I stated that there will be couples who save 10%-15% of their income and invest it slowly and conservatively and will enjoy a successful retirement – and there will be others who will not be successful. You implied that you felt it would not be successful at all.

Notice that I only used 10% of savings, not 15%. So, I took the more conservative approach.

I also don’t think Kathryn, nor most people, consider principal payments in their house as part of investing 10%-15% of their income. The 10%-15% would go into things like the RRSP and TFSA and non-registered portfolio or even additional real estate. Thus, I don’t consider it ‘cheating’ but perhaps I’ve misread others statements on this.

Whether or not you believe that the government programs will be intact when you retire 35 years from now for your entire retirement has no bearing on a couple retiring tomorrow. From what I’ve gathered, the CPP is in good shape but there is some lack of confidence in the OAS. What would you say to a couple beginning retirement on January 1, 2010? Would you be able to support an argument that the government programs will fail them in 10 years? 20? 30?

I also implied that just because you have high incomes does not mean you need high retirement incomes in order to enjoy retirement. People who are used to living off a low percentage of their take home pay will find it easy to transition to a lifestyle where their basic needs are covered and a few ‘luxury’ items/activities are budgeted for.

My limited experience with people who have retired is that if they didn’t travel a lot when they were in good health and could afford it, they don’t change that behaviour when they are retired. As we get older, change seems to elicit different emotional responses – exciting, necessary, irritating, fear.

I honestly don’t know of anyone who substantially increased their lifestyle spending upon retirement – all of them have seen it come down and in some cases, quite drastically (as a result of poor planning). They had the ability to fund an accommodating retirement, but they didn’t execute what they needed to do. There is a big distinction.

So, some people may need 80% of their preretirement incomes while some people will need much less. I project my wife and I will need only 40% and that still will cover multiple vacations every year and a new car every 10 years.

As for the impact of inflation, one hopes that indexed government programs will not be adversely affected. And, if one positions their retirement portfolio to insulate somewhat from the rise and fall of inflation, this could become less of a concern. Some people suggest drawing down from that part of the portfolio which has risen the most, and others have recommended taking extra growth from a good year and putting it away into a TFSA and invest it into some investment vehicle that has lagged during the year.

All in all, I stand by the assertion that there will be many people (not necessarily most) that will enjoy a comfortable retirement after saving ‘only’ 10% of their income and invest it smartly, conservatively and consistently, I would wager that the percentage of retired Canadians who have done this is quite small. This may be due to a higher percentage in the past who relied on defined benefit pension plans along with government programs. Since DBPs are becoming more the exception than the rule, and with increased coverage over taking control of one’s retirement destiny, there should be growing empirical evidence to test this theory.

I would counter that you never actually showed any math on the drawdown phase.

You’re right I didn’t. The draw-down phase has a couple of very dicey problems that make the math difficult:

1. Earnings stability: our models are currently relying on a stable interest rate above inflation. But this isn’t what happens, and it’s not what’s happening. In your model the couple is hosed if they only beat inflation by 1% (instead of 3%). A five-year drought followed by a couple of good years will make the good years “worse” b/c the capital base will be smaller.

2. Post-retirement requirements: assuming that a couple only needs 80% is still a dicey guess. That only works if you assume that the retiree(s) are “happy” with their current set of hobbies and pastimes, at their current levels. If you want more from retirement, that’s going to be tough. I mean, if could only afford a 2-week vacation every year at 64, you’re not magically going to hit 65 and be able to take 6-month vacations like the 2-week vacations you used to take. If you had a hobby you really wanted to pursue (like golf or carpentry) and you couldn’t afford the gear while bringing in a salary, you’re not magically going to be able to afford it now that you’re only bringing 80%.

Is the “retirement dream” to live like you did when you were working? Don’t we want to do the things we never had the time / money to really do?

3. Government programs: talking about the draw-down phase for the “average” couple requires some extensive assumptions about the status of government-funded programs. Frankly, I’m pretty sure that I will not have similar retirement benefits when I hit 65 in 35+ years. In fact, I’m pretty sure that the age will be 72 or 75 by the time I get there.

