Posts in Retirement
Numbers, Numbers, Numbers: Avoiding the Useless Retirement Plan, Step Two

The point: You can't plan where you're going until you know where you want to go and where you're starting from.

Do you know what you want out of life?

If that sounds like a surprisingly navel-focused question coming from a financial planner, it's only because - dare I say it - you probably haven't met the right financial planner yet.

Whether you do it for yourself or hire a professional to get you started, effective financial planning is the ultimate navel-gazing activity, albeit one with lots of numbers involved. "What do you want out of life" is the first question you have to answer, and the sooner you can answer it with certainty, the faster you'll get it, whatever "it" is.

I know (precisely) what it is

I don't want to get all motivational speaker on you; let's not pretend that everyone can walk out of their cubicle job and onto a beach as long as they just visualize it strongly enough. This isn't a self-actualization exercise, and you don't have to tune into the vibrational frequency of the universe or some such nonsense. You just have to know precisely where you are now and precisely where you want to be (and when). Then you have to play with numbers, or you could look into retirement plan services and gain some help.

In my last post, I wrote about ignoring the "how much do I need to retire" question in favour of the "why" question. Today - although I just spent another 184 words on it because "why" is important - we're firmly back in the realm of real numbers ("Hooray!" shouted all of the money-nerds in the room.)

The second step to building a real (as in: not cookie-cutter) retirement plan is to figure out exactly how much you're spending and on what. If this sounds suspiciously like "budgeting", or "cash flow management" or "building a spending plan", that's because it is. The success of your financial plan - every single part of it, from retirement to debt elimination to insurance to investment strategy - is entirely, utterly dependent on how well you manage your income and expenses.

This is important enough that I want you to drop everything on your to-do list until it's done. There's nothing that can't wait for you to get your income and expenses analyzed, prioritized, and aligned with your goals.

(Shameless plug: if digging through a year's worth of transactions is something you can't find time to accomplish, it's something I'm very, very good at.)

And - for those of you about to skip this step because it seems like a lot of work and you already have a budget - if by "I already have a budget", you mean "I have a spreadsheet with amounts in it that I don't match to reality", or "I track my transactions in Mint but don't really look at the data", then I'm calling bullshit. Don't skip the next section, unless you want to continue to skip through life, ignorant of your potential, and only likely to reach your goals by accident.

How to figure out exactly what you're spending and on what (and what it has to do with retirement planning)

Step One: Pull out or download every single statement from every single bank account and credit card that you've used in the last year. If you use cash but haven't been keeping track of where, stop using cash.

Step Two: Start adding things up. Your fixed payments and recurring bills will be easy, so start with them. Anything you pay regularly should have its own category and running total, even if it's not a necessity. Move on to variable spending on necessities like groceries. You'll be left with an overwhelming list of transactions for things like clothes, entertainment, and eating out.

Step Three: Stop being overwhelmed. Figure out a sensible way to categorize your discretionary spending. By store? By type of purchase? I lump it all together, but that's because I've already done this exercise and am now in the "living by my budget so I can reach my goals" phase of life. Plus, it's a pitifully small amount at my house.

Step Three and a half: Realize that you're going to have to make some changes to your spending if you want to reach any of your goals, unless your goals include "working until I'm dead" and "never get to live the life I want". Today you're just adding things up, but later you're going to start subtracting, so take some time to get acquainted with the idea.

Step Four: Analyze. What will you have to spend money on when you're retired or reading on the porch as an independently wealthy forty-five year old? Will your mortgage be paid off? Will you still be driving frequently? Will you need life insurance? Will you spend more at Christmas? You're going to be older; will you have benefits at work to pay for your glasses and dental work? Presumably you won't be paying for diapers anymore, so you can strike those out of your budget with joy.

Your goal is to come up with the amount of money that will reasonably cover your expenses in retirement. This number can be expressed annually, monthly, weekly, or daily for all I care; frequency doesn't matter, and neither (at this point) does inflation. What matters is that your future expenses are based on real life, not on a statistically unlikely to be true "rule of thumb" that some back office analyst made up.

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Okay, so you have a number. Finally. Now what?

Now that you know what your expenses will be, you get to think about how you're going to cover them. The next step in building a retirement plan that has a reasonable chance of success is figuring out where your income is going to come from.

This is part three of six posts about realistic retirement planning. If you're just starting with this one, the rest are here:

RRSPs: Hunting Season (what banks and brokers are really offering at RRSP season)

Avoiding the Useless Retirement Plan, Step One (figuring out what you mean by "retirement")

Incoming (how to predict your retirement income from public and private pensions)

Fun With Retirement Calculators (how to make the best use of a faulty tool)

Effective Retirement Planning is About Spending, Not Saving (And Sit Up Straight) (what to do if you can't save enough)   

RetirementSandi Martin
Avoiding the Useless Retirement Plan, Step One

The point: A realistic retirement plan doesn't start with a number and work backwards; it starts with the question "why?"

Quick, go to the personal finance section of you newspaper or feed reader and count how many articles and posts from last week start with the question "How much (insert financial product here) do I need?" and end with a number like "$1,000,000" or a tired "about 70% of your current income"?

(Answer: eleventy-billion. Give or take.)

