The Stanford Research Institute advises planning to replace 75% of one’s economic human life value in the event of death, disability or retirement. What does this actually mean?
Consider your ability to earn an income akin to a money machine located in your basement. Just as you would insure such an asset against flood, theft or fire damage; its real present value is equivalent to whatever capital is required to produce your Family’s current annual income. If 5% is the assumed investment return and the annual income is $100,000 – then $2m of capital is required. If $300,000 – then $6m. (see Mark Etherington’s Trusted Advice article of April 23rd, 2012 entitled “You Might be Surprised to Learn What Your Greatest Asset is.”) Yes, that assumes the capital is preserved; but is also available to allow the family to stay in their home; afford its alteration to accommodate a disability; index the income; pay for emergencies; help fund educational costs, etc., etc.
While a disability/critical illness or premature death can occur anytime, insurance can be provided for pennies on the dollar to provide replacement capital and income; retirement only occurs at the confluence of “transition” and “ambition” as outlined in the first article of this series. Thus while it requires the actual capital to fund the required income target, it will not on average represent a sudden event; or conversely its funding can be well planned.
Hopefully mortgages have been paid; education provided; many years lived and assets accumulated. Therefore one should have more assets to accommodate less longevity; although in retirement some people worry that one’s weekends grow from two to seven days weekly.
Kira Vermond wrote an article special to the Globe and Mail on Jan 27th, 2016 entitled: ‘How Long Will I Live?’ and other helpful online retirement calculators. In it she makes the point that everyone’s retirement needs are different and that whilst a financial planner can accurately help tailor a specific retirement plan, there are a number of tools available to allow everyone first to glean a better idea of their targets:
“The Retirement Goal Planning System app” from the Allianz Global Investors Centre for Behavioral Finance helps prioritize retirement goals.
“How Long Will I Live” from the University of Pennsylvania helps you understand your expected retirement income time frame while the “CANADIAN Retirement Income Calculator” from the Government of Canada outlines what you can expect from the Canadian government and what you need to be saving to close the gap.
“GetSmarter AboutMoney.ca” from the Ontario Securities Commission provides cash flow and retirement budget worksheets.
“ESPLanner BASIC Canada” from the University of Calgary School of Public Policy addresses what they refer to as ” life – cycle consumption planning” to keep one’s standard of living as consistent as possible throughout a person’s life.
More thoughts ahead in Article 3 of this series; but hopefully helpful tools in the process.