Your example assumed that well over 50% of the income was going to come from these government programs.

4. Home Equity: Note that we haven’t included any consideration for owning one’s residence….

This is kind of cheating here, if you’re saving 10% and you’re putting equity into your home, then you’re effectively saving more than 10%.

You also have to balance the value of the home against the inherent depreciation of the home. If you reverse-mortgage the home, you also have to somehow maintain the value of the home. So you’re pulling money out, you only get to keep money that doesn’t go towards repairs or taxes. 30 years is a lot of home repairs in Canadian winters.

30 years represents (US numbers):
- 1.5 decks
- 1 set of vinyl or screen doors
- 2ish sets of electrical accessories
- 2 sets of kitchen faucets
- 1.5 sets of shower doors
- 1 set of linoleum floors or 3 sets of carpets
- 1 set of Softwood, hardboard, and plywood
- 0.5 sets of OSB / particleboard
- 2 sets of furnaces / AC / heat pumps
- 2 garage door openers
- 2+ sets of paints, caulks adhesives
- 1+ set of shingles
- 2 sets of the common appliances (fridge, range, washers, dryer, etc)

What’s more is that your ability to leverage your free time and complete these repairs will be drastically reduced if you hit 80 and are no longer able to say, lay your own carpet.

5. Post-retirement income: part of “retirement” concept often assumes that we do “nothing of value” with most of our time. Of course, retired people can do lots of valuable things with their time, things that are actually worth money.

My 77-year old grand-father does handyman work at his retirement home. (15 years after his quad-bypass heart surgery) Until their late 60s, he and his wife maintained a large garden and did lots of canning. My retired step-mother is writing a book fit to publish. My “semi-retired” mother is traveling to South America to teach English and computer skills. Not only does she get paid, she also drops her cost of living dramatically.

How many elderly Wal-Mart greeters need the money? How many planned to be greeters?

If you add this all up, I think it’s easy to see that the “drawdown phase” is ridiculously difficult to work math for. (not saying it can’t be done, but it’s probably way more than a blog comment :)

There’s an AARP article analyzing some of the complications. (It’s worse in the US where you have to cover healthcare after retirement)
“Many Americans envision a retirement where their lifestyle continues much as before…Our work shows that this is often not a realistic expectation… many retirees will have to cut back far more on expenditures than they expected.”

““the agonizing issue… is that many have to save more, spend less and work longer before they retire.”

I like your concept of using Work Year Income to make the point about saving 10% of income every year will not be enough.

I would counter that you never actually showed any math on the drawdown phase. In my mind, there will be many scenarios in which this will be enough… and there will be many scenarios where it won’t.

For high income couples they may see a retirement where they only need 40% of their preretirement incomes (my wife and I fall into that category). For low income couples, they may need closer to 80%.

However, if we factor in full OAS and only the average CPP payout for each spouse (http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml) we’d find that the couple receives about $24.5K combined and that is pretty much tax free. That low income couple who have only been earning about 55% of the YMPE (based on the average CPP payout) have been taking home about $42k combined (after taxes, CPP and EI contributions). If they need only 80% of their preretirement take home income, they would need an additional $9k (which is almost tax free) from an RRSP, TFSA, Non-registered portfolio, annuity, etc.

Do you know what 3% growth x (7.7 x work year income of $42k) is? It’s $9k (plus another $700).

So, for couples, it seems possible that the 10% of after tax income invested over the long term at appropriate risk levels CAN be a successful strategy. It would be more difficult for an individual.

Note that we haven’t included any consideration for owning one’s residence and the ability to tap into the equity well into the retirement drawdown phase. This may, or may not, be another option to ensure a comfortable living.

Regarding limiting beliefs, I don’t believe in #2 nor #3. While I don’t share details regarding income or networth with anyone other than my wife, I do think that talking about it helps to empower and encourage one towards financial intelligence.

