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The mid-net worth/mid-career client

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This is a common retirement scenario. In this case, the client is in early-to-mid career and struggling to save for retirement. Typically he 'knows' what his current investment levels are and does not want to hear the bad news, namely that he should be saving more.

"I can afford to put $7000 in my RRSP, and that's it!"

Of course, if you run RRIFmetic in the normal way ('start smoothing at age' set to subject's current age and amortize), the chances are that the program will tell him he should not only max ($18000) his RSP, but he should be investing another $5K outside his RSP. (23K total)

Dilemma... do you tell him the truth, or do you cave in to his $7K?

If you really wanted to do him a service, you would be telling him that he should be investing well beyond his $7K, but if we wish to humour him or have him slowly come around to face reality, we want to force the program to keep to the $7K.

There are three approaches.... (skip to method 3 for the easiest/least elegant)


Method 1 (tweak the 'Scaledown' factor.)

Note... we MUST keep the 'start smoothing age' at the client's current age! This is a trial and error process, however it isn't too onerous.

The procedure is as follows..... first, go to compute { Alt C }, select 'scaledown'. The scaledown window pops up. Pick a 'scaledown starts at age'. This is, generally, the client's retirement age, but it could be described as the age at which the client expects to enjoy a reduced lifestyle (his last kid leaves home and he moves to Lasqueti Island ...)

Next, you must pick a Scaledown factor. This is where the trial and error comes in. Pick something extreme, say 50% (.5).

Amortize. Remember, the 'start smoothing at age' MUST be the client's current age.

Examine the results, specifically the investment levels (Reg and non-Reg) for the first year. If they are still above the client's stated $7K limit, then it is time for 'THE TALK'! (In this case, the client is just going to have to face up to reality..... he will have to start saving at a higher level than his current $7K.)

If, however, the 50% scaledown delivers an investment schedule for that first year that is less than the $7K, then, go back to the 'scaledown' window and increase the factor (from .5 to .7, say).

Amortize once more, and examine the investment levels for the first year. Repeat this several times until you come up with investment levels that are close to his stated $7K. Result... a downward-stepped net income/lifestyle which just runs his capital out, and accedes to his $7K investment restriction..


Method 2 (force a higher 'net income target' )

In this case we still keep the 'start smoothing at age' untouched. The way we do this is to adjust the 'net income target' (1st column of the data entry grid for his working years) upwards until you approximate the investment levels which the client has indicated.

If he says he can only invest 7K and the program calculates he needs to invest 13.5+5 or 18K, then enter an amount 11K above the net income solution. I.e., if the program amortized flat at 30K, then enter 41K (just for those preretirement years) in the 1st column. You will have to repeat this several times until you get close to his 7K.

Either of these two methods are preferred. It is more precise, and takes a bit of trial and erroring, but it keeps to the RRIFmetic smoothing methodology throughout the whole projection.


Method 3 (moving 'start smoothing age' ahead in time)

Finally, there is one more -easier- way to do this.

We are going to delay the smoothing math (that which forces investment levels) for a few years. Enter the.....

'Start Smoothing at Age' technique

The 'Start Smoothing at Age' parameter is found in the middle of the Environment Frame. What it does is delays the 'smoothing math' and allows you to specify exactly what the client wishes to invest near term.

In this case, simply drop in the $7K RSP contribution down to just before the 'start smoothing at age'

This third way is a no-brainer but it delivers a 'choppy' net income in the years prior to the 'start smoothing age'

Take your pick.

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