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Personal Financial Planning

Financial planning specialist: Don Nilson

The popular business press regularly runs articles about the dire straits of Canadians’ financial affairs. Recent examples include the following:

• 62% of those surveyed who seek to retire by age 60 expect they will need to work beyond that age
• 15% of retired people continue to work; one third of those for financial reasons
• 21% have not commenced to put aside for retirement and 51% have put aside less than $30,000
• Canadian household savings rates have declined to 1% of personal income
• Household debt averages 100% of personal disposable income
• In BC, housing costs (including mortgage payments, property taxes and utilities) equal 40% of pre-tax household income. In Vancouver, that statistic is 47%. The average for Canada is 31%.
• 72% of Canadians do not work under a “financial plan”, even though 48% utilize financial advisors

Are these articles scare-mongering? Or realistic wake-up calls?

Ten years ago, we developed and promoted a comprehensive program that included “retirement forecasting”. By this, we mean an exercise of gathering information on one’s assets, debts, earning capacity, spending habits and inheritance expectations, and then, with the aid of computer programming and a set of assumptions, gazing into the crystal ball to see where one would end up in, say, 30 years.

In its simplest form, the question in retirement forecasting is: Will I have enough? However, many more pertinent questions can be answered, too, like:

• Can I indeed retire early?
• What savings rate do we need through the remainder of our working lives?
• Is my investment risk profile too conservative for where I need to get to? Too aggressive for my loss of sleep and what I will require?
• Can we afford to help our children and still have enough for ourselves later?
• What if I will require expensive health care support in later years?
• Can I afford to support my charities as I would like?
• Can we keep our home?
• How much can we leave the children and still enjoy life?
• Can we “live it up” in early retirement while we still have our health?

Nick Murray, a senior New York financial advisor who has written several books and appears on the speaker circuit says that development of your financial plan needs to start with two simple questions: Who do you love? & What do you love to do? The answers to these seemingly trivial questions will answer the more important question: What is the money for? When you have the answer to that question, you will know better how much money you will need to accumulate and how it should be managed.

A large income and large savings pot doesn't guarantee a rosy outcome, any more than a low income and small savings foreshadows doom and gloom. Why? One’s lifestyle expectation has a lot to do with it, of course. Interlaced with that is one’s propensity to spend unwisely. We have reviewed several books with huge potential impact on your view towards spending money. These articles can be found in our Book Reviews section.

Ten years ago, the market response to our retirement forecasting program was under-whelming, to say the least. One client was interested… and thought that the information should be free of cost. Program shelved!

It is ten years later now and, surprise, everyone is ten years older and ten years closer to retirement. We have resurrected this program and found that many people are now interested in learning how their dollars today will stretch to tomorrow. Each assignment has been very interesting and different from the others:

• We had one situation which looked precarious; however, with a prudent life style, comfortable retirement was possible
• We had another situation where the individual desperately sought immediate retirement. Given the modest lifestyle expectation, the retirement forecast determined it was do-able
• We had another situation where one party in the couple desperately wished to retire early. The retirement forecast, however, didn't look good, particularly given the propensity to longevity on both sides of the family. But one more year at the grindstone extrapolated out to make a significant difference thirty years hence. How could this be? Well, one more year working was double edged: it meant one more year of contributing to saving and one less year of drawing on savings. And 365 ticks happily were marked off on the wall calendar
• We had a couple who had worked hard for twenty years and raised wonderful children, but at age 40, there wasn't much put aside for retirement. The retirement forecast showed what the rewards would be from a committed savings plan. Suddenly, what seemed daunting and hopeless, was do-able—$85,000 was amassed in five years!