Your physical strength is more about your core
and less about how big your muscles are. Your core strength improves
your flexibility and balance, at the same time as it keeps your bones
strong. In financial health it is the same; savings are core to maintaining
financial security at every stage of your life, including retirement.
What you will need to take the Financial Strength
test:
Net pay amount
Savings account statements
Retirement account statements including your pension statement
Other investment statements
Calculator, pencil/pen and some paper
Internet access (not required but helpful)
Step 1: Calculate your monthly take home pay
Take your net pay and multiply it as follows:
•
If you get paid once a month that is your
net monthly take home pay
•
If you get paid every 2 weeks multiply
your net pay by 2.167
$1,153.67 x 2.167 =
$2,500.00
•
If you get paid every week multiply the
amount by 4.333
$576.97 x 4.333 =
$2,500.00
Add any other monthly income:
•
Investment income
$37.56
Total net income
$2,537.56
Step 2: Calculate your total monthly planned savings contributions
Take each of your savings statements and add up the monthly contributions:
•
RRSP savings
$50.00
•
All savings accounts
$0.00
•
Mutual Funds
$100.00
Total planned monthly contributions
$150.00
•
Take the total planned contributions and
subtract 10% of your total net income to determine if you are meeting
your savings goal
$150.00 – $253.76 =
–
$103.76
Step 3: Finding your place on the Strength scale
Part 1:
Monthly savings – find the category where
your monthly planned savings falls:
•
Surviving: current non-retirement
savings $0 – $49
•
Stable: current non-retirement
savings $50 or more, but less than 10% of net monthly income
•
Secure: 10% or more of
net monthly income
In
our example we are in the stable category – we save more than
$50 a month, but we are not meeting the minimum 10% of net monthly
income requirement.
Step 4: Calculate your total savings to fund your Retirement Plan
Take each of your savings statements and add up the amounts
•
All term deposits
$23,816.27
•
All savings accounts
$1,214.25
•
All Mutual Funds
$38,499.98
Total savings
$63,530.50
Take 70% of your highest annual income
and multiply that by the number of years you expect to be retired
$80,000 x .70 x 20 years =
$1,120,000
Subtract what you currently have saved
$1,120,000 – $63,530.50 =
$1,056,469.50
Divide by the number of years you have
before retirement
$1,056,469.50 ÷ 22 years =
$
48,021.34
Calculate roughly what you need to save
annually (including interest/investment income) to fund your
retirement:
•
Subtract your total
expected annual pension payments from all sources from your last
calculation (i.e., CPP and your May’09 pension plan statement)
$48,021.34 – $36,140 =
$11,881.34
Step 5: Finding your place on the Strength scale:
Part 2:
Retirement
planning – find the category that your retirement saving falls:
•
Surviving:
No retirement plan
•
Stable: Minimal retirement
plan, but planned retirement savings does not meet the annual target
retirement savings requirements
•
Secure: Retirement planning
meets the annual target savings requirements
While we are on our way to saving
for retirement we do not save enough annually to meet the calculated
annual requirements. Overall, then we are considered stable.
Strength Improvement Plan Now that you know where the gaps in your savings are it is
time to come up with your new savings strategy. Paying yourself first
is the simplest way to make an immediate difference. The minimum amount
that you should be saving every month is 10% of your net monthly income
– in our example that equals $253.76 ($2,537.56 x .10). This means each
month before you pay anyone else – you immediately move a specific amount
into a savings vehicle. Whether it is to a variable RRSP account, mutual
fund, TFSA or a daily interest savings account – it happens first.
But first you need to know where you are in
terms of your expenses. If you have not already done so now is the time
to do your Financial
Cardio test as you need to know if your savings goals can
be met. Once you have your budget worked out determine if there are
some extra expenditures you can cut back to get your savings ramped
up over the coming months. It will not be too long before your strength
improves along with your flexibility and cardio.
Not sure where to start – come in, drop us
a line or give us a call.
Financial
Fitness Test: Strength
