Retirement Planning 101

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The Reality….

• Tens of millions baby boomers closing in on retirement

• Number of North Americans age 65+ projected to grow 21% in the next 10 years

• Pensions playing a smaller role

• Savings rates at an all time low

• Social Security and stock market uncertainty

• Increasing life expectancy

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The Future is Uncertain

Future 1: “Lottery Retirement”

Future 2: “Welfare Retirement”

Today

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The Goal is Certainty

• Be realistic about your retirement expenses• Identify sources of funds for retirement income• Develop an income strategy• Match expenses to income• Evaluate the risks

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Risk Management is key

• Investment Risk• Longevity Risk• Withdrawal Risk• Encroachment Risk• Taxation Risk• Inflation Risk• Health Cost Risk

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VariablesWhat we can’t control

• Stock markets• Interest rates• Inflation• Currency

What we can control• Our behavior• Asset allocation• Which investments will

create income• Navigating the tax brackets• What we defer for tax

purposes• Initial and ongoing

investment recommendations

• Investment costs

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Longevity

0%

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105

MaleFemaleAt least one spouse

Age

78 81 86

85 88 91

91 93 96

Pro

babi

lity

Probability of a 65-year-old living to various ages

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Basic Expenses

• What are your current expenses? Will they be the same or different in retirement?

• Housing• Food (2 x 3 x $6 x 365 x 25 = $328,500 for food!!)• Transportation• Healthcare costs• Taxes (income and property)• Other bills (insurance premiums, credit cards,

educational loans)

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Discretionary Expenses

• How will your lifestyle and income needs change?• Travel• Entertainment• Hobbies• Club memberships• Gifts for others• Gifts for yourself

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Inflation

Today 10 Years 20 Years 30 Years0%

$50,000

$100,000

$150,000

$200,000

$50,000 $67,196

$74,012

Source: New York Life Investment Management LLC, 2004.The hypothetical example is for illustrative purposes only and assumes a 3% annual rate of inflation and annual retirement expensesof $50,000 at the start of retirement.

How inflation rates can impact purchasing power

3%4%

$90,305

$109,556$121,363

$162,170

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5 Common Retirement Mistakes

• Not contributing or participating in a plan• Not contributing early or enough• Improper asset allocation• Miscalculating retirement needs• Cashing out too early

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Power of Compounding

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Compounding with regular additions

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Improper asset allocation

• Too conservative

• Concentrated in company stock

• Conventional wisdom: subtract your age from 100 to find the % of assets to invest in stocks.• For example, a 70 year-old could have 30% invested in

stocks (of course subject to return objectives, personal tolerance for risk etc.)

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Historical Returns

• US Small Company Stocks: 13.4%• US Large Stocks: 11.0%• Canadian Stocks: 10.1%• Canadian Bonds: 7.4%• 5-year GIC: 7.0%• Treasury Bills: 5.9%• Canadian Inflation: 3.8%

Source: Morningstar. CDN$ Returns Jan 1950 – June 2009

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20’s 30’s 40’s 50’s 60’s 70’s 80’s 90’s

Cover cost of

living; get out of debt

Save for home, children’s college

education; protection for

family

Save for retirement

Two Phases of Retirement Planning

Retirement Saving

?

Retirement Spending

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Variable Investment Math

1 2 3 4 5 6 7 8 9 10 Ann Ret

7 7 7 7 7 7 7 7 7 7

9.4 14 13 23 -4 10 -1 21 -4 -7

-7 -4 21 -1 10 -4 23 13 14 9.4

7%

7%

7%

Source: Buying Time – John Wiley & Sons

Sequence of returns during the growth and savings phase aren’t as important…

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Accumulation Math

1 2 3 4 5 6 7 8 9 10 Value

7 7 7 7 7 7 7 7 7 7

9.4 14 13 23 -4 10 -1 21 -4 -7

-7 -4 21 -1 10 -4 23 13 14 9.4

$196,715

Source: Buying Time – John Wiley & Sons

$100,000 Investment

$196,715

$196,715

At the end of a given period, the dollar value of an account will be the same, regardless of the order in which the returns came…

