Do I have enough money to retire? Will I run out of money? Am I ok? These are some of the most fundamental questions that financial planners are positioned to answer. They are also some of the most subjective and complicated questions to address because the answers are different for everyone. In a survey completed in February 2020, it was determined that 70% of Canadians who are saving for retirement are not sure if they are saving enough.[i]
Understanding Personal Consumption
Ensuring that clients have enough money to retire is one of our most important responsibilities and is dictated by two key factors: how much you save and how much you need to withdraw per year in retirement. Although both of these factors sound like simple tasks to determine, there is one common variable that underpins success and is a requirement for calculating cash flow; you need to have a very accurate and clear understanding of your personal consumption rates.
Canadians frequently do not know the magnitude or the details surrounding their personal consumption. In our experience, clients often know the cost of big ticket items such as their mortgage payment, car payment, and company stock purchase programs, but when it comes to their consumption rate, clients often misjudge the amount they spend by about 25%. When personal consumption is misrepresented it can lead to bad advice. If the estimation is too low, it will result in positive planning outcomes where there should not be any. A number of negative scenarios are then possible including having to make drastic lifestyle changes or not having enough money to retire.
How Are We Solving The Problem?
At Camber, we value the data and believe that using numbers that are “good enough” or “a rough guess” is not acceptable when it comes to building our client’s retirement strategies. So, we did something about it. Together, with the University of Calgary data science department and our own real-world experience, we developed an algorithm to improve the way we understand and determine personal consumption. Using the Statistics Canada’s Survey of Household Spending dataset, our algorithm takes a few key client data points and predicts consumption across a variety of broad consumer and household consumption categories.
Consumption rates should not be confused with total spending; meaning that they do not include taxes, mortgage or rent payments, loan payments, or savings. Think of consumption rates as lifestyle expenses. For example, the cost of eating at restaurants, drinking a Starbucks every day, or the handful of subscription services most of us have. A $15 Netflix account is easy to omit and does not seem relevant, but once you add up the monthly costs of your Disney plus, Spotify, Crave, Amazon Prime, and Apple Music accounts that $15 becomes quite a bit more. These little expenses add up and are almost always underestimated.
Our algorithmic method ensures that we have the most accurate consumption rate possible to build our clients’ plans. By taking the parameters from our dashboards including income values, mortgage details, and tax rates, and combining them with publically available data from Statistics Canada, Camber can build an accurate baseline for a client’s consumptions rate. Together, with our clients, we are then able to use this baseline number as a starting point to refine their actual consumption rate. We have also found that through this process clients become more engaged in understanding their finances, are more prone to candid and open conversations, and generally get better results.
Once the consumption number is determined, our team is able to establish savings rates and retirement withdrawal rates. This can very easily be the difference between saving $20,000 or $100,000 per year. It can also mean remaining at a sustainable withdrawal rate of 4% to 6% and having assets left to leave a legacy or letting it creep up to 8%+ and not even having enough money to retire.
Our data driven method is unique, and providing our team with better insights into client consumption rates. That level of detail is improving the accuracy of savings rates, retirement withdrawal rates, and client engagement, which drives better plans for clients and increases their long-term chances of success. We live in a time where technology is providing new innovations at an almost daily rate. Is it not time that wealth management started to step up and innovate for Canadians? We believe that it is and strive to provide the future of financial advice every day.
Come test Camber’s dashboards and see how better data can help ensure that you have enough money to retire.
[i] Sadeh, Alen. “70% of Canadians Think They Won’t Save Enough for Retirement, Scotiabank Poll.” Cision. February 11, 2020. https://www.newswire.ca/news-releases/70-of-canadians-think-they-won-t-save-enough-for-retirement-scotiabank-poll-896861522.html