And, if I took the point of view that the more I have, the less someone else has, then the opposite would be true – and it isn’t. If the poverty rate in Canada started to climb alarmingly, it would seem to me that not only would I not gain in the process, but in fact that I would lose out simply because the economy would suffer greatly taking almost all down with it.

Net worth can be quantified – self worth can not (at least easily). There are many people in the world with 100 or even 1,000 times my net worth. I think that the number of people who are worth 100 or 1,000 times more to the human race than I am is a much, much smaller number.

Some simple examples of limiting beliefs:
@Krista: Unfortunately, there are a limited number of resouces in the world.

This comment is obviously dependent on how you define “limited” and “resources”. Sure there is some finite amount of sunlight (for example), but we’re definitely not using all of it. Yes there’s a limited amount of silicon in the world, but we’re getting a lot more mileage out of that silicon today than previously.Is there a limit to the number of books we could write or blog posts we could make? Probably, but for all intents and purposes it’s pretty much unlimited right now.

Your concept of “limited resources” assumes that all of the value we generate comes from the hoarding of resources. In reality most of the value we create comes from the harnessing of resources.

@Kathryn: “Debt hinders cash flow”

By its very definition debt actually increases cash flow.

In fact, debt forms the basis of wealth growth for the vast majority of the world’s wealthy. Basically every wealthy person you’ve ever heard of has as some point taken on debt to increase their cash flow and to make more money. Taking on debt is the basis of the entire stock market. Debt pays for infrastructure and government projects, hospitals, roads, schools are all debt spending.

The problem here is that you’re equating “debt” with “money spent on capital losses”. The problem here is not “debt”, the problem is “debt spent on non-generating resources”.

@Kathryn: “The miracle of compound interest makes mathematical sense.”

Really? If Jesus had invested 1.00 in year 1 at a measly compounding rate of 3% he would have $47,255,178,755,828,605,388,683,227 which is more than the total current GDP of the world.

But toy examples aside:…
Saving 10-15% of your income invested for long term growth slowing and incrementally over your working years may be the boring path to financial success but it works.

Are you sure about that? Does the math really support your statement?

Let’s ignore inflation and measure everything in “work-years” (WY). If you save 10% of your income over 40 years, you will have saved 4 WY. That’s not going to get you from 65 to 95.

So you’ll obviously need interest to make this happen. Let’s assume that you make 3% interest above inflation, every year like clock-work. You still only have 7.7 WY. And 3% interest above inflation is very good. The US actually has bonds that are protected against inflation (TIPS). Since their 2003 inception, the 20-year bond has never yielded 3%.

So not only does 3% only get you 7.7 WY of savings after 40 years. We already need to invest outside of government bonds just to make that number. So we’re already outside the realm of “boring”.

Now don’t get me wrong, I have money in RRSPs (and 401k). And I think that it would be prudent for everyone under 70 to look at saving 10-15%. But I maintain no illusions that my 10% is going to get the “Freedom 55″ retirement plan. In fact, I love what I do and am planning, at best, a “retirement” involving less work hours.

To rephrase that for clarity: I’m saving 10-15% of my income with no intention intention of stopping work. Working until you die is not the common definition for “financial success”… so we may need to at least temper your above qualifications.

@Kathryn: “2. Spend less than you make.”

I’ve taken to phrasing this as earn more than you spend. It’s a whole “cart-horse” thing, but it’s empowering instead of restrictive.

@Kathryn: “3. Paying yourself first and automatically makes saving nearly effortless.

What exactly is “pay yourself first”? Are we talking about saving for personal goals (“I want a new tennis racquet”) or security goals (emergency fund) or investment goals (money for university) or paying your bills or all of these?

As a person who’s pushed the “automatic” button too far or tried to save too much, i can also argue with the “effortless” portion of that comment. If you’ve never saved money, and then start automatically saving money, you are going to wreck your existing lifestyle. If you already don’t have a large enough income, then automatic savings and “paying yourself first” are going to leave you with month at the end of your money.

