If you ask me the biggest benefit you can achieve through financial planning is peace of mind.
For those contemplating retirement, this could mean knowing when you will realistically be able to retire, and knowing what sort of lifestyle you can reasonably expect to enjoy based on what you have saved.
For those in retirement, peace of mind comes from knowing that you have done everything you need to do, and all that is left is to enjoy — no worries!
To get to this point, there are many questions that need to be answered, such as: how much will I receive in government benefits and pensions? How much will I need to earn on my investments? What about inflation? What about taxes? And for some the question of what will happen to my money after I am gone?
Clearly technology alone will not ensure your financial peace of mind. A lot is still up to you. But it can help, in terms of telling you what you need to do to achieve financial peace of mind, or what sort of lifestyle you can enjoy based on your resources. In fact it can do this with impressive accuracy when incorporated into the financial planning process.
Allow me to illustrate by example. A working couple recently informed me that they were considering retiring, but were unsure of whether they were able to. They felt reasonably secure, but had no way of knowing for sure if they had enough to provide the type of retirement they envisioned without the risk of running out of money.
We scheduled an appointment to begin the process.
The first step was to gather all of their information and input it into my favorite financial planning program. This included: pension information, including indexing, bridge, and survivor benefits; government benefits they would receive; other financial assets including RRSPs, TFSAs, and non-registered investments, as well as retained earnings in a private company.
The next step was to establish a retirement budget. This involved an estimate of what their monthly expenditures would be, annual vacation costs, and estimated future lump sum expenditures (i.e. new vehicle, financial assistance to children, etc).
Now that the computer had all the information, all that was left was to make some assumptions. Specifically we needed to choose an assumed rate of return on investments, an inflation rate, as well as how long they would need income for.
For all three the computer was again helpful, as it provided up-to-date mortality tables, as well as decades of historical data on rates of return and inflation.
For starters, we looked at mortality tables that indicated life expectancy of 80 for males and 84 for females of their attained ages. This equated to about 24 years of required income, which we rounded up to 30 to be safe.
Inflation was fairly straight forward. We simply took the historic average of 3% and based our calculations on the assumption that their required income would increase by that amount every year.
The assumed rate of return was more complex, but at the same time enlightening. The program allowed us to customize whatever asset mix we saw fit, and look at not only what we could expect in the way of returns, but also how likely it would be to achieve a given rate of return. We began with an asset mix of 60% fixed income and 40% Canadian equities, which posted an average annual rate of return since 1924 of 8%. But to be safe, we also looked at rolling 30-year periods. As it turned out the worst 30 year period between 1924 and today (for our chosen asset mix) was from 1929 to 1956. During this 30 year period our chosen asset mix achieved an annual rate of return of 5.7%. We assumed some fees and again averaged down to be conservative and agreed on an assumed rate of 4% – a rate that is achievable with little risk – even in today’s low interest rate environment.
All that was left to do was to click on the results page, and there it was – in full colour. Based on our conservative assumptions there was enough to fund their retirement with full indexing. They both smiled.
It didn’t stop there. The results page allowed us to change any of the variables and provided an updated assessment. Interestingly, earning a higher interest rate did not make a huge difference. In fact all it really did was increase the size of the estate. On that basis we decided to construct a conservative investment portfolio that would have a high probability of success.
There was still much to be done. We would need to construct a suitable portfolio to maximize returns without incurring excessive risk. There was tax planning with respect to their private company and their income mix. And there were estate planning issues. But we knew now that regardless, everything would be fine – and from there forward, the planning would only improve things.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). The views expressed are those of the author, and not necessarily those of Raymond James Ltd. This article is for information only. Securities are offered through Raymond James Ltd., member CIPF.Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca
