Can You Retire Comfortably Only Saving 10% Of Your Salary

In The Wealthy Barber, which was one of the best-selling books on money in Canadian history, author David Chilton argues that the average Canadian can set themselves up for a comfortable retirement by doing one simple thing. All you have to do is set aside 10% of your income, invest it wisely using a mutual fund, and you’re in business.

Critics of the book point out it was first published in 1989, which was an era of much higher interest rates, and often uses aggressive return assumptions of 10-12% per year to “prove” setting aside just a small percentage of one’s income can work. And Chilton himself acknowledges that the advice to buy mutual funds is outdated, telling Canadian investors in 2015 to find exchange traded funds instead.

Are the critics right, especially considering the low interest world which we deal with today? Or is Chilton right? Let’s have a closer look.

The power of compounding

We all know that starting to invest earlier in life is a big part of making sure you’ve got enough cash for retirement. So let’s run the numbers on two imaginary investors.

Say they both make $50,000 per year, which is about average these days. One puts aside $5,000 per year starting at age 25, while the other horses around and doesn’t get serious about saving until age 40. We’ll assume each investor can earn a consistent 8% return over time and stops contributing at age 65.

The first investor does quite well for himself, turning his periodic investment into a nest egg worth more than $1.5 million. The second investor still does pretty well, but only accumulates $429,000.

Now we have to make an assumption about their retirement. If each retires at age 65, it’s prudent to assume they’ll still be kicking around at age 90, just to be safe. Each wants to keep the same lifestyle, so we’ll assume they withdraw $45,000 per year, since they don’t have to save for retirement any longer.

There’s just one wrinkle we’re missing, and that’s inflation. Over 40 years, inflation of just 2% will approximately halve the spending power of $50,000 per year. I’m not sure that it’s fair to include it though, since we haven’t given our imaginary borrowers a raise over their working lifetimes. So we’ll be a little conservative and assume they both want to live on $60,000 per year.

The conclusion is obvious. Our second investor only accumulated $429,000, which means he’ll have to withdraw 14% of his nest egg each year. It’s not going to last any longer than a decade at most.

Even our first investor might be in for a rough time. $60,000 per year is 4% of his $1.5 million retirement fund. If it continues to grow at a modest pace, he’ll be fine. But if it doesn’t, he’s running into danger of running out of money too.

The problem with projections

The investment business would take my hypothetical situation and use it to guilt people into buying more investments. Hey, it’s what they do.

But the future isn’t quite as dire as I’ve painted it out to be. Firstly, both of our fictitious savers would be eligible for Canada Pension Plan and Old Age Security payments, adding at least $1000 per month to their income. And if both were married, they can count on their spouse to get at least OAS.

Plus, there’s no reason to assume that much spending. Most retirees have their house paid for and their kids have left the nest, hopefully becoming financially independent. And like I previously mentioned, they no longer have to save for retirement.

In reality, I can picture a scenario where a retiree only needs $30,000 or $35,000 per year to live comfortably, with between $10,000 and $20,000 of that coming from the government. Suddenly, our two investors only need to generate $15,000 or $25,000 per year from their portfolios. In that situation, even the borrower with a $439,000 nest egg is still in pretty good shape, while the guy sitting on $1.5 million will never run out of money.

I’m not saying you don’t need to save for retirement, because of course you do. Just remember that likely your spending won’t be as high as it is now, and you’ll have help from the government. With those two things in your favor, saving 10% should be all it takes to ensure you’re not eating cat food during your golden years, provided you start at a relatively early age.

What is a Shareholder Annual Meeting Like?

Have you ever attended the annual shareholder meeting for a stock you own? Chances are you have not. Attendance at meetings has dwindled over the years. Some speculate that it is because most shares are now held by institutions. Individual shareholders may feel powerless. Attending the meeting would be a waste of their time.

US Regulations require public companies to hold an annual meeting each year. The notice typically comes with your annual report, along with a proxy notice. Many companies have now taken their annual reports and proxy ballots online, only sending paper if you request it.

I’ve attended meetings for two companies, both within driving distance of my home.

Boring annual meeting of my employer.

