Financial Planning Talk

[peter12]

I think a 5% return is more the norm. That said, yes, it is not impossible to save large amounts of money on any salary. Right now, I am the sole earner while my wife goes to law school. It has been that way for the last 2 years. During that time, I was making a decent wage, and dropped down this past year due to the recession. We still save upwards of 20% of our income, and still have money for going out, clothes, and small holidays. It is about prioritizing certain things at certain points in your life.

Many people have said things like "well, I like to take trips, and don't save as much as I should." Well no kidding. A single trip abroad could cost up to 10% of you annual earnings.

[Cruz chic]

Originally Posted by bizaro86

I truly believe people would save more if they understood compound interest.

Age Earnings Savings Interest Nest Egg
22 $31,500 $3,150 $- $3,150
23 $32,445 $3,245 $252 $3,497
24 $33,418 $3,342 $280 $7,118
25 $34,421 $3,442 $569 $11,130
26 $35,454 $3,545 $890 $15,565
27 $36,517 $3,652 $1,245 $20,462
28 $37,613 $3,761 $1,637 $25,860
29 $38,741 $3,874 $2,069 $31,803
30 $39,903 $3,990 $2,544 $38,338
31 $41,100 $4,110 $3,067 $45,515
32 $42,333 $4,233 $3,641 $53,390
33 $43,603 $4,360 $4,271 $62,021
34 $44,911 $4,491 $4,962 $71,474
35 $46,259 $4,626 $5,718 $81,818
36 $47,647 $4,765 $6,545 $93,128
37 $49,076 $4,908 $7,450 $105,486
38 $50,548 $5,055 $8,439 $118,979
39 $52,065 $5,206 $9,518 $133,704
40 $53,627 $5,363 $10,696 $149,763
41 $55,235 $5,524 $11,981 $167,268
42 $56,893 $5,689 $13,381 $186,339
43 $58,599 $5,860 $14,907 $207,106
44 $60,357 $6,036 $16,568 $229,710
45 $62,168 $6,217 $18,377 $254,303
46 $64,033 $6,403 $20,344 $281,051
47 $65,954 $6,595 $22,484 $310,130
48 $67,933 $6,793 $24,810 $341,734
49 $69,971 $6,997 $27,339 $376,070
50 $72,070 $7,207 $30,086 $413,362
51 $74,232 $7,423 $33,069 $453,854
52 $76,459 $7,646 $36,308 $497,809
53 $78,753 $7,875 $39,825 $545,509
54 $81,115 $8,112 $43,641 $597,261
55 $83,549 $8,355 $47,781 $653,397
56 $86,055 $8,606 $52,272 $714,274
57 $88,637 $8,864 $57,142 $780,279
58 $91,296 $9,130 $62,422 $851,831
59 $94,035 $9,403 $68,147 $929,381
60 $96,856 $9,686 $74,351 $1,013,417

Hopefully the table will format, but it shows what saving 10% of your income will do. I started the income at $31,500 at age 22 right out of school, or $15.75/hour for one person working full time. Not exactly 1%. I assumed a 3% raise every year, which gets you close to the median family income in Alberta by retirement at age 60. The family in this example never earns more than the median family income in AB, so again, not 1%. If they save 10% of their income and earn 8% return, that ends at over $1MM, which if you can pay off a house would allow for a more than comfortable lifestyle, imo.

Maybe you don't like 8% as an assumption. If you don't, I had to extend out to age 66 to get to $1MM at 6% returns. However, at 67 your OAS kicks in, and you could start taking CPP as well, so the $1MM would go further.

I didn't have to assume someone gave you $$, but I did have to assume diligent savings from day 1. On the other hand, if you set it up automatically every paycheck, you miss it a lot less.

I was making about $15 k a year when I was 22. That was good money back then when we rode around in stagecoaches.

[SeeGeeWhy]

Originally Posted by HockeyIlliterate

We must travel in different circles. I can't imagine not having $1.5 million saved up by age 50, and I'd be shocked if most of my friends didn't think likewise. And that's all I'm going to say about that because I don't want to say too much.

But on the spending matter---I track what I spend every month (and have for years), and $40k a year with no rent/mortgage payment would sustain, in my view, a very nice lifestyle. It won't allow for first class flights every week to Paris, but it will allow for plenty of travel and you won't go hungry. Besides, there is only so much stuff that you really need (or, honestly, want) to buy after a while.

