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The BAPKIN PlanA Back-of-the-Napkin Approach to Financial Empowerment
By Gerard Hass
iUniverse, Inc.Copyright © 2012 Gerard P. Hass
All right reserved.
Chapter OneSTEP 1: A BETTER LIFE
You know you want it! The Dalai Lama says so.
My friend Michele looked up at the people gathered on the overpass along Highway 401, now appropriately named the Highway of Heroes on its stretch from Trenton to Toronto, and asked, "Why do you suppose they do it?"
I looked up as I always did, at each successive overpass, to nod my respects to the scores of people who had dedicated this Sunday afternoon to standing along the highway, some with Canadian flags waving, others with signs, and yet others with just themselves but all with a sense of purpose. Firemen in full dress uniform from each community along the route stood on fire trucks, providing colour guards with flags flying, as did some Ontario Provincial Police officers. They were here, as they always are, to pay their respects to the most recent Canadian soldier who had been killed while on duty in Afghanistan.
"I suppose they are here to pay their respects to the deceased and show love and support to his family."
"I understand that," Michele commented. "I mean, why do you think the soldiers become soldiers?"
Good question. Having spent five and a half years in the Royal Hamilton Light Infantry, I felt somewhat qualified to provide an answer. "Various reasons, I would imagine. Speaking for myself, I felt a sense of duty to serve my country and help others, I craved the adventure that the military provides, and I thought maybe I could make a difference in ensuring that democracy and freedom remained entrenched in our daily lives. I also got $18.25 a day."
Okay. So the money I got paid was very little incentive considering I made more than three times that amount as a student employee at Stelco. Michele did pose a good question though. Why would people be willing to sacrifice their lives for people they don't even know? It also got me to thinking further. What motivates us to take chances or make sacrifices for what seems to be little reward? What core needs are we trying to satisfy?
I know that when I ask clients what their core desires are, a common answer is that they want to reduce stress and simplify their lives. But as I question them further and we drill down to why each need is important, a common theme develops—most people express themselves as wanting to enjoy life and/or wanting to help others.
These are our core desires, and they lead to the conclusion that we are looking for our lives to have meaning. We want to feel like our existence matters. We want to feel a sense of accomplishment. We want to justify our life. We want to understand our purpose. We want to feel inner peace and have peace of mind.
Having a sense of purpose is the root of our desires, and this leads us to want a better life. That's what we are seeking. The Dalai Lama has expressed that our life's purpose is to seek happiness and that our journey is that of seeking something better. I happen to think he's right, and perhaps, upon reflection, so will you.
If we are seeking a better life, the next step is to understand the importance of our health in contributing to that goal. Oh, I'm not just talking about our physical and mental health, although these are very important components of our overall health. But you should recognize that many different facets of your life are integrated. I like to think in terms of five different facets of health—I've already mentioned mental or emotional health and your physical health—but there is also the health of your relationships, your spiritual health, and your financial health.
You may not think so, but these are all integrated, like pieces of a puzzle. If one of these components is doing poorly, it can have negative effects on the other aspects of your health.
Let me give you an example. Years ago while working as an investment adviser, I came across a couple, Diane and Henry, who had made some terrible financial choices. Henry was working for steel manufacturer Stelco Inc. and had seen the stock rise out of the recession in the early '90s from $1 a share to $9. Henry was convinced that this was only the beginning of something big, so he and his wife invested their entire retirement savings, amounting to several hundred thousand dollars, into the stock. Not very prudent. As well, Diane had power of attorney on a family member's money, and they invested all that money into Stelco stock as well.
By the time I had met the couple, the damage was done. They had several months where they could have undone their financial folly, but they wanted to score big so they sat on their investment and hoped for the best. Unfortunately the best didn't happen. Stelco stock went down significantly, and they saw more than half their savings disappear quite quickly. And it got worse. Stelco eventually went bankrupt before US Steel bought the assets, but there was nothing left for the shareholders.
The stress of having put all their money, including the money Diane was looking after for her family member, into one stock that didn't do well was taking its toll on their relationship. Diane's emotional health had deteriorated to the point where she was on antidepressants, and her physical health had also deteriorated as a result of all the worry. She was continually sick, and it affected her work.
