Retirement Savings: How Much Is
Enough?
Wondering how to get yourself on the road to financial health? A simple
phone call about your retirement plan is probably the best route you
could take. Most of my clients are comfortable with my services and you
may be one of them.
The planning process
Like most advisors, I will start by asking for the details of your
current financial situation, including your savings, investment
patterns, liabilities (such as loans, credit card debt, or a mortgage),
and future obligations such as education costs for your children. I will
use a software package that helps analyze this information to give a
picture of your financial health. The next step is to examine what kind
of retirement you see for yourself. The analysis will uncover
inefficiencies in your investments, and help build a better portfolio
that will carry you through your retirement years.
How much will you need?
Retirement planners used to assume that you would need about 75 per cent
of your current income after retirement. The thinking was that you could
eliminate your work-related expenses (such as commuting and work
clothes) once you retired. But fewer Canadians are opting for a quiet
retirement at home. Many purchase a second home in a warmer climate, or
choose this time to travel. Your initial needs can be as high as, or
even higher than, your current income. Later in life, in your 70s and
80s, you may prefer to stay home. You may then be able to live on a more
modest income, if you do not need the money for health care. However,
the key question is what retirement means to you. You have to find the
answer by yourself.
How long will you live? How long
will you work?
Our increasing lifespan is another big variable in retirement planning.
The average Canadian man can expect to live to age 76. Canadian women
live an average of 81 years. And many people live even longer. Most
advisors will insist you plan until at least age 90. Another crucial
question is how long you will continue to work. Will you have a choice
of retirement age, or will your employer offer you a pension while you
are still in your early 60s? Many people hope to retire early or spend
the last few working years consulting and easing into retirement. Can
you save enough money to support yourself for 30 years after retirement?
Saving is only part of the equation ¨C you also have to let your money
grow in investments that beat inflation. Inflation can erode the
spending power of your retirement income, both while you are saving and
once you have retired. I will factor in the effects of inflation on both
your retirement income and your investment portfolio.
Where will the money come from?
Most Canadians have several sources of income after retirement. You will
likely draw Canada Pension Plan or Quebec Pension Plan benefits.
Lower-income Canadians will receive Old Age Security payments (and
perhaps other supplements). You may have a pension or a deferred profit
sharing plan from an employer. And you should have savings, both inside
Registered Retirement Savings Plans and in non-registered investments.
You must collapse your RRSPs in the year you turn 69. You can transfer
the RRSP money to a Registered Retirement Income Fund (you must withdraw
money from a RRIF annually) or use it to purchase a retirement income
annuity. Consider where your partner will be in the years after your
retirement. Will he or she still have some years to go on earning and
saving? Have you considered balancing your incomes after retirement? The
more equal your incomes are, the less tax you may have to pay.
Spending and saving
The most difficult part of retirement planning is to look at how you
save and spend your money now. Consider your current cash flow. "Fixed"
expenses can include costs such as mortgage, utility, rent and loan
payments, food, child care, and regular contributions to charity or to
RRSPs. Anything left of your earned income is what you are spending. A
thorough retirement planner will analyze these spending patterns and try
to find ways to use your money more effectively. Perhaps you have credit
card debt that would be better handled through a line of credit. Perhaps
your loans or liabilities can be handled in a way that makes them
tax-deductible. Any money you can free up gives you extra opportunities
for saving. Your advisor can help you set up a regular savings plan that
puts the money into a retirement portfolio before you can spend it.
Your retirement portfolio
I will make recommendations about the structure of your portfolio. These
suggestions will consider your tolerance for risk, but be aggressive
enough to give you the growth you need. The earlier you begin the
process, the longer your money can grow. Getting your RRSPs into shape
is essential. I may recommend saving in non-registered investments as
well. Ask your advisor, I would like to show you the long-term
performance of plan to help you understand the investment style and
choose something appropriate for yourself. Make a date on your calendar
to revisit this investment plan in three or six months. I would like to
review with you the retirement savings profile at least twice a year.
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