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So When Can I Afford To Retire?

By: David Howe

The performance of the stock market has left many DC plan members singing the blues over their retirement plans. David Howe, of Eckler Partners, asks the musical question ‘When can I afford to retire?’

The stock market meltdown of the last two or three years has devastated the savings of many Canadians whose retirement funds are held in RRSPs and Defined Contribution pension plans. The S&P/TSX reached a high of 11,424 back in the fall of 2000. It fell to a low of 5,695 in October 2002. The question is: how long will it take to get back to that high?

Warren Buffet, no slouch at the investment game, has said that investors should now expect returns from an equity portfolio of about 6.5 per cent. If Warren is right, it will take about 15 years for the S&P/TSX to rise from its low in October 2002, to its peak in 2000. Naturally, any estimate of this kind is based on assumptions. However, the only assumption in this case, other than Warren’s, is that the stocks in the index will pay average dividends of two per cent per annum, which is about the historic average and not far off what many investors pay in management expenses.

But remember, in 15 years’ time, a dollar will no longer be worth a dollar because of ever-present inflation. If inflation is factored in at, lets say, 2.5 per cent, it will be almost 35 years before the S&P/TSX reaches its former peak in real terms.

Clearly, Warren could be wrong. It has been known to happen, by his own admission.

However, there are few in the investment field who would expect the doubledigit returns we saw in the 1980s and 90s. So, what happens if we get returns of 9.75 per cent? Now, we can expect the S&P/TSX to return to its former high in only nine years. Of course, very few portfolios mirror the S&P/TSX. If you were heavily invested in the high tech industry and your securities mirrored the NASDAQ, you might have to wait almost 30 years. If, on the other hand, your portfolio mirrored the Dow Jones Industrial Average, it would be a mere nine years.

And how does this stack up against history? Well, it took 25 years for the S&P 500 to recover from the crash of 1929. Since then, the longest it has taken for that index to return to a former peak is seven years.

So, what should you do in response to this picture? Go and see your financial planner, or consult an astrologer. Don’t ask me. I’m just a simple arithmetician, so don’t shoot the messenger!!

David Howe is an actuary and consultant with Eckler Partners Ltd.

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