The couple ended up eventually pulling themselves out of the financial crisis, but only because both of them had jobs with pensions. Their retirement lifestyle was significantly reduced because of their choice, and they both had to work almost a decade beyond what they had originally planned on.
Relationships, financial health, emotional health, physical health: I think that you can see from their experience just how the different pieces of the puzzle can affect your well-being.
I'm not qualified to advise on relationships, emotional health, and fitness, but these components are just as important as financial health. Someone in poor health can have difficulty earning money from employment and may have high medical bills that eat away at his wealth or make it very hard for him to create any. If you are depressed, it might have an effect on your work and creativity.
Seek out knowledge in these areas, but like everything else, keep it simple. You are more likely to stick to it if you do. For example, it's not rocket science to understand that maintaining a healthy weight will help you stay physically healthy. A proper diet combined with exercise can help control this. A person wanting to eat in a healthy manner would be sure to control portion sizes and not to overeat. He would stick to low fat items, and vegetables would not be a foreign word unless, of course, you spoke a foreign language in which case it would be some other word that meant vegetables.
Which reminds me: I personally believe that having a sense of humour and not taking yourself too seriously goes a long way to good health and happiness. If nothing else, read the comics once in awhile. Smile a lot and thank people even for the smallest things. A positive attitude can help you take the right steps to making your dreams a reality.
Being Committed to a Better Life
So, you've concluded that you also are seeking a better life. What is the first financial step that you should be taking?
The first step is to be committed to following a simple plan with a simple goal, something that you can remain committed to without it being overbearing. We'll start with Step 1: being motivated, committed, and having a target number. A what? A target number. C'mon, you must have seen the commercials that some financial institutions have been sponsoring telling you that you're supposed to have a personal number.
The target number is what you are striving for your investment assets to be worth at retirement. It must be achievable based on your personal circumstances, and for most people it will fall between $300,000 and $900,000. I also like clients to have a second target number, a higher number that includes the value of your home and any other assets that can be sold to provide retirement income or a value for an estate. This second number helps us make big- picture financial decisions throughout our lives, but we'll touch on this later.
Middle-aged, middle-class workers are kidding themselves if they feel they are going to have a retirement as comfortable as their parents without saving for it. The reason is that many of our parents had defined-benefit pension plans. These are the type that most teachers, health care workers, and government workers have. They are guaranteed incomes that are paid to them in retirement based on their years of service and the income levels they earned.
According to data provided by Statistics Canada for 2008, about 30 years ago almost 35 percent of the labour force belonged to a defined-benefit pension plan. No longer. Now, only about 25 percent of employees have them, and almost 60 percent of those are public sector employees. The rest of the working masses have a form of savings plan that their employer offers and provides some small contribution toward, or they have nothing at all.
While government pension programs—Old Age Security and the Canada Pension Plan (Quebec Pension Plan in Quebec)—will carry part of the load, the vast majority of workers today are responsible for saving most of the funds that go into their savings plans, and they carry all the risk of how the investments perform.
But most people are not sophisticated enough to handle these moneys in the way a pension manager would, and they lack the coolheaded needed to do so, which makes it likely that they'll earn significantly lower returns than their parents' plans did, and thus they'll have less capital to provide for them in their retirement.
There's some debate as to how much is enough, but according to a well-known pension expert a typical couple should do just fine in retirement if they pay off their house and each partner accumulates $200,000. He stated that a $500,000 RRSP, along with government money, is enough to provide a couple earning $100,000/year with what they're used to in retirement. And thus, for most middle-class persons that do not have a defined-benefit pension plan, $500,000 is a good target number to have in savings.
Of course, $500,000 is for someone who is retiring today. If you are younger, then you'll need a larger number, because costs rise over time. We can only hope that incomes also rise so that you can sock away a larger amount more easily.
A 2010 analysis done by Russell Investments also substantiates $500,000 as a decent number to be shooting for. The study finds that you'll need to save $20 for every $1 in pension income shortfall that you would like to earn. This number is a rule of thumb that they have devised, and it incorporates the retirement needs that we may have to cover—essential living expenses and lifestyle expenses—as well as income that we may be receiving from the government or our company pension plan.
Yes I am very aware that having such a number is not as good as sitting down with a financial planner and having a proper plan prepared for you based on your personal situation, but the purpose of the BAPKIN approach is to recognize that many, many people are not going to do so. I would sooner see you doing something as simple as the napkin plan suggests rather than nothing at all. After all, if you try to achieve $500,000 in retirement savings and fall short, you'll still likely be better off than if you procrastinated and did nothing.
