..................................$3,600

Utilities/Telco
..........Internet/Cable...............................................$1,800
..........Cellphones....................................................$1,000
..........Water Tank Rental..........................................$250
..........NatGas/Water/Hydro.......................................$3,000

Entertainment/Leisure
..........Vacation......................................................$6,000
..........Movies/Restaurants/Theatre............................$1,800
..........Gifts............................................................$2,000

Essentials
..........Food...........................................................$3,600
..........Clothes........................................................$1,200
..........Toiletries/Cleaning Supplies..............................$600
..........Hair/Makeup..................................................$900
..........Charitable Giving............................................$500

I then added 10% to be safe since there might be items I've forgotten or surprises that could occur.

We are planning to be debt free and live in Canada (perhaps BC as opposed to Ontario where we've been for most of our lives).

I'd be interested in any areas I've completely forgotten or understated and what you are using for your income requirements.


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## steve41

Sorry, all I did was run those parameters under a 6% rate assumption and a 0% rate assumption. I lost the original file, so I recreated it using those same numbers. Here are the two stripped down plans as a 2 page pdf.... worth the agro? It essentially says that putting all your retirement nest egg 'under your mattress' delivers a $29K lifestyle whereas a 6% market return would deliver a $45K lifestyle.


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## Sampson

cannon_fodder said:


> What I am interested in is what people are projecting for their required ATI upon retirement in today's dollars.


Thanks c_f for putting that all on paper. I came up with very similar numbers based on similar categories ($40k). Funny though, I've always thought we would push for double the income ($80k), and it really gets me wondering again, is that necessary.

What I personally don't have a good grasp on yet is lifestyle inflation. Its started to creep into our live a little this past year due to some good salary increases.

Best luck in reaching the dream!


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## cannon_fodder

steve41 said:


> Sorry, all I did was run those parameters under a 6% rate assumption and a 0% rate assumption. I lost the original file, so I recreated it using those same numbers. Here are the two stripped down plans as a 2 page pdf.... worth the agro? It essentially says that putting all your retirement nest egg 'under your mattress' delivers a $29K lifestyle whereas a 6% market return would deliver a $45K lifestyle.


Ok... there were some important details not present in the original post to figure out what was happening. Now I see with the pdf file you referenced.


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## Racer

This thread was beyond me. I read the posts, watched the FP video, and plan to follow a number of the links this week. And I'll try getting a copy of Unveiling the Retirement Myth.

Leslie's plan --

_ Instead you should be doing WHAT YOU CAN every day of your life. 
* Don't save 'what your plan says you should save'. Save whatever you can. 
* Don't invest in safe (lower return) investments because your plan says you don't need your portfolio to grow. Invest in whatever you think will earn you the highest return (within your volatility tolerance).
* Don't spend $$ in retirement the magic number someone quoted. Spend what your investments earn - after reinvesting inflation and putting $$ aside for year's of poor returns._

sounds exhausting. Save whatever I can, forever? Come on. I'm a hard worker, but I need hopes and goals to motivate me. And the thought of anxiously logging on to my online discount brokerage in 2050 with rheumatic joints and failing eyesight is ludicrous. I think that Old Me would curse Young Me for not figuring out a g**d*** magic number or buying an annuity. 

I think I am following what steve41 is saying. That approach sounds kind of exciting actually. He offers a sophisticated magic number, to net zero or to net a certain legacy, based on predicted behaviors. The advantage of figuring out that magic number (and then adding a big fat safety cushion) is that I could then get back to the business of doing what I AM truly good at. 

I think I have to re-read this thread...again.


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