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Brown-bagging could fund your retirement

Stop eating money now to avoid going hungry later

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Retirement planning is one of those things that's probably better to start earlier rather than later. But how late is too late? It's arguably never too late, as making small changes today can yield big returns in the future. But what's the key change someone can make if they're approaching retirement carrying debt or with minimal retirement savings?

There are five main variables that individuals have a degree of control over in their retirement planning: life expectancy, assets, liabilities, income and expenses.

Mike Baldwin did a great retirement planning cartoon about life expectancy. A man is sitting with his financial planner, who is typing away on her computer. She looks up and says, "If you're alive this time next week, you'll be living beyond your means." OK, so there's not much you can do about your life expectancy. You can try to increase the return on your assets and this is commonly the primary focus of the financial industry.

Typically, increased returns can only be earned over the long run by taking on greater risk, though other strategies such as tax planning or wise investment decisions can also help increase returns. Liabilities are a drag on retirement planning and reducing interest charges by restructuring debt (or avoiding it as much as possible) can help in retirement planning.

Increasing income is easier said than done. Most employees are limited in terms of salary increases or bonus potential, but they can always get a part-time job or start a side business. The self-employed can always work more to increase their income. Last but not least, pre-retirees (or everyone, for that matter) have a strong degree of control over their expenses. Expenses are the variable people have the most control over. It can be a lot more empowering to choose to cut your expenses in advance of retirement rather than being forced to do so in response to a shortfall while in retirement.

Surprisingly, small changes make a big difference. Consider two small changes most people could easily make to their budget: their home phone and eating out. The base monthly cost of one national home phone provider is $58.61. That's more than $700 a year and seems unnecessary given most of us also have cellphones.

What about eating out? Assuming someone spends $7.50 a day for lunch from Monday to Friday and they take four weeks a year of vacation, that's $1,800 a year. If they brown-bagged their lunch, they could probably keep their costs around $2.50 a day or $600 a year. That's another $1,200 of potential savings.

What impact would these two changes have for a 45-year-old? Assuming they make the two changes and put those savings toward either paying down a debt at six per cent interest or investing them at a six per cent return (ignoring tax refunds from RRSP contributions), they will enter retirement at 65 with a net worth $84,356 higher.

What does this mean in the long run? That retiree will be able to spend an extra $6,207 a year for 20 years (indexed to inflation). That's the equivalent of about $4,177 in today's dollars, which could be a significant increase in one's retirement budget. Retirement planning is all about costs and benefits.

People have to weigh today's costs in order to place a value on tomorrow's benefits.

 

Jason Heath is a fee-only certified financial planner and income tax professional for Objective Financial Partners Inc. in Toronto.

Republished from the Winnipeg Free Press print edition June 28, 2012 B5

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