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Forget what you've been taught about retirement saving

The people who sell retirement planning and the people who typically write about retirement planning have managed to drum into our heads the fact that we’re gonna need a bazillion dollars if we ever hope to retire. It’s left many of us feeling inadequate.

The following excerpt is from Never Too Late: Take Control of Your Retirement and Your Future by Gail Vaz-Oxlade.

If one more person asks me how to make a million dollars so they can retire comfortably, I'll scream. The people who sell retirement planning and the people who typically write about retirement planning have managed to drum into our heads the fact that we're gonna need a bazillion dollars if we ever hope to retire. It's left many of us feeling inadequate. It's left some of us depressed; we know we'll never make it. And it's scared some folks into sticking their heads into the sand and hoping the retirement hunter doesn't come up behind them.

Hey, the hunter's coming. Sticking your head in the sand is not the answer. But neither is The Magic Million that's often tossed about as the Holy Grail of retirement savings. I want you to forget everything you've heard about how much you'll need. Just forget about it. It's irrelevant to you what Jack will need, or how much Jenny will have. The only number that's important is how much YOU will need.

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I'm going to help you figure out just that.

The other thing that The Spurts use to put the fear of God into people who are saving for the future is the spectre of inflation. "Inflation" gets bandied about a lot, but most people don't have a clue how it affects them. And you should. Don't worry. I'm not going to ask you to calculate anything. But you should understand what inflation is and how it affects your purchasing power.

Know How Inflation Works

Imagine that you're selling lemonade. It's a hot day and there's a big demand for a tall, cold glass of what you've got. You can probably charge two bucks a glass and get away with it. Yup, thirsty people won't think twice about shelling out for a little lemony relief. And if you're down to your last glass or two, someone may offer a premium, coughing up an extra 50 cents to grab a glass. So, when supply is low and demand is high, prices jump. Of course, if your next-door neighbours all decide to set up their own lemonade stands, you're going to have to practically give it away to get it off your hands. And if the weather suddenly changes, a cold wind blows the leaves and your customers' thirst away, nobody is going to pay a red cent for your lemonade. What's true for lemonade is also true for money.

When there's more money than stuff to buy, prices go up. When there's more stuff than money, prices go down. Inflation is the measurement of the changes in prices of all that stuff.

The Consumer Price Index (CPI) is the way we measure inflation. The CPI is a measure of the rate of price change for goods and services bought by Canadian consumers. It is calculated by comparing the cost of a fixed basket of items that we buy in a particular year. Since the stuff in the basket never changes in terms of quantity or quality, the CPI shows pure price movements.

So what's in the basket? Prices for a whole bunch of stuff including food, shelter, energy, clothing, education, health care, personal care, transportation, recreation, booze, and smokes. It's a big basket, and if you want to know how everything compares, then you look at the whole basket, called the All-items Index. But since most families don't buy everything in the basket every year, the All-items Index-and the inflation rate generally quoted in the media-can be very misleading.

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While the overall CPI rose 1.3 per cent in the 12 months ending December 2009, when you look at the smaller groups-like food, transportation, and the like-you get a clearer picture of how our budgets are being hit. In the same time frame, gas prices were up 25.6 per cent. Overall energy prices were up almost 6 per cent, and food prices were up 1.7 per cent. Shelter prices were down 1.7 per cent, primarily because of a drop in the price of natural gas and the decrease in mortgage interest costs. The mortgage interest cost index (yup, that's how specifically the basket can be broken down) fell almost 5 per cent because interest rates had fallen so low during that period.

Canada is a big country, and costs vary widely from one region to another. That's another reason the All-items Index, and the number you hear bandied about, has very little to do with individual Canadians' realities. If you live in the Atlantic provinces and your costs have gone up 3 per cent, you don't give two hoots about the overall CPI number.

Don't Drive Yourself Nuts with Inflation

So why do we talk about inflation if there are so many variables and variations? Because inflation affects the purchasing power of our money. If you were trying to figure out how much money you would need in May 1986 to live in May 1996 when you finally retired, wouldn't it be important to know that your dollar would purchase only 74 cents worth of stuff?

And that's why you'll hear all The Spurts talk about how important it is to take inflation into account when you're trying to decide how much money to set aside for the future, and how much you'll really need.

I'm of a slightly different mind. Hey, you can turn yourself inside out trying to figure out how much to save, and how much you'll have, and how much you'll need, but if you don't actually do something, it's all for naught. Sure, inflation will affect your purchasing power. But there's no way to predict it and nothing you can do about it, so turning yourself inside out over inflation is an exercise in frustration. Better to focus on what you CAN save than on how little your money will buy once inflation has taken its bite.

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And that's the big problem we're seeing right now. People aren't doing very much. Our savings rate is in the dumper.

We've lost hope. We're sure we'll never be able to achieve what The Spurts are telling us we'll need. So we just don't bother.

Stop that! The only way to take control of your retirement and your future is to DO something. Never mind what you won't have.

Focus on what you will have, which will be more than if you turn your back on your future and do nothing.

Get Rid of The Magic Number

Okay, now that you understand inflation, you know it is what it is and being "scared" or "panicking" is pointless. You're also not going to let some Joe who doesn't know squat about you or how you live try to tell you how much you'll need, right?

Perhaps the most damage to our savings motivation has been done by the formulae and massive numbers that have been bandied about by retirement experts and journalists alike. Headlines declare that we'll need a million dollars if we don't belong to a company pension plan. A million dollars?

Really? And what do you do if you can't save The Magic Million? Give up?

Projections are just projections. They don't carry any water if the factors on which they are based are no longer true. And how can you "know" what's going to happen in the future?

When I started saving using an RRSP, I was in my very early 20s. At the time, inflation was running at around 12 per cent (yes, really), and one of the first investments I made was a stripped bond paying 14 per cent for 30 years. (A dumb advisor subsequently convinced me to sell for the capital gain back when I was still young and naive and thought those people had my best interests at heart. But I digress.)

All the retirement savings calculators ask you to guess at stuff like your rate of return and inflation. Well, how could we possibly know this since markets change and economic conditions change? We can take a guess, but that's all we're doing.

And we should be prepared for the fact that when things do change, so will the projections.

If I had based my retirement planning on the rates of return and inflation of my early investment years, things would look very different from someone starting out now in our current low-interest-rate environment, particularly if we're both very conservative investors.

All this is to say forget about the experts, the projections, the calculators. There is no magic number that will ensure a safe and financially secure retirement. Each of us has a different life, different expectations, and different needs. We must figure out what will work for us as individuals and ignore the tempests in teacups regularly brewed to grab our attention.

Save because you know that you must save if you want to have some money in the future. And save as much as you can.

If you start small, so be it. Over time, grow your savings until you are putting away a solid amount every single month. Hey, this isn't rocket science. You'll only have in the future what you don't spend today.

Know that once you jump on the savings bandwagon, it's easy to get carried away. You may even find you want to stop spending money on the things that make life a joy. So when your partner suggests you head off on a lovely vacation together, all you can think about is how much money you'll be "wasting" because it won't be going into your retirement pot.

Give your head a shake. If you put all of your focus on your future, you'll be one miserable puppy to live with.You have to find the balance between having a great life now, and having enough to keep having a great life when you retire. And knowing how fast your money can grow, given enough time, will give you the confidence to have a life now and plan for the future. So that's what we'll talk about next.

Abridged excerpt from: Never Too Late published in Canada by HarperCollins Publishers Ltd. Copyright 2011by Gail Vaz-Oxlade. All rights reserved.

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