Q.
Will you review the
financial plan
prepared for me by a certified financial planner? I am 65, single and have a good income, but I’m scared I don’t have enough money to retire even though the plan says I do.
—Kate
FP Answers:
Hi Kate. Reading your question started me wondering about two things. One, will I see the cause of your worry in your financial plan? And two, how does someone know if their financial plan is plausible?
In lieu of publishing your financial plan, I will provide some background details and comment on specific areas of your plan.
You earn about $200,000 annually and are planning to stop working at the end of this year. Investments are made up of $700,000 in
registered retirement savings plans
(RRSPs), $125,000 in a
tax-free savings account
(TFSA), $300,000 in a non-registered investment account, and two rental properties (you are living in one unit) worth $2.3 million with mortgages of $1.2 million. You also have a private corporation with investments worth $1.5 million and a $1 million rental property with a $675,000 mortgage. You are a self-confessed Chicken Little and feel you need about $50,000 annually after tax and mortgage payments.
There is lots of money in your net worth and income so what is causing your worry? My guess is you are not connected to the plan, which is leading to a lack of confidence. That leads to the question, “How can a financial plan inspire confidence?”
After examining your plan, I see four things you and your planner can do that should inspire the confidence you need to retire now and get on with enjoying your
retirement
. Those four things are: work collaboratively; don’t skimp on the details; use realistic assumptions and repeat these steps every year at a minimum.
Have you heard the expression, “Plans are useless, but planning is priceless?” I think this perfectly describes your situation. Your planner gathered information, prepared the plan and presented it to you. I found the plan you showed me hard to understand, and I am a financial planner!
You need to be in the room, providing input and learning. Your planner inputs financial advice and you input variations of your vision of life. Both sets of inputs are entered into financial planning software so you can run different what-if simulations. Running different simulations provides immediate feedback to different ideas and choices, leading to accelerated learning. Learning leads to believing and building confidence.
Next, don’t skimp on the details. Take the time to itemize your cashflow: money coming in and money going out. These are your numbers, which you understand, and they will help connect you to the planning process. Plus, your numbers help you and your planner understand your current lifestyle and help you to think about the things you may like to do in the future.
Your plan assumes spending $120,000 annually after tax, which is based on spending your investments down to zero by age 88 and keeping your rental properties. Make this more realistic by running a plan based on a projection of your current spending and ideally how your spending may change over time.
Rental income was not included in your plan because the rental properties are considered break-even propositions after considering repairs and mortgage payments. That may be the case today, but over time rental incomes will increase with inflation and inflation slowly reduces debt. Again, the more detail you add the more you will believe in the output.
Your Chicken Little nature is leading to conservative assumptions such as 4.75 per cent investment returns and a 2.25 percent general inflation rate. You are also assuming your annual spending will be increasing at a rate of three per cent, a higher rate than the inflation rate. You assume constant spending of $120,000, in today’s dollars to age 90, and finally, the rental properties are appreciating at two per cent.
There is nothing wrong with using conservative assumptions if you also run simulations assuming more plausible assumptions. For instance, most retirees don’t continue spending at the rate of inflation throughout retirement, which is the opposite of what your plan projects.
Also, rental properties are appreciating 0.25 per cent less than the rate of inflation. I understand why you might make this assumption in 2025, but do you think over 25 years that will be the appreciation rate? A second thing that your plan overlooks is that when you put a conservative growth rate on rental properties you underestimate the future tax liability, which is the opposite of conservative.
Kate, take a collaborative approach to planning, adding as many details as possible without fudging things. Using plausible assumptions helps to build confidence in the output. What really makes this work is repeating the planning exercise annually or as often as needed. This repetition and revision make your assumptions honest. You start believing the projections and are better prepared to deal with change, all of which leads to that freedom you are looking for.
Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.