I can see the attraction of approaching your finances like this, I really can. It's so nice and tidy, which is why journalists and bloggers love writing about it. (Question? Check. Answer? Check. Lets go to the beach, because my work here is finished.)

But if you're serious about thoroughly understanding your money, building real wealth, and reaching for something more than what you have now, starting with a number is starting at the wrong end of the question.

WRONG

In my last post, I wrote about the inadequacy of the "retirement planning" regular people get at the bank or with a commissioned salesman. This "planning" is ostensibly meant to answer the question "how much do I need to retire?", but really only serves two purposes for the institution:

  • Scare you into purchasing more of their retirement-branded products, or

  • Convince you to list any assets not already on their custody, so they can offer a "second opinion" and have a shot at collecting them.

(What, you thought the salesmen were actually going to give out retirement advice for free? Just because you didn't cut them a cheque, doesn't mean you didn't pay for it.)

Starting at the right end of retirement planning means asking a question that salesmen just don't ask, because the answer take more than an hour to figure out, and they have other - more lucrative - activities to pursue.

RIGHT

Asking yourself this question is the (absolutely, unequivocally) mandatory place to start if you want a realistic retirement plan. It's not a Cosmo quiz, so it will take longer than four minutes, and you might want to pour yourself some coffee.

The Most Important Retirement Question You'll Ever Answer: WHY?

 Answering "why?" is figuring out what you want your life to look like in the future. We like to call it "retirement", because it's an easy shorthand, but this exercise is about way more than an age and a resignation letter.

This exercise cuts right to the heart of your relationship with money; why you're slaving away to earn it, spend less of it, borrow it, repay it, invest it, and leverage it. Are you hoping to buy stuff, or time, or experiences?

Do you imagine your life continuing on just about the way it is now except with an older body and fewer kids around? Or do you hope for something radically different?

If your "Why?" involves reading in a chair on the porch, surrounded by waist-high piles of books and eating junk food, not having to watch your grocery budget, and little else*, and you want it to happen as soon as possible, your future spending plan will look dramatically different from the person's who wants to work until she qualifies for the most pension she can get and then start a business selling kale (or whatever).

Okay, now what?

Now you get to dive head-first into a pile of bank account and credit card statements. Hooray!

(But it's going to have to be later. This post is long enough already.)

*That would be me. Surprise.

This is part two of a six part series about useful retirement planning. If you're starting with this post, the rest of them are here:

RetirementSandi Martin
RRSPs: Hunting Season

The point: buying an RRSP sometime between January and March doesn't mean you have a retirement plan.

Go into any bank between January 2nd and February 28th and you will be haunted by the specter of an underfunded retirement. You will be offered "retirement planning", and - if you are scared enough of eating cat food when you stop working, and haven't yet found your own Bankosaurus Rex - you will come away from the meeting convinced that "contributing to an RRSP" and "retirement planning" are the same thing.

They are not.

RRSP Season is to the bank what Valentine's Day is to Hallmark: the opportunity to separate lots of people from lots of money while convincing them that what they're doing is meaningful.

(Okay, taking advantage of rules that allow you to shift income from a year in which you'd pay more in taxes to a year in which you'd pay less isn't exactly comparable to buying boxes of cards to throw away give to your kid's entire class. Sue me.)

The retirement calculations that core clients of retail banks (read: you) are offered are the same ones you can use yourself by googling "retirement calculator". They are pre-filled with assumptions about your rate of return, your possible CPP and OAS rates, how much money you'll need, and inflation rates, and the people operating them have about as much training for using them as you do.

This means that your "retirement plan" will be based on these cookie-cutter assumptions: you'll need 70% of your present income to live comfortably, you'll receive a 5% return subject to a 2.5% rate of inflation until age 65, when you'll receive the maximum possible amount from CPP and OAS.

The person sitting across the desk from you has zero incentive to help you figure out what the assumptions should be for you. Your appointment is only booked for an hour, right? And there are six more people he has to see after he talks to you. He's not going to mess with the assumptions to make them actually resemble your life, because that would take more time than his manager is going to be happy with.

What the salesperson will have all the time in the world for is this section:  Despite the fact that anyone helping you to plan your retirement income needs to know how much you've got saved and really should be talking about your entire portfolio, rather than the slice that's invested with them, is beside the point, which is: the financial industrial complex is leveraging "RRSP Season" to maximize your uncertainty, create fear, gather up your assets, and then forget about you.

Here's the problem for you: a "retirement plan" consisting only of "I put some money into RRSPs every year because I was afraid of missing the deadline and my advisor told me I need to save more" is only by the sheerest luck going to afford you the luxury of retiring, let alone building any kind of meaningful wealth that will let you do more than just meet your basic needs once you stop working at the arbitrary age of 65.

The solution: back away (quietly) from the salesperson with the retirement calculator. Block your ears and sing loudly when you encounter the "how much should I save for retirement" articles that end in an actual number.

In my next posts I'll show you how to ignore the "how much should I"s, figure out your own numbers, and stop being manipulated by the fear and hype of hunting RRSP Season.

This is part one of a six part series about realistic retirement planning. You can read the rest here:

RetirementSandi Martin