Quick Math Tricks = Financial Wizardry
Quick math to get you into the savings game.
Russell $20 Rule: Estimating Your Retirement Backpack
Every $20 you have at retirement will generate one dollar of income for 30 years (i.e. retire at 60, age expectancy of 90, three per cent inflation with 65 per cent in fixed income and 35 per cent in equities).
For example, if you require $20,000 per year in income (in addition to government benefits or company pension), you will need $400,000 on your retirement date.
FYI: Maximum CPP and OAS support is approximately $17,000 per year at age 65.
Rule of 72: Compounding Coolness in Action
Calculate how fast money doubles by dividing per cent rates into 72
i.e. Your money will double in just over seven years at 10 per cent, at eight per cent money doubles every nine years, six per cent takes 12 years, four per cent takes 18 years (hope you’re young).
By procrastinating, you are eliminating the “Big Jumps.”
FYI: Wealth = money + return + time (use time to your advantage while you can)
Inflation Impact: Cutting Money in Half Without Damaging the Paper
If inflation stays at three per cent, your purchasing power is cut in half every 23 years.
For a 35-year-old, $50,000 will only buy $25,000 worth at 58 years of age and can only buy $1,000 per month’s worth at 81 years. Can you support yourself on $1,000 a month?
A real-adjusted return is what you have after the effects of inflation. You need three per cent just to stay in the same spot—more than that when taxes are taken into account
FYI: Our government boasts that “core inflation” is at 2.3 per cent (June 2009). However, this doesn’t take into account energy or food. Food costs rose 6.4 per cent last month from a year ago, led by a 16.4 per cent increase in fresh vegetables and a 13.9 per cent increase in fresh fruit. Core inflation is a fine measurement as long as you don’t plan on eating food, driving your car or heating your home.
Asset Allocation: Bulls, Bears, Oh My!
Asset allocation refers to how an investor distributes their investments among various classes of investment vehicles. A ballpark guide of weighing equities and fixed income is to assign fixed-income investments to your age. As you get older, your portfolio gets more boring. (Note: boring can be cool).
i.e. At 40 years old, investments are 40 per cent fixed income and 60 per cent equities.
