How Long Will Your Money Last ?

How Long Will Your Money Last ?

...That depends

  • How much do you have?
  • How much do you want to withdraw each year?
  • What Rate of Return do you expect on Your Investments? (Is it realistic?)
  • What is the rate of inflation?

Actuarial Expectations

Financial actuaries today calculate that annual withdrawals from a portfolio should be about 3% of the initial value if the portfolio is to be sustainable. Most clients want or need more, so let's look at a typical scenario for someone with $300,000 in savings.

Scenario Assumptions

  1. Deposit $300,000 and withdraw $15,000 per year. You only need to make 5% per year to maintain that income...sounds reasonable. But returns on GIC's are too low, so you invest in a moderate risk portfolio of about 50% equity and 50% fixed income investments. That should be safe enough, right?
  2. Market returns over first three years are ...+8%...+11%...then a bad market and you lose 20%. Remember the 2000-03 Tech Bubble Crash and the 2008-09 Subprime Mortgage Crash? A 20% loss for a moderate risk portfolio can easily happen. Even dividend stocks lost values up to and over 50% in some cases. Read about Dividend Stock Risks here.

Results

YEAR 1
  • $300,000 makes 8%, so at year end, the portfolio = $324,000
  • You withdraw $15,000...leaving a balance of $309,000
YEAR 2
  • $309,000 makes 11%, so the portfolio = $342,990
  • You withdraw $15,000...leaving a balance of $327,990
  • So far, you have drawn $30,000 and still have $327,990...more than you started with...looking good.
YEAR 3
  • $327,990 losses 20%, so the portfolio at year end = $262,392 ($327,990 - 20%)
  • You withdraw $15,000...leaving a balance of $247,392
  • At this point, the portfolio is in trouble.
  • If the next year was again weak and only had modest losses of -4%, you would end the 4th year with a portfolio worth about $222,496. Not a comfortable feeling when you want to draw $15,000 per year. The withdrawal rate is now over twice what financial actuaries recommend. It has become a slippery slope.

There are options to provide security to ensure that you don't run out of money, as outlined in our How to Buy a Pension discussion, but in the meantime...

How long will your money last?

You need to speak with your financial advisor and request an analysis. Or, if you need help, contact us and we will put you in contact with a Canadian Financial Advisor who has experience working with Canadians in Mexico to help them establish secure income streams.

Refer me to a Canadian Financial Advisor

Return to How to Buy a Pension

Return to Canadians in Mexico main page

HOME Page