The first meeting I attended was the one for my employer. Yes, I owned stock in the company and was a legitimate shareholder.

I had no reason for going, other than curiosity. I wanted to see what a shareholder meeting was like.

This one was held in a company presentation room (one I personally used quite frequently to lead training sessions). It was held during the work day, so I just strolled over to the meeting location and worked a bit later that day to make up for the lost time. When I walked in there were about 15 – 20 people in the room, if that. Most were either board members or company officials. There were a few other employees listening in.

There were no movies, no presentations, little discussion and no controversy at all. The meeting lasted all of 20 minutes and consisted of only the items on the agenda and proxy: Election of board members, ratification of an accounting firm, and approval of incentive compensation plans.

It was boring. The quarterly earnings updates with questions and answers by reporters and investors is much more interesting and revealing of company activities.

If you really want to know what is going on in the company, read the annual reports.

Some of the other stocks I own have a bit more controversy. Shareholder added voting items to these can be interesting and are usually discouraged by company management. For instance, a Boeing shareholder (or maybe more than one) presented a proposal that Boeing prepare a report on Lobbying practices. Boeing management viewed the proposed report as an unnecessary expense.

Other shareholder proposals may deal with social issues, that if enacted could impact the company bottom line, but perhaps make certain social issues better.

Interesting (but congested) meeting in Omaha.

A few years back I bought some B class shares of Berkshire-Hathaway – the company Warren Buffett started. I knew at the time that I wanted to go see what their annual meeting was like, plus it appeared to be (and has been so far) a good growth investment.

The annual report, proxy statement and forms to fill out for a meeting pass typically arrive in early spring. The actual meeting is held in May (usually the first Saturday) in Buffett’s home town, Omaha Nebraska.

As with the meeting of my employer’s company, the actual annual meeting of Berkshire-Hathaway was short and boring, but all of the surrounding activities were interesting. Interesting enough for this meeting to now be known as the Woodstock of Capitalism. Approximately 40,000 people attended in 2015.

The surrounding activities start on Friday evening and extend through part of Sunday. Events include special shareholder discounts in Omaha at Berkshire held companies (like Nebraska Furniture Mart), a huge exhibit hall set up with booths from Berkshire held companies, offering discounts on merchandise to attending shareholders or information about the company itself. There is a cocktail reception on Friday evening and a 5 k run on Sunday. Saturday usually starts with a bang. In 2015, a bit of a parade was held, with the Wells Fargo stage coach pulled by horses coming down the street and later, the car with Buffet, et al. There is a chance to get close to Buffet and do a newspaper toss competition and a picnic at the Nebraska Furniture Mart later in the weekend.

To read all about it, you can check out the Wall Street Journal blog, detailing last years meeting or take a peek at the 2015 Visitors Guide.

Most of Saturday is devoted to questions from shareholders. Many of the questions are submitted ahead of time, through selected press members (shareholders email the questions to them ahead of the meeting but Warren and Charlie do not see them ahead of time). However, throughout the meeting, Buffett and sidekick Charlie Munger (Vice-Chairman) do take questions directly from previously identified shareholders.

The meeting is held in a huge auditorium and to allow those shareholders to pose the questions, several stations are set up throughout with microphones. Last year, there was one question from a 7th grade student from Florida who asked: How do you make lots of friends? And how do you get people to like you and work with you?

These questioners are picked at a certain time in the morning at each one of the 11 or so microphone stations via a drawing.

If you own BRK shares, I encourage you to attend the meeting at least once. Even if you don’t own any shares, each shareholder can get up to 4 meeting passes – so if you know someone who owns shares, they might be a source. Another option which might work is to check online sales sites, such as eBay. Sometimes shareholders sell their passes!

Another US company which apparently has a less than dull annual meeting is Walmart. Check out their online site to see videos of last years meeting.

I do not know of too many companies that work this hard to give the shareholders a chance to quiz management. Most companies seem to give shareholders little incentive to come to the meetings or ask questions.

That may be changing however, as more companies are now being allowed to hold annual meetings online as reported in this National Public Radio article.

Have you ever attended a shareholder meeting? If so, what was it like?