Forced Savings Works

The title is based on a study from Stats Canada entitled, “Do Workplace Pensions Crowd Out Other Retirement Savings? Evidence from Canadian Tax Records” , which implies that forcing folks who don’t save for retirement, to save for retirement by increasing their Retirement Pension Plan (RPP) contributions works quite well.

The study finds:

Pension

Is the Pension Tree’s fruit not good for You?

For workers who do not save much for retirement on their own, the $1.00 automatic increase in RPP contributions increased net savings by about $0.95. For workers who save regularly for retirement, the $1.00 automatic increase in RPP contributions was largely offset by a similar reduction in RRSP contributions. The study was designed in such a way that these results do not simply reflect program rules, such as contribution limits.

So if you make someone who doesn’t save much, save more, they save more, however, if you make someone save more, who already saves, they will save less? Wow

Given we have this interesting perspective on Money and saving, where does the new Ontario Pension Fund fit in this equation? Food for thought?

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The 4% Draw Down Theory (again)

On Monday I asked about the 4% Draw Down Theory for retirement savings planning, and what readers thought, and as usual there were some very smart responses, and because of that I have come back with a better model for your perusal.

The major comment was that the model didn’t take into consideration Inflation, and that is an important thing to consider in your future. The other important thing to remember is not to retire carrying a large debt load (if any, really).

Our new model is a bit more conservative, where we only have $1M “nest egg” and assume we grow our nest egg by a generous 2%, however, this time assume an inflation rate of 3% (which is comparable to now, unfortunately). With inflation, you need to adjust your withdrawal to compensate for your shrinking spending capabilities, so you increase your yearly “allowance” by 3% (unfortunately each year).

Spoiler Alert: Note the red numbers at the bottom of the table, no you don’t make it to 25 years.

Also note that your withdrawal doubles in about 24 years following that rule of 72 as well.

Savings Amount at 65 $1,000,000.00
Savings Growth assumption after 65 2.00%
Assumed Inflation 3.00%
Initial Amount to draw every year $40,000.00
Age Amount Left Inflation Adjusted Withdrawal
65 $960,000.00 $40,000.00
66 $938,000.00 $41,200.00
67 $914,324.00 $42,436.00
68 $888,901.40 $43,709.08
69 $861,659.08 $45,020.35
70 $832,521.29 $46,370.96
71 $801,409.63 $47,762.09
72 $768,242.87 $49,194.95
73 $732,936.92 $50,670.80
74 $695,404.73 $52,190.93
75 $655,556.17 $53,756.66
76 $613,297.94 $55,369.35
77 $568,533.46 $57,030.44
78 $521,162.78 $58,741.35
79 $471,082.45 $60,503.59
80 $418,185.40 $62,318.70
81 $362,360.85 $64,188.26
82 $303,494.16 $66,113.91
83 $241,466.73 $68,097.32
84 $176,155.82 $70,140.24
85 $107,434.48 $72,244.45
86 $35,171.39 $74,411.78
87 -$40,769.32 $76,644.14
88 -$120,528.16 $78,943.46
89 -$204,250.49 $81,311.76
90 -$292,086.62 $83,751.12

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