As for the tax matter, in the US, if the $40k is from dividends/capital gains, there won't be any federal tax to deal with. As far as the federal tax code is concerned, earned income is for chumps.

Most people, even professionals, do not track their expenses every month or look at their financial house the same way you'd organize a business' activities into income statement, balance sheet and statement of cash flows. This is habit #1 for sustained good financial health and if you can't do that you certainly can't make a budget, save, insure, or manage an investment portfolio properly such that you amass a position of after tax cash of 1.5 million 25 years after beginning a career.

Begs another question, who on earth would manage their cash so inefficiently?

[bizaro86]

Originally Posted by Cruz chic

I was making about $15 k a year when I was 22. That was good money back then when we rode around in stagecoaches.

Fair enough. For a 22 year old right now 30k is our soon-to-be minimum wage.

I would suggest that at any income level, saving 10% of salary and investing it reasonably (and in days of yore interest rates were higher giving you a chance at a better return) would have a person ending up being able to replace their full income by the time they reach retirement age.

[polak]

Wow according to bizaros chart I'm decades ahead of where I should be on one side and decades behind where I should be on the other....

[bizaro86]

Originally Posted by peter12

I think a 5% return is more the norm. That said, yes, it is not impossible to save large amounts of money on any salary. Right now, I am the sole earner while my wife goes to law school. It has been that way for the last 2 years. During that time, I was making a decent wage, and dropped down this past year due to the recession. We still save upwards of 20% of our income, and still have money for going out, clothes, and small holidays. It is about prioritizing certain things at certain points in your life.

Many people have said things like "well, I like to take trips, and don't save as much as I should." Well no kidding. A single trip abroad could cost up to 10% of you annual earnings.

I won't make your eyes bleed with another table, but if you assume a 5% return, this fictional "below AB median wages family" would need to save 12.5% of their income every year to end up with a $1MM nest egg at age 66.

[peter12]

Originally Posted by bizaro86

I won't make your eyes bleed with another table, but if you assume a 5% return, this fictional "below AB median wages family" would need to save 12.5% of their income every year to end up with a $1MM nest egg at age 66.

Which is not horrible. As I said, we humble folk save upwards of 20% of my income, and we do just fine.

[bizaro86]

Originally Posted by polak

Wow according to bizaros chart I'm decades ahead of where I should be on one side and decades behind where I should be on the other....

I'm not saying anyone "should" be anywhere. But I think people miss the power of compound interest. By the end of the table, your money is earning way more than you're saving, which makes it much easier to increase your net worth.

When Fuzz posted that 60K savings, it makes it seem impossible for the average person to become financially independent. But it's not, even without a silver spoon. It's harder without one, but not impossible. When people think things are impossible, they don't even try, which is a shame.

Starting to save as soon as you start working (or if you didn't, I'd recommend starting now as a good second choice) gives you time to let compound interest work for you.

[Fuzz]

Originally Posted by bizaro86

I truly believe people would save more if they understood compound interest.

Maybe you don't like 8% as an assumption. If you don't, I had to extend out to age 66 to get to $1MM at 6% returns. However, at 67 your OAS kicks in, and you could start taking CPP as well, so the $1MM would go further.

I ignored interest because I was being lazy What you wrote here is more realistic at 6%, having $1MM by 66. That's still a long ways form $1.5MM at 50 and by the time a lot of us are that age, $1MM isn't going to be living high on the hog. It's still an ideal world that you could start saving at 22, not have any unanticipated expenses for that period, student loans, mortgages etc...

That being said, I'm probably close to a good example of someone this works for, as I don't have any kids, live modestly(other than vacations) and do save lots. Though recent pay cuts are not helping...

I do consider myself very fortunate though, and understand why my friends are not in my position.

Sorry for the off topic posts....

[CliffFletcher]

Going on vacations isn't the difference-maker here. It's having kids that changes everything. We put $6 k a year into RESPs alone.

[bizaro86]

Originally Posted by peter12

Which is not horrible. As I said, we humble folk save upwards of 20% of my income, and we do just fine.

Indeed. Additionally, I suspect the majority of people make more than the number beside their age in the table, but save less. If you save 20%, you'll end up very well off no matter what the markets do. If you end up with good returns, you'd end up wealthy.

