For most Canadians the idea of a financial planner is synonymous with having an investment portfolio. When considering a financial plan from a financial planner, questions are usually limited to: What’s the rate of return you can provide, and what are your fees?
Now while it’s true that generally speaking, the higher the rate of return, the better, and the lower the fee, the better, your conversations about your finances shouldn’t start and end with your investment portfolio. Instead, your investment portfolio should really be viewed as a means to an end—as a way to help you implement your overall financial plan.
When Canadians think of a “financial plan,” the first question they have is almost always: how much do I need to retire?
To answer this question, there are a few ways to look at this:
1. How many years will the money last if you are earning, let’s say, 6% annually on your portfolio?
2. How much money do you need for a 30-Year Retirement?
So in a vacuum, here’s your answer to the two simplistic retirement questions.
How long will your money last?
Assuming a 3% real rate of return (or 6% minus a 3% increase in the cost of living), Table 10.1 will give you a rough idea.
A portfolio of $4,000,000 with a 6% return would pay out $200,000/year in cash flow and will last a little over 30 years.
Not coincidentally, a $3,000,000 portfolio at 6% return would pay out $150,000/year in cash flow and will last a little over 30 years.
As you may be able to intuit, there’s a simple rule about how long a portfolio will last. This simple rule is that with a return that’s 3% above inflation, you can withdraw 5% of your total portfolio value to last 30 years.
How Many Years Will the Money Last?
How much money do you need for a 30-Year Retirement?
Real spending factors in inflation by increasing the withdrawals by 3% each year.
How Much do I Need for a 30-Year Retirement?
While the above two equations are interesting to note, I would not recommend using these formulas as a backbone to your plans. I would only use them as a very rough idea.
Why are these only rough guidelines to your financial plans for retirement?
- Your investment risk tolerance may not be static throughout the years.
- You need to examine sequence of returns risk, as returns are not the same every year (that is, even if you get the same long-term rate of return, the order or sequence in which you obtain the returns will impact how long your funds will last once you start making withdrawals).
- It is prudent to factor in all the tax implications on all accounts from taxes on withdrawals as a characteristic of returns.
- Additionally, tax laws, tax rates and government benefits constantly change.
Finally, the problem with ‘How much money do you need for a 30-Year Retirement?’ is you really shouldn’t be picking your life horizon in advance!
While mortality tables will tell you that there is a 50% chance a 65-year-old lives to 85 and an 11.5% chance a 65-year-old lives to 95, life is random and I wouldn’t build a plan this way.
When working with a financial planner, your written financial plan – and when I say “financial plan,” I don’t mean an Excel spreadsheet — should capture all that we have discussed in this book and more.
I personally think these are the “top questions” you should be researching, contemplating, and finding answers to as you think about your finances, your financial plan, and the value proposition of your financial advisor/planner:
- What occurred in the latest federal and provincial budgets that may affect my situation?
- What are your views on future potential upcoming changes?
- Do you have access to tax-efficient Structured Flow-Thru Shares?
- Is my dividend and salary mix appropriate given my situation?
- Are my insurance needs covered—both wealth insurance and risk insurance?
- Are my wealth needs covered?
- Will you be my advisor over the next 20 years or will it be your associate?
- Is my investment portfolio tax-efficient?
- Do I have access to pension fund assets that many banks and insurance companies do not have such as Space X and Neuralink?
- What is my risk tolerance this year? What was my risk tolerance last year?
- What has been my historical rate of return? What is my projected rate of return?
- What are my fees, how do they compare to the industry and are there other options?
- Are there upcoming thresholds to lower fees or any consolidation of account benefits?
- Are my fees tax-efficient?
- What is my strategic asset allocation? Does my portfolio need to be rebalanced?
- What is my asset location and is it appropriate?
- What are my RRSP, TFSA, Non-Reg and Corporate portfolios forecast to be worth at my retirement at the current savings rate? What about projected estate value?
- What’s my debt situation and are there any opportunities to turn “bad debt” into “good debt”?
- Is there an opportunity to use debt to my advantage given my ability and willingness to do so?
- Am I making full use of all the trust structures available?
- Is there open communication between my financial planner(s), accountant(s) and lawyer(s)?
- Is my estate plan efficient from a protection standpoint?
- Is my estate plan efficient from a tax standpoint?
- Do I need to update my Primary and Secondary Will?
