Run, Forrest, Run!
Topic: Wealth Planning
May 22, 2018
Image used with permission: iStock/Nattakorn Maneerat
Run, Forrest, Run!
Last fall I competed in my first long distance race – the Toronto Waterfront Half-Marathon. Just to be clear, I didn’t break any world records. My goal was to finish the race in a “respectable” time. Finish I did. Respectable time, I don’t know. But overall, it was a gratifying experience. I am planning to run again this year, with a goal to better my time, so at least I can publish (brag about) it in a blog next year.
So here I am, analyzing what I can do better this year. And I can’t help but realize the similarities between running long-distance and some aspects of financial planning we help clients with.
The basics of both preparing for a long-distance race and retirement are to build stamina (savings) consistently over time, unless you are Forrest Gump who, on a whim, “just felt like running”. To have the best chance to run a competitive race you have to start training months in advance. Similarly, to build a comfortable retirement nest it is best to start early and save consistently.
It goes without saying that discipline is the key to overcoming any challenge in life that’s worth pursuing. Hard choices have to be made. Run now or tomorrow? Save now or later? You get the point.
Training for a competitive long distance race is more technical than you would think. On top of building stamina you have to build strength. So, in addition to making sure that you push yourself that extra mile each time you go out to train, you have to make sure you include hills and sprints in your training program. Likewise, in addition to a regular savings strategy, it’s important to utilize the right combination of vehicles (taxable account, RRSP, TFSA, Hold Co.) to build a versatile retirement nest. This will ensure, when it is time to draw from these accounts in retirement, your cash flow is optimized and you pay the least amount of taxes.
It is one thing to know the theory behind a good training regimen. But to get out there and pound the asphalt and ramp up miles each day is another story. Sometimes, it is more a psychological battle than physical. To motivate myself I like to visualize running across the finish line on race day—my arms raised, amidst a crowd of cheering spectators. When that fails, I step into the shoes of Rocky Balboa and envision myself climbing the famous 72 steps. I know, it’s cheeky, but helps me get over the bump. If you need a psychological trick to motivate yourself to financial prosperity, try to picture your future self. You want to make sure that good looking person is taken care of.
One area that I need to work on is “timing” my pace on race day. I find this tricky. At the start of the race the tank is full, legs are fresh and adrenaline is pumping—it is easy to get overly enthusiastic. Although there’s nothing wrong with starting strong, one takes the risk of running out of gas before the finish line. Alternatively, you can start slow, build up your pace and shift to a higher gear later in the race. This strategy is fine, too, but you don’t want to leave too much gas in the tank at the end, with no mileage left to use it. Perhaps, running at a steady pace throughout is the answer?
At retirement, many people face the same conundrum. Should we spend more in early years while we are healthy? Surely our expenses will reduce as we age and become less adventurous. Alternatively, we could start more cautiously and preserve our portfolio to ensure that we don’t run out of gas before the finish line. Maybe it is reasonable to assume our lifestyle needs would stay steady throughout retirement?
A recent study published by The Employee Benefit Research Institute (EBRI) examined the extent to which the non-housing assets of certain retirees changed during their first 20 years of retirement. They discovered that retirees generally exhibit very slow decumulation of assets. More specifically, they found that after 20 years of retirement, the median reduction in savings was only 11.8% for retirees with at least $500,000 in non-housing assets. What is more, one-third of all sampled retirees had increased their assets over that period. (1)
Although this is a U.S. study, in this article in The Globe and Mail, Frederick Vettese, partner at Morneau Shepell, opines that in all likelihood Canadian retirees have preserved the same value or more in non-housing assets.
That is to say, most retirees start the race cautiously and plan to ramp up their spending pace closer to the finish line. “Life is like a box of chocolate. You never know what you’re gonna get”, Mr. Gump’s mama used to say. Indeed, life is unpredictable and full of surprises. So based on your personal circumstances, starting cautiously might be the most prudent approach.
But if you have saved diligently, used the right combination of investment vehicles and strategy, and feel healthy at the start of the retirement race, it is worth considering starting strong to give yourself the best chance to live life to the fullest.
With financial planning projections, we can help you determine your right pace based on your personal circumstances, to help you better your time on race day.
“That’s about all I got to say ’bout that”, Forrest Gump. MH
(1) Asset Decumulation or Asset Preservation? What Guides Retirement Spending? By Sudipto Banerjee, Employee Benefit Research Institute April 3, 2018.