Your Money: Retirement is coming … will you have enough?

By Medicine Hat News on November 18, 2017.

For years you’ve been saving for retirement. How much do you think you will spend during retirement? Will you have enough? You’ve probably considered the first question from time to time, but have you taken a hard look at the second question?

It’s one thing to save for retirement in general, but what about your specific retirement? There are plenty of recommendations out there touting the four-per-cent rule of thumb; that’s the amount of your retirement assets you should spend each year of your retirement. Does that figure have any connection to you and your retirement? What you want today may change from what your needs will be when you actually reach retirement. Estimating what you will spend will involve a blend of personal reflection and number-crunching.

If you’re between 10 and five years away from retirement, now more than ever is the time to sit down and do some solid planning. This is when you need to work closely with your financial advisor to map out your spending patterns over the stages of retirement.

You’ll need to construct a flexible, tax-efficient cash flow to meet your fixed bills and discretionary spending. Of course certain risks will always be in play. You may be struck by illness. The market could dip. Inflation and asset allocation will have an impact on how you withdraw from retirement income sources.

Despite the potential for these risks arising, you’ll need to shift from an accumulation mindset to laying out your retirement spending and income. What are the most likely events in your life that may require you to review and recalibrate your planning?

The concept we use is called “spending zones.” Let’s assume there are four spending zones during your retirement: 1. Moving toward retirement: 60-63; 2. Active retirement years: 64-70; 3. Slowing down: 70-80; 4. Staying put: 80-90

Now, within each zone, insert goals and life events that could affect spending. For example, will you be travelling? Meanwhile, it’s a rare person that does not face some type of health challenge. Based on your family health history, what might yours be? What level of expenses will be associated with that challenge?

Several studies conclude that a Canadian without private health coverage will spend about $5,400 a year on out-of-pocket health expenses. The cost of long-term care is, of course, much higher. According to http://www.senioropolis.com a nursing home in Ontario ranges from $15,000 to $130,000 a year. Long-term care can range between $20,000-30,000.

Here are some key questions to work through with your certified financial planner (CFP) for planning your retirement: When do I want to retire? What are my retirement income sources (government benefits, pensions, investments)? Will I have debts when I retire? Do I have sufficient health coverage? Will I sell my home because I may not be able to maintain it, or I will need the proceeds to fund my retirement? What would I like to leave for my spouse? Will I be leaving a legacy for my children? Will I be leaving a gift for charity?

To answer these questions, you’ll need to take a step back and set out as much as possible how much you’ll need in each spending zone — broken down by goals and life events. This presents a budgeting challenge, which may or may not be your forte. Either way, your CFP can help. Dive into your financial files for the