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Withdrawal Math

1 2 3 4 5 6 7 8 9 10 Value

7 7 7 7 7 7 7 7 7 7

9.4 14 13 23 -4 10 -1 21 -4 -7

-7 -4 21 -1 10 -4 23 13 14 9.4

$100,000

Source: Buying Time – John Wiley & Sons

$100,000 Deposit $7,000 Withdrawn Annually

$117,986

$83,150

However, during the withdrawal period, it can have a dramatic impact if you experience negative years earlier on. In this scenario, there is a difference of $34,836 or 42% between the high and low account values after 10 years.

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Investment Withdrawals

Source: New York Life Investment Management LLC, 2004.This chart shows the results of withdrawing different inflation-adjusted amounts each year. The hypothetical example assumes a $500,000 balance and a portfolio comprised of 50% stocks, 40% bonds and 10% cash. Each withdrawal rate is adjusted for inflation by 3% per year. Rates are based on a hypothetical return rate of 6.3% derived from 8% for stocks, 5% for bonds and 3% for cash. This example is for illustrative purposes only and does not represent the performance of an actual investment. There is no assurance that similar returns will be achieved.

Withdrawal Amounts

9% = $45,000/yr.

8% = $40,000/yr.

7% = $35,000/yr.

6% = $30,000/yr.

5% = $25,000/yr.

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Protect your nest egg

How to calculate retirement income

• Add• Estimated annual social security benefits (CPP, OAS)• Projected annual pension benefits• Withdrawal from investment savings (i.e. 4-6%)

• As you increase your withdrawal rate, you increase the probability of prematurely running out of savings

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Probability of meeting income needs

100% Bonds

75 Bonds

25 Stocks

50 Bonds

50 Stocks

25 Bonds

75 Stocks

100%

Stocks

4% 83% 93% 94% 90% 85%

5% 52% 67% 74% 73% 68%

6% 23% 33% 44% 51% 51%

7% 8% 11% 20% 29% 35%

8% 2% 3% 7% 15% 22%

Withdrawal rates over a 25-Year retirementSource: Morningstar.

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Protect your nest egg

How to calculate the size of retirement savings needed

• Need $50,000 annual retirement income• $10,000 annual social security payments• $20,000 annual pension benefits• Need $20,000 [$50K – ($20K - $10K)] from your nest egg• Divide annual dollar amount needed by annual withdrawal

percentage amount• Savings Required = $20,000 / 4% = $500,000 Savings Required = $20,000 / 4% = $500,000

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10 steps to successful estate planning

1. Designate a team of professionals

2. Draw up a household balance sheet

3. Understand your life insurance needs

4. Draw up your will

5. Establish power of attorney for property

6. Establish power of attorney for personal care

7. Minimize taxes and administration fees

8. Keep track of accounts and important information

9. Review and update regularly

10. Let someone know

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Non-Financial Considerations

• Where will you live?• How will family impact your plans? • How will your spend your time?• Will work enter into your plans? • What will you do that is fulfilling, meaningful and

purposeful?• What needs to be in place to maintain your sense of well-

being?• How will you deal with health issues?• What plans do you have for maintaining your physical and

mental well-being?

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Contact your financial advisor regarding…

• Preserving capital and protecting assets• Creating income in the most efficient manner• Minimizing taxes (income and estate)• Growing capital • Managing overall risk• Business succession• Establishing a cost efficient and tax efficient transfer of

wealth (spouse / estate)• Addressing philanthropic and / or gifting objectives• Trust planning

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• Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

• Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Goodman & Company, Investment Counsel Ltd. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Should you require such advice, we strongly suggest that you speak with your investment advisor.

• This document is not to be distributed or reproduced without the consent of Goodman & Company, Investment Counsel. Dynamic Funds is a division of Goodman & Company, Investment Counsel Ltd.

Important Information

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