HOPE FOR EARLY RETIREMENT PART 2: HOW YOUR FINANCIAL ADVISOR MAY 'ADVISE YOU'

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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What Are You Most Likely to be Told?

I've written about financial advisors before and will give a brief summary here. Basically, I believe that, like every other field on the planet, most financial advisors do an ok job, some do a terrible job, and a few do a fantastic job and actually advise you on financial matters in your best interest. Here is what my experience has been with financial advisors (my experience hasn't been good).

If your experience with a financial advisor is like mine you will most likely be asked for the amount of money you want to retire on, then will need to figure out how much you will need to save every year in order to meet that goal. Let's use an example. Let's say you would like to retire on $50,000 each year for the rest of your life in retirement, you are now 35 years old, and you want to retire when you are 60 years old (doesn't sound like early retirement, does it). You will have to decide on how much interest you will likely achieve each year in your retirement. The going wisdom right now is that you would make about 4-6% in safe investments (that's actually high for going wisdom, but let's play along). Let's use 5% for this example. You will need to save $1,000,000 before the age of 60 in order to retire on $50,000 each year at 5%. You have 25 years to save $1,000,000. That means you will need to save an average of $40,000 each year to have $1,000,000 by the age of 60. Some may argue that you don't have to actually save this much because you can invest it, but even at an average annual return of 9.25% (including the cost of money managers for mutual funds and inflation of 3%) you will need to save $25,000 each and every year until you retire. If you want an actual early retirement, you will need to invest $48,000 each year with the same returns to retire by the age of 50.

Problems With This Scenario

The most you can invest in an RRSP for 2015 is right around $25,000, but in order to be able to put that much away, you would need to make $140,000 (you can only contribute up to 18% of your annual income).

Mutual funds require you to pay the money manager before you take out any money. The average tends to be around 1.25% of your portfolio. That means for every $1,000,000 saved you will be paying the money manager around $12,500 even if your portfolio losses money that year. If your portfolio makes 5%, then after your payment to the money manager AND the erosion of your money to inflation (let's say 3%), you will have made only 0.75% on your money. The reality is that you will need to make much better returns than you think you will need to. In retirement you may actually need to make about 9.25% in order to have the $50,000 each year you originally wanted.

You are taxed fully on each dollar you 'make' in retirement. So, under this year's tax requirements you would lose about $9,350 to taxes if you live in Alberta. That means you only have just over $40,000 left to live on.

Inflation eats away your money's worth each year. What this means is that in 25 years you will need more than $100,000 each year to equal the amount $50,000 buys you this year.

The average financial advisor makes money only if you invest in certain mutual funds. This makes it difficult to make the best decision for yourself because you have limited options.

Summary

While this post isn't that much different than my first in this mini series, it illustrates how difficult it is to retire early for most Canadians. In my next post I will give an alternative where you have to invest less and you will retire with more than either of these first two posts.



Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html