Don’t get me wrong, I use automatic methods of saving. But “automatic” is a tool not a truth. And unless you’re already “wasting” lots of money, “paying yourself first” is rarely “effortless”.

——

So there’s my little rant,

I think I’ve laid out arguments against even the “things I know”. And I’m definitely open to hearing counters and objections.

In fact, when it comes to the 10-15% savings rule I’m ready to have an all-out spreadsheet / modelling war :)

Again though, while this approach can enhance cash flow you need to know what you are doing to be successful at it.

Each person will have their own truths and limiting beliefs.

Thanks for sharing many of yours here. I’m surprised at how many others related to #3. I thought I was alone on this one.

I have similar “truths” for my financial beliefs:

1) Live within your means
2) Pay yourself
3) Reduce debt

Do items 1, 2 and 3, in any order, and you’ll be fine.

You can always change/alter the scale of these 3 truths to fit your means, ie., pay down more debt than you pay yourself; live lower and reduce more debt; but in the end – believe and live all 3 truths and you’ll be fine….

Cheers!

Regarding limiting belief #3, I struggle with this one a lot. The better we do financially, the guiltier I feel about the uneven distribution of wealth and resources in the world.

It is purely by chance that I was born into a society which has abundant opportunities for me to realize my potential and ambitions. So many people are born into circumstances that limit their ability to prosper.

I often wonder if one person’s gains come at another person’s loss.

It is always the conclusion from this showdown that will motivate someone to take action or not.

Big fan of NLP and how it relates to money management.

Maiku: There is a great book by Jack Canfield called The Success Principles. His approach to changing ones limiting beliefs is one of the best I’ve heard. It comes down to:

1) Recognize your limiting belief.
2) Challenge it by reversing it and making fun of it.
3) Create a new written / spoken belief that states what you want to believe.

It’s full of some great examples. If you’re looking it up it’s principal 56 of 64.

Great post. I have thought about this before but I liked your mention of #3 in particular. This one has always got me as well since I my parents impressed upon me at a young age that we were borderline poverty (I’m not sure it was entirely true but I can understand the reasoning behind saying it like that). So I grew up with a semi-dislike for the well off (I wanted to be like them but disliked them for having everything easier).

So now that I am older I have tried a couple of times to start up businesses but I have never actually implemented. The reason is that I try to come up with ideas that will help everyone (like educational software etc.) but then scold myself for not being able to offer it for free (so that people like my younger self would have the same opportunities as others). That one thought is really a show stopper!

So yes, I can attest to the power of “negative” thoughts about money. Do you have suggestions on changing one’s beliefs?

one of my limiting beliefs that my parents and cultural background instilled in me is that money equates personal self worth/esteem. the more money you make, the more successful you are. this has been a serious serious struggle for me going thru university, my 20’s and now into my early 30’s. given that i am not wealthy, i don’t earn alot but still convincing myself that i’m a worthwhile person, that success is not measured in the job you have or the salary you earn.

for me this ties into the “talking about money”. majority of my social circle are of the same background with parents that immigrated here and that taught us the same values. i find we are all walking this delicate balance of what to disclose and what not to disclose about our personal financial situations. i recently had a friend disclose how much of their mortgage they paid off in a short amount of time which obviously speaks indirectly to their salaries (it’s not 100% savings and being frugal). am i happy they are well off or am i resentful they are making me feel inadequate.

i see a very distinctly different view on money and talking about money based on cultural upbringing or background. i would like to see a post on this in the future!

I agree with Observer as well and I think it is commendable that you are open minded enough to reexamine your beliefs.

Personally, I think that we all have our own comfort zone when it comes to our financial game. If the average person followed your advice listed in the first 4 points they would do better than most people.

Then again, instead of point #4, some people may want to enhance cash flow by taking advantage of good debt (debt used for investment purposes) to step up their journey. One point here though. You absolutely must know what you are doing when using leverage or you can lose a lot of sleep and money.