Tool - Accumulation - Projecting Balance

 

Tool : Why save 15%

A simple tool to understand why we should save 15% for retirement. 

To access the file, clic above for a link to an Excel file without macro. The goal of the tool is to let you understand the impact of savings. It will allow you to model the impact of a higher savings rate, higher salary, of savings later and much more. See at the end for other information to navigate the file.  

Analysis :

Virtually all in finance recommend to save for retirement. Often, we talk about a 10%-15%. But why? Go into the tool above to explore what savings means for you. 

Conclusion: 

• For a 50 000$ salary, saving 15% starting at age 20 provide 1.3 million at age 60 .
• Supposing that we need after retirement 70% of salary pre-retirement (due to lesser tax/paid house/no more kid) and the rule of 4%, it should provide a retirement at age 57. This would however not count for governmental pension or taxes.
• Some parameter in the tool have a multiplying effect. In other word, if we increase by x% that parameter, the balance increase by x%.
• Savings rate, this has a linear impact. However, if you change our savings rate during your lifetime, the impact would not be linear. The tool permit to change the period when you are savings which simulate a bit this.  
• Starting salary, this has a linear impact. This is incredible at first glance, keeping all else equal, a person earnings $100,000 or $50,000 would be able to retire at the same time if he save the same %. The tool also have a salary increase parameter. The impact is almost linear, but not exactly.  
• Impact to start savings later 

• The impact of savings 10 years later is huge. We can overcome it by saving a lot more. 
• Assumptions: 
• Saving until age 65
• Current $ is identical for all scenarios 
• Impact to stop saving earlier
• What would be the impact to stop savings before retire, while saving from age 20

• If we compare, it is worst to wait 10 years and invest for 35 years than to save at age 20 and stopping 20 years later ($816k vs $873k in the above table)   
• Impact of the return 
• In Canada, many investment options have gigantic management fees. We use to see 2% fees, a few years ago. 1%-2% of management fees may seems small, but the impact is enormous. Today, we still see investment fees of over 1% which ruins our retirement perspective. Here's the impact of changing returns : 

• The scenarios with fees (ie: -x%) are horrible. If we invest in a product with 2% of investment/management fees, we lose more than 50% of our balance in the firm pocket which seek to "help" us invest. 
• With 0.5% fees, its more reasonable, we still lose a bit more than 10% of our balance. You can limit the fees by investing by ourself via an online brokerage account (Qtrade, Wealthsimple, Questrade and others). 
• Instead, if the scenarios are better than expected, we could see a doubling of our balance. The return used in the scenarios are those for investing in actions only based on the estimate from the institute of financial planning of 2024.
• The impact of asset allocation
• The base scenario is 100% in actions. It is the one with the greatest return. For a young 20 years old, it would be disastrous to invest in short term or even bonds. However, a mix of bonds and actions or a target date fund, could be more appropriate if it let you sleep at night and prevent you to sale at the wrong time. Target Date Fund diminish the % in actions the closer you are at the target date. The returns do not account for diversification and rebalancing. However, the impact of rebalancing and diversification is just around 0.1%-0.2%.   

How to use the tool:

• Save the file on your computer.
• Go under the tab EN and modify the input cell in green. 

Tabs:

• EN : Main tab to explore. 
• Autres scénarios : A list of scneario pre-prepare for you to explore the impact of your choice 
• Hypothèse :  List of assumptions and the reference for these 
• Table :  Statistics

Lexicon:

Current $ : Impact of time. To better understand at is worth $100 in 45 years, it is easier to use current $ . Example, $1,000,000 in 2024 was worth the same as $970,873 in 2023 supposing a 3% increase in cost of living.  

Need pre retirement vs post retirement : While subject of debate, many experts think that we will have less needs after retirement than before. Before retirement, we are paying for a house, we have dependent kids, higher taxes and some cost related to going to work. A rule of thumb says that we would need about 70% of our earnings after retirement. 

4% Rule : Withdrawing 4% of the balance each year, we would never empty the piggy bank. We can also increase the original withdrawal by the general inflation and would still never miss any money. This is based on historical study which reflected the impact of withdrawing 4% per year during 30 years and the balance remained positive starting any years since 1930s.