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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If You Can: How Millenials Can Get Rich Slowly (A review)

Michael James told me about a booklet entitled If You Can How Millenials Can Get Rich Slowly by William J. Bernstein (ASIN: B00JCC5JKI) (Publisher: Efficient Frontier Publications ) (the Amazon Kindle link is included as well), and I am very impressed by the writing style of Mr. Bernstein and the message he is sending with this inexpensive booklet.

If You Can booklet from Amazon

If You Can booklet from Amazon

Amazon Link for Booklet to help Millenials with Money

I usually shy away from reading books on investing and such (I have a large pile of books I have promised to review, but have not quite got around to doing anything about them), so this booklet took only about 3 months for me, to get around to reading. It takes about an hour to read, but it does have a lot of homework assignments in it that could make it longer, if you want to do the homework (the homework is reading some of the books that you should have read already, if you think of yourself as an investor).

The booklet is a how to save enough money to retire, with a strong how-to theme. The booklet is U.S. based, however it is still very applicable and topical for Canadians, if you simply:

  • Think of a 401k and IRA as being similar to RRSPs, and LIRAs (I do realize there are significant differences ).
  • The distribution of Index Funds in your retirement fund could just as easily be:
    • TSE Index Fund
    • Canadian Bond Fund
    • International Index Fund
    • There are many similar “couch potato” portfolios you could use
  • Social Security is like our Canada Pension Plan

The advice given in this very short essay mimics many of the points I have made over the past ten years, and I have no problem listing them here:

  1. If you can’t save you’ll die poor
  2. You must understand how finances work, or you are doomed to fail
  3. If you ignore the past financially you will fail as well
  4. You can be your own worst enemy when it comes to money
  5. “The financial services industry wants to make you poor and stupid” (that is a direct quote)

Yes (5) sounds remarkably like me, but my guess is Mr. Bernstein is much more qualified to make that statement, so I will be quoting him in the future.

Overall Review

Read this booklet, it would be the best $0.99 (US) you have spent this year. I have bought copies and sent them to my kids to read, with a few comments added to it, and you should read it as well. This is a well written, concise and to the point explanation on how to retire with money, and how to save, just read it, it will take a 1/2 an hour tops (if you do the homework, it will take a lot longer, but that would even be better).

Mr. Bernstein has written a bunch of other books, that I may take out of the library and peruse as well.

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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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