TORONTO, June 3 /CNW/ - Some investment experts estimate that retirees
will need to replace as much as 80% of their pre-retirement income for a
financially healthy retirement.
But according to Russell Investments Canada's new "Retirement Rule of
$20", it's not a question of how much income replacement is needed - it's how
much you'll need to collect from investments, benefits, and pensions per year
in retirement. These factors can combine to help retirees combat market
volatility and longevity risk.
"If you are close to retirement or already there, this rule of thumb
gives you an estimate of the amount of investment income you can expect to
earn annually over the rest of your lifetime. Remember that your investment
income may be supplemented by other sources such as pension plans and
government programs," explains Irshaad Ahmad, President and Managing Director
of Russell Investments Canada.
The $20 Rule of Thumb
The Russell Retirement Rule of $20 simplifies retirement planning by
breaking it down as such:
- For every $1 of annual income you expect to need over your
retirement, you will need $20 saved at the day of your retirement
(with inflation indexing).
- The $20 Rule is based on current data regarding average life
expectancies and the long-term rate of return from a balanced
retirement portfolio consisting of 35% equities and 65% bonds.
- Example: A couple is heading into retirement with $400,000 in
registered savings. They can expect that $400,000 to generate about
$20,000, increased by an annual inflation rate of 3%, in annual
retirement income (exclusive of other sources such as CPP, OAS, etc.)
for a period of over 30 years.
"Even in these volatile times, Canadians have a lot to be optimistic
about when planning their financial futures. The Retirement Rule of $20 can
help you determine the level of income you'll generate in retirement based on
your registered savings. In addition, these savings may also be supplemented
by other sources of income, such as government pension plans," says Ahmad.
"Based on Russell's Rule of $20, a couple's $400,000 in registered
savings can expect to generate $20,000 in retirement income. Combine that with
an estimated $25,000 worth of CPP and OAS income and a couple's total yearly
retirement income can be approximately $45,000. This is just one example,
since other scenarios could feature various levels of savings and potential
income, depending on the retirement lifestyle that a couple has in mind."
The Rule of $20 is a quick and powerful way to measure your expectations
of post retirement income based on your current retirement savings. It can
also be applied to plan for two of the biggest threats to your retirement
income: market volatility and longevity risk."
"Even with a conservative 35% allocation to equities, the obvious concern
for retirees is the impact of significant volatility in the early years of
retirement, especially taking into consideration the markets of late," says
"When the Rule of $20 is tested in a previous challenging historical
return environment for both equity and fixed income - using the mid 1920's as
the starting point of retirement, the results are encouraging."
As Figure 1 shows, there is significant up and down market volatility
right at the onset of retirement, but interestingly, the payout potential is
not reduced as longer term probabilities of capital markets come to fruition.
The black line shows how long a $20 investment would have lasted using actual
historical data beginning in 1924. The result is that the portfolio achieved
payout expectations that lasted more than the 30 years base case scenario (the
Figure 1: Rule of $20 Adjusted for Duration of Payouts
Managing Longevity Risk
According to Russell research, the Retirement Rule of $20 projects a
retired couple's funds to deplete in about 30 years or around age 90, assuming
retirement at age 60. While that's a decent lifespan by most standards, it
does leave open the possibility of running out of money during a lifetime. In
order to alleviate some of this risk, a couple could aim to save more. Figure
1 shows the impact of saving $25 per $1 of desired income; this would project
payouts to last slightly beyond age 100. Conversely, if the couple only saves
enough for $15, all else being equal, payouts would be expected to end around
"There are of course ways to work around this potential shortfall.
Reducing the payout rate to something less than $1 is an example. If $15 was
the only achievable amount, the couple can reduce their payout expectations to
$0.76, which increases the duration by 9 years to the initial 30 year
projection. Other approaches may be to take on part-time employment or curtail
spending, all viable means to aid in bridging the gap," says Ahmad.
"The Retirement Rule of $20 gives you a retirement asset target and can
help you to plan your retirement savings to meet your long term goals.
However, it is still highly recommended that you talk to your advisor so that
you are introduced to programs that can provide you with enough income to
provide for Essentials and Lifestyle while leaving enough for your Estate."
The Retirement Rule of $20 is part of Russell's complete retirement
investment solution, which features a full range of retirement portfolios,
such as the Russell Retirement Essentials Portfolio.
For more information on the research details regarding Russell's $20
Retirement Rule and other Russell Retirement Solutions, please contact Thien
Huynh (416) 640-2529 or visit www.myfinanciallyhealthyretirement.com.
Russell Investments provides strategic advice, world-class
implementation, state-of-the-art performance benchmarks and a range of
institutional-quality investment products. With nearly US$150 billion in
assets under management (as of 3/31/08), Russell serves individual,
institutional and advisor clients in more than 40 countries. Russell provides
access to some of the world's best money managers. It helps investors put this
access to work in corporate defined benefit and defined contribution plans,
and in the life savings of individual investors.
Founded in 1936, Russell Investments is a subsidiary of Northwestern
Mutual Life Insurance Company and headquartered in Tacoma, Wash. Russell has
principal offices in Amsterdam, Auckland, Johannesburg, London, Melbourne, New
York, Paris, San Francisco, Singapore, Sydney, Tokyo and Toronto.
Russell Investments Canada Limited is a wholly-owned subsidiary of Frank
Russell Company. For more information, please go to www.russell.com/ca.
Commissions, trailing commissions, management fees and expenses all may
be associated with mutual fund investments. Please read the prospectus before
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past performance may not be repeated.
Nothing in this publication is intended to constitute legal, tax
securities or investment advice, nor an opinion regarding the appropriateness
of any investment, nor a solicitation of any type. This is a publication of
Russell Investments Canada Limited and has been prepared solely for
information purposes. It is made available on an "as is" basis. Russell
Investments Canada Limited does not make any warranty or representation
regarding the information.
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The Rule of $20 is based on a number of assumptions: The annual
withdrawal amount is discounted at the calculated indexed annuity rate of
2.86% and it is based on an allocation of 35% Equities & 65% Fixed Income.
There is a 0.7% alpha (or return on top of assumed asset class returns)
assumption for the total nominal return in addition to a management fee of
1.8%. The return assumptions for the asset classes are 9% for equities, 6% for
fixed income and CPI is assumed to be 3% for the duration. The mortality rate
used for the Rule is based on actuarial table "Unisex UP94 projected to 2015
using scale AA" (Source: Society of Actuaries). The form of distribution used
for the calculation of the Rule is Joint and Survivor with the contingent
beneficiary receiving 60% of original estimated distribution once the primary
recipient passes away. The contingent spouse is assumed to be age three years
younger. The investment is assumed to be held in a registered account.
For further information:
For further information: Thien Huynh, (416) 640-2529; Katita Stark,