My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, May 11, 2015

How Your Birthdate Can Impact Your Financial Affairs and Retirement

Have you ever wondered if you had been born a few years earlier (or alternatively, a few years later), what effect it would have had on your financial affairs and retirement? I personally have pondered this issue; specifically wondering whether my housing and stock market returns would have improved if I had been born two or three years earlier.

Retirement


Based on my contemplation above, I was intrigued when I read a recent article by Ian McGugan in The Globe and Mail on the perils of early retirement, in which he noted that “there’s not much justice when it comes to retirement. Two people born a few years apart can follow identical investing plans and yet wind up with radically different results, simply because of the way the market performed over the course of their investing lifetimes”.

This issue of varying financial returns is known as “sequence of returns”. The sequence of returns you experience can cause a dramatic difference in your retirement funding, especially when you have negative market returns early in your retirement vs later in your retirement. This is because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. However, based on the data discussed below, you also face a sequence of returns risk when saving for retirement, which is birth year, retirement year and market return correlated.

Those of you who read my six part series on retirement, “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” will recall I discussed the concept of sequence of returns in Part 5 of the series, when I talked about the various factors that can impact both the funding of your nest egg and your withdrawal rate in retirement. In that post, I discussed some comments made by Wade Pfau, a retirement researcher who has a Ph.D. in economics from Princeton and is currently Professor of Retirement Income at The American College and the Director of Retirement Research for McLean Asset Management and inStream. Wade has a popular blog, called appropriately, Wade Pfau's Retirement Researcher Blog .

In Mr. McGugan's article, he notes a new tool created by Wade that reflects variances during the accumulation phase of your retirement. The tool, called The Retirement Wealth Index, reflects how many years of income someone would have accumulated if they had started contributing 15 per cent of their salary to a balanced stock-and-bond portfolio at 35 and continued until they hit 65.

The Globe and Mail article goes on to say that “Prof. Pfau estimates that someone reaching 65 this year would have accumulated 10.7 times their annual salary by following the strict investing regimen described above. That's among the poorer outcomes of the past 20 years. In contrast, an investor who turned 65 in 2000 would have had more than 18 times their annual salary. Even in 2005, a new retiree would have built up a nest egg worth more than 14 times their salary.”
This empirical evidence supports my intuitive observation. What a difference your year of birth can make in your investing nest egg.

Housing


I don’t have any empirical evidence for the affordability of housing, but obviously based on the price of homes in Toronto, in which the average cost of a detached home recently hit one million dollars, it is a huge issue for many, especially younger people.

I have personally observed that similar to the sequence of returns for investing, even a year or two can affect your housing returns. When I look back at friends and family who had comparable financial situations to me, but were either two to three years older or two to three years ahead of me in purchasing their first homes, they always seemed to buy when the Toronto market was weak or stable and to always be selling when the market had risen (and I was buying). As a result, they leapfrogged ahead of my housing affordability simply by virtue of timing and/or date of birth and ended up in areas I could not afford (unless I was willing to take on substantial debt). Of course, I realize I should not be complaining, as my housing experience pales in comparison to today's generation who face a monumental challenge in purchasing a starter home.

I am grateful for where I am financially in my life (although I do have some regrets based on non-birthdate decisions). I do however feel, that my own stock market and home buying experiences re-enforces how the luck of your birthdate can impact your financial future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.