"Freedom 55" - more fantasy than reality for most of us

The Advocate, Wednesday November 1, 1995

I'm sure we have all seen the comercial on TV. But, has anyone ever explained to you how much money it takes to actually retire at age 55?

According to actuarial statistics, the average life expectancy for males is 78. For women. it is 82. That means you will have to supply yourself with income for 20 to 30 years after the paycheck stops. I like to call it a second income. Hardly anyone talks about this second income, yet that is what all of us who retire will eventually need. In theory, once a person retires, theor cost of living is less than when they were working. The standard rule of thumb is that you will require 70 per cent of your pre-retirement income to maintain your lifestyle after you quit working.

For example, large ticket items such as a house should be paid for. Therefore, expenses should be significantly reduced. Anything lower than 50 percent would be considered poverty level. When a person calculates how much money that entails, they also have to build into their calculations inflation (i.e. in 1967 $1.00 is equal to 24 cents - $4.95 is required to equal the 1967 dollar). A person 30 years old earning $50,000 today will have to earn $125,000 in 25 years based on an average of five per cent inflation just to stay even. If they retire at age 55, they will need $87,500 per year based on 70 percent of their working income. It would take $1,500,000 of capital to generate that income (based on an average six per cent interest rate).

As I have written before, you cannot count on the Canada Pension Plan to supply money for your retirement (see my article of November 1993, "Boomers Beware" or contact me for a copy). This income of $87,500 would have to be indexed to keep up with the cost of living. Taking the same five per cent inflation factor, in 20 years when a person is 75, they would need $200,000 per year to stay even. If they were living on the six per cent interest as income, their standard of living would have lessened by 56 per cent. They would have to live on 44 per cent of the income they needed at age 55. This would be well below poverty levels. They would need to have made their capital grow significantly enough to generate a $200,000 yearly income. On top of the six per cent, their capital would have to grow an additional five per cent.

Growth is something a saver has difficulty with. The mind set (paradigm) has to shift from a saver (interest) mentality to an investor (growth) mentality in order to maintain one's lifestyle. You would need an investment that has an average annual rate of return of at least 11 per cent. How well are your investments doing? As I have written several times before, time is the magic ingredient that unleashes the power of compounding.

A definite immediate financial plan is necessary for everyone who earns an income if they expect to fulfill their retirement goals. I think you can clearly see that the goal of retirement at age 55 is more fantasy than reality for most of us (see income illustration table 2). Just ask anyone in their 50s if they can retire at age 55.

I have some excellent articles on the subject. Contact me for your copy of "Behind London Life's Powerful Freedom 55."

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Created: Thu May 16 10:30:50 1996
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