Wednesday, 30 November 2011


The word Retirement brings mixed emotions. First, it brings visions of relaxing on a nice clean, warm, sunny beach or trekking in beautiful mountains or something similar. Then the mind moves on the the more practical matters. And all of those end up around the issue of Money.

"Will we have enough?"

"How much do we need?"

"Where will be get it from?"

"When should we start preparing?"

"How long should I plan for?"

These are all good questions. Its important to have answers to these and more as early as possible. Although most people don't start to think of these questions till they're in the late 40s or 50s.

I would like to start off with this simple analysis.

With advances in Medicine we here in Canada (and most of the developed world) can look forward to longer and healthier lives. It wouldn't be surprising to have a lot of people of my generation reach their 90s and even hit the century mark. No one wants to run out of money in retirement. So for planning purposes we will assume that everyone will live to a 100. Now lets also agree that most of us also don't really start earning till we're 25. And even though we would all like to retire ASAP, lets assume that we're shooting for a reasonable retirement age of 65.

So we have 40 years of earning (65 - 25 = 40) that must somehow pay for 35 years of retirement (100 - 65 = 35). In effect, each year of earning needs to pay for 2 years - one is the earning year itself and one in retirement.

I hope you are not already in deep panic. Am I really saying that you effectively need to save 50% of your earned income each year? Not at all! Yes it does appear that way. But in reality, you only need a fraction of that in savings to pay for your retirement. And that's because time is your ally.

Lets say that whatever we save in the first year of earning will pay for the first year of retirement and the 2nd year's savings will pay for the 2nd year in retirement and so on and so forth. So each year's savings have an opportunity to be invested and grow for 40 years. That is a long, long time. What happens to invested money in this long period of time? Well if you invest in the likes of Nortel and Enron or with people called Madoff, it kinda disappears. But you're smart. So you will invest it wisely.

Every dollar that you save and invest in any given year, will grow 7 fold at a very conservative growth rate or 5% for each of those 40 years. If you save $1,000, you get a shade over $7,000. Save $10,000 and it becomes $70,000. And that's all at a mere 5%.

Realistically one should expect it to grow somewhere between 8% and 10%. At 8%, that same $10,000 comes out to over $210,000. Yes that's right. I didn't throw in any extra 0s there. At 8%, over 40 years you can expect your savings / investment to grow 21 times.

I hope you can now appreciate that preparing for retirement is not too difficult. As long as you start early. That's the key. I'll come back to all the questions we raised above. But for starters I simply want to point out that the thought of Retirement does not have to bring a headache. Time is your friend. So do enjoy life now but spare a thought for your future self as well. And the sooner you start to think of your future self, the less you will burden your current self.

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