Cornerstone Two: Retirement

Retirement is something most of us dream of and everyone looks forward to. From stopping or scaling down your work and travelling, to just relaxing at the cottage, everyone has different retirement dreams. However, what you do now determines how your retirement looks in the future. The plan you put in place will ultimately determine whether you are golfing on the beach in Florida, or mini putting at a miniature scale putting green.

If you are in your twenties and are reading this PERFECT! You are going to learn what you can do now to set yourself up for your dream retirement. If you are well into your working career and are reading this thinking about how much you procrastinated, it may not be too late, we just have a lot of catching up to do.

The first huge impact on how we save for retirement is inflation and the effects of inflation on not only the goods we purchase, but also how inflation erodes your money. To illustrate the effect of inflation I will use arguably the most debated topic of gasoline.

In August of 2000, the average price of fuel across Ontario was 70.3¢ per litre.

In August of 2014, the average price of fuel across Ontario is 139.2¢ per litre.

*http://www.energy.gov.on.ca/en/fuel-prices/fuel-price-data/?fuel=REG&yr=2000

Using these two numbers, we can see that in 14 years, the average price of fuel has risen 198% and almost doubled in price! Think if everything rose that much, what we would be paying for everything!? Now think how much of an impact that would have on your savings you are putting away today.

Through inflation alone, in the next 20 years your expenses are expected to double. So if we look at a 25 year old today with expenses of about $1500 per month, their expenses by the time they are 45 (due to inflation alone) are expected to double to $3000. Then if we look at their expenses by the time they are at retirement age of 65, they are expected to double again (again due to inflation alone). We all know that your expenses fluctuate over time however, this illustrates what consequence inflation will have on your overall cost of living!

Now that I have scared you away talking about inflation, I am now going to talk about how we can use compounding to battle inflation.

Compounding is the ability for your money to make money. How does this happen? Well the way I like to describe it is to think about a snowball. You can start out with a small little snowball and roll it down a hill. That little snowball is still there, however as it rolls down the hill it is gathering more and more snow and growing larger and larger.

How does this relate to money? Think of a small amount of money, say $100. Now lets say that money is put into a fixed investment that earns 4% over 5 years. The chart below illustrates how that $100 grows.

Beginning of Year	End of Year
$100	$105
$105	$110.25
$110.25	$115.76
$115.76	$121.55
$121.55	$127.63

As you can see, not only is the interest applied to the original $100, but it is also applied to the end of year balance from the previous year. This is a small scale example, now lets look at the procrastinator who delays their retirement until they are well into their working career, for this we will look again at Person A and Person B.

Person A is 25 years old today and starts to put away $2500 per year into some sort of a savings plan. Over the course of their working career, assuming they retire at age 65, they will be putting $100,000 into a savings plan. Now, assuming a conservative 4% interest rate, we can say that their $100,000 investment is expected to grow to approximately $250,000. Thats $150,000 of unearned money. Meaning you didn't have to put any effort in to make that $150,000!

On the flip side, lets look at Person B. This person procrastinates and procrastinates their retirement then realizes by age 45 they have nothing in place for their retirement. So at this point, instead of putting away $2500 they start putting away $5000 per year. They are still putting away the same $100,000, however assuming the same 4% interest rate, their money is only expected to grow to $150,000. Thats a difference of $100,000 and about 60% more!

You might still be wondering and asking, well Scott, how does that work? To explain this let me go back to the snowball example.

Person A is young today and since they are young chipper and in shape, they can climb all the way to the top of the hill. They make a small snowball and roll it from the top. Since they have the whole distance of the hill to roll their snowball down, their snowball grows quite large.

Person B however is 20 years older. Since they are older and not quite as in shape as they once were, they can only climb half way up the hill. They make the same size snowball as Person A started with, however their snowball is rolling for a shorter distance and doesn't grow to nearly the same size as Person A's snowball does. 

Now that I have illustrated both the nasty effects of inflation and how you can use compounding to battle this, I have now concluded my talk about retirement. I hope that you have started your retirement savings, and if you have congratulations! If you have not, get something going. Every little bit helps. Maybe instead of buying all your coffee's at Starbucks, you can start to make them at home!

Start early and put time on your side. As I talked about in liquidity the government and our employers are giving us less and less so you are the largest part to contributing to your retirement.

If you would like to start your retirement savings now call me. We can work through your exact situation and create a retirement plan that will help you retire in Florida or at your new cottage, rather than in your backyard.

If you have started your retirement savings great! Let's still sit down and evaluate what you have. Let's have a look at what you are putting away and if that truly is enough to retire comfortably with. 

And finally, if you are retired, congratulations! Do you know if your money will last you for your whole retirement? What if I told you I can predict if and/or when that money will run out. Let's sit down and look at your current situation.

I can be contacted be email at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122 Ext. 411.

Thank you and stay tuned!