What should your number be? I think you need to consider your personal circumstances. How much money do you presently make? Are you comfortable with this? If you had no debts, would you be comfortable with one half that amount? My experience has been that most people would be. So a family making $140,000 would be trying to have a retirement income of $70,000.
Is this possible? Well, yes it is. It is very possible. Let's say both the husband and wife worked, with one earning $100,000 and the other earning $40,000, and they are aged 40. Let's also say that they have managed to save $80,000 in their RRSPs and company savings plans.
Since they are both working, it is reasonable to assume that, as a family unit, they could receive government pensions of about $25,000. Currently a full Canada Pension pays in excess of $10,000, and Old Age Security pays in excess of $6,000, so given that a couple could receive as much as $32,000, I think an estimate of $25,000 is being reasonable.
Could be more or less, but if they did receive $25,000 they would need to have enough capital to generate an additional $45,000 in income. Using the Russell rule of thumb of 20x, that would mean they would need to save $900,000. Assuming they save for 25 years (to age 65) and earn 4 percent on their savings, they would need to save approximately $16,500 per year combined, or just less than $1,400 per month. This would include what they and their employers are paying into their company group retirement plans. This is absolutely doable for persons dedicated to a better life, considering that, in our example, this couple would be receiving almost $9,000 per month in after-tax income while working.
The math is no different for a single person and is also achievable. After all, a single person is more accustomed to living off her sole income throughout her working years. If we are trying to achieve about 50 percent of our present income when we get to retirement, a single person would likely have a lower retirement savings goal (since it's based on a single income), and so the amount required to provide that income isn't likely as much as a married couple.
It is sometimes easier for a single person—whether a single parent or not—to save for retirement than it is for a married couple, at least once the kids have grown up and moved out, because that person need only be disciplined for himself or herself. Sometimes couples have the additional complication of one of them being a big spender.
But don't get wigged out by all these numbers. Just decide on a target number that you are shooting for—higher or lower than $500,000. That's a start. You can always refine it later using the help of a professional financial planner, but at least it is something that you can start to work toward right now.
Be committed to a simple plan and a simple number.
Be committed to wanting a better life, and start taking steps toward better health and wealth.
Whether it is an exercise program, better eating habits, or developing a savings program, take smaller steps until you get comfortable and develop good habits. Actions take time to become habits so do things in stages until they become habits, and then take the next step. It's all about developing and sticking to a positive program, so don't derail yourself by making it too hard to do. Be proud of your small victories and learn to think positively. Decide on what your number is going to be, between $300,000 and $900,000, and start thinking about how you are going to achieve it.
I have a target number that I am saving toward: Yes No
Chapter TwoStep 2: Live within Your Means
So now that we have our "number," how do we get to it?
One critical element of the BAPKIN Plan: You should not have any debt when you retire. Simplifying life means not having to worry about payments at a time when you are relying on capital to live. No mortgage. No car loan. No debt. Debt repayment is part of the next step in the BAPKIN approach.
We supposedly live in different times than the past three decades. It is being called the "new normal," a term popularized by Bill Gross of investment management firm PIMCO, and its meaning has morphed into people no longer being voracious consumers and investment risk-takers but rather cautious, subdued, and net savers, similar to those who survived the Great Depression. It is a function of the recession and high unemployment levels that are being experienced as a result of the global financial meltdown and the aftershocks that have been occurring in economies worldwide since 2008.
If we're not working, we're not spending. If we think our jobs might be going to disappear, we don't spend. If our new job pays less than our old job, we don't spend as much. We'd rather pay down existing debt than incur more debt. We have games nights at home and eat in a lot more. In other words, we are learning to live within our means. That's the new normal—or so that's what is supposed to be happening.
Is it? For many responsible persons, yes it is, but there is an element of society known in investment circles as the "new abnormal" or the "schizophrenic consumer." This being avoids brand name staples for items such as shampoo and toothpaste but splurges on more expensive discretionary items that he doesn't need, like a daily latte. It's sort of a Jekyll-and-Hyde spending pattern.
Excerpted from The BAPKIN Plan by Gerard Hass Copyright © 2012 by Gerard P. Hass. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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