(My fictional family ends up at $3.3 MM at 66 if they save 20% and earn 8%, on below median wages the whole time) I think 20% would be very tough in Calgary at the $31k level, but I think trying to save something as early as possible is key.

[lazypucker]

How can anyone guarantee a steady, uninterrupted income with raises throughout one's working career spanning 40 years?

For the past 5 years, I have worked in 6 contract jobs, but with the unfortunate economy, my contracts weren't always get renewed and I only work an average of 7 to 8 months a year with the rest of the time I was sitting at home with no EI or other supplementary income.

Others always say to me that with the "ridiculous" contract rates people are getting, people like me should have tons of money saved up in the bank. I want to ask how you can have any substantial savings when you are only working 6 months on, 3 months off for the last 5 years?

[CliffFletcher]

Originally Posted by bizaro86

I'm not saying anyone "should" be anywhere. But I think people miss the power of compound interest.

I don't think people miss the power of compound interests. But most people in their 20s and early 30s are focused on:

• Paying off student debt
• Saving for a downpayment on a house

If you're making enough money to do both those things, while paying your own rent and living expenses, and still save thousands a year for retirement, good on you. You probably have a very well-paying job. Personally, my income didn't crack $30 K a year until I was into my 30s.

[bizaro86]

Originally Posted by CliffFletcher

Going on vacations isn't the difference-maker here. It's having kids that changes everything. We put $6 k a year into RESPs alone.

I have two little breathing cost centres myself, and would say that they're the most expensive luxury good I've ever acquired.

The 6k/year in RESPs is a big chunk of money, but personally I don't think I'd do that if I couldn't do retirement savings first. Or at least split the money or something.

I know for us, the adjustment of going from 2 incomes to 1 has been huge. (My wife didn't go back for long enough between to qualify for EI on our 3 month old). There have been big cuts in both vacations and savings for sure. Hopefully this thread can spend more time derailed and less time talking about huge new layoffs - 2 incomes to 1 was tough, but 1 to 0 would be dicey.

[bizaro86]

Originally Posted by lazypucker

How can anyone guarantee a steady, uninterrupted income with raises throughout one's working career spanning 40 years?

You can't. I'm just a guy on a message board who did a quick spreadsheet. I could have put random life ups and downs into it (layoffs, whatever) but I didn't. Everyone's circumstances are completely different. I'm not a financial advisor, and I'm not judging anyone who has saved less through various circumstances.

Originally Posted by CliffFletcher

I don't think people miss the power of compound interests. But most people in their 20s and early 30s are focused on:

• Paying off student debt
• Saving for a downpayment on a house

If you're making enough money to do both those things, while paying your own rent and living expenses, and still save thousands a year for retirement, good on you. You probably have a very well-paying job. Personally, I didn't crack $30 K a year until I was into my 30s.

Maybe people don't miss it, or maybe the people you talk to are smarter than my social circle. I'm relatively young, and many of my coworkers/friends make good incomes and save nothing for retirement. If I mention compound interest, I often get an eye glaze.

I agree that other priorities matter too, and you could build a similar table showing results required for someone who spends their first X amount of savings on student loans/downpayment.

As for cracking $30k per year until being in your 30s, again, not designed to be a 1 size fits all spreadsheet. Not everyone's situation can be perfectly described in 90 seconds of excel. I would comment that if you're older, inflation has a big effect here, so saving 10% would end up with less, but since you'd be retiring sooner, the purchasing power of that money would likely be similar to the $1MM in a couple of decades.

[CliffFletcher]

Originally Posted by bizaro86

The 6k/year in RESPs is a big chunk of money, but personally I don't think I'd do that if I couldn't do retirement savings first. Or at least split the money or something.

We contribute to both. But since I haven't found an investment scheme with a guaranteed 20 per cent return, we figure maxing the RESPs is the way to go. Nothing saying we can't have the kids pay back some of the money after they go do school.

[CaptainCrunch]

my retirement plan involves a bottle full of heavy pain killers and a jump out the window of whatever company I'm working for at the time.

Hopefully I'm not working at a ground floor office.

[IliketoPuck]

Originally Posted by CaptainCrunch

Hopefully I'm not working at a ground floor office.

Haha, you were when I dropped off that bottle of scotch a few years ago.

[lazypucker]

My retirement plan is contingent on winning the Lotto Max jackpot...

[darklord700]

nm.