The magic numbers for retirement: why they don't always add up

Numbers power satellites, help us predict the future and serve as rules of thumb for retirement planning. And while numbers have generally proven useful, the same can't be said of the "magic numbers" on which we often base our retirement decisions.

Humans went 200,000 years without numbers until the Sumerians inscribed clay tablets and baked them in the sun.

Today, numbers power satellites, help us predict the future and serve as rules of thumb for retirement planning. And while numbers have generally proven useful, the same can't be said of the "magic numbers" on which we often base our retirement decisions.

The 4% rule

In 1994, U.S. financial planner William P. Bengen devised a "safe" retirement savings withdrawal strategy that would guide a generation of retirees: the four per cent rule. Under this rule, you withdrew four per cent of your total retirement assets in the first year of retirement. Then, in subsequent years, you increase the amount by the previous year's inflation.

So, if your nest egg is $1 million and inflation is two per cent, you would withdraw $40,000 in the first year and $40,800 ($40,000 plus two per cent) in the next. Stay the course and, according to Bengen, you can expect your portfolio to last 30 years. Bengen has since retired, and it may be time the four per cent rule followed. The four per cent figure is based on historical returns of the U.S. market, not today's markets.

Moreover, the rule doesn't work if the markets do something unexpected. If returns are subpar, especially in the first few years, your savings may not last 30 years. But experience better-than-expected returns, and you could end up with considerable assets late in life that you could have enjoyed earlier.

100 minus age

Asset allocation and the discipline of adjusting your goals is complicated and time-consuming. So, along came the "100 minus your age" rule. How it works: subtract your current age from 100, and the remainder is your suggested equity allocation, with the difference being your fixed-asset allocation. For instance, if you are 55 years old, 45 per cent of your portfolio should be in stocks.

Unfortunately, while convenient, this rule doesn't take into account rising life expectancies or falling interest rates. Also, not everyone retires at the same age, or shares the same tolerance for risk or investing goals. An age-dedicated rule ignores many essential factors. Imagine you are risk-tolerant, 40 years old and have an investment horizon of 30 years: the rule would suggest a 60 per cent equity allocation, which may be too conservative.

$X million net worth

Many of us measure our ability to fund retirement with a lump sum: $1 million, $5 million and so on. This suggests that a lump sum portfolio should cover all of your future expenses for the rest of your life. However, expenses are rarely fixed, and everyone has different goals for their retirement which require different sums. Rather than setting an arbitrary number, consider creating a personalized financial plan that takes into account your individual circumstances and specific needs.

Few retirement decisions can be made using universal "magic numbers"; your magic numbers are unique to you. Remember to always speak with a qualified professional about your situation.

Mathieu's new column, Your Financial Corner, will appear in each edition of Chamber Vision magazine, published by The Greater Moncton Chamber of Commerce.

About the Author

Mathieu LeBlanc, CPA, CA, CIM

Associate Portfolio Manager, The Cormier Group of RBC Dominion Securities
Mathieu LeBlanc is a Chartered Professional Accountant and Associate Portfolio Manager with The Cormier Group of RBC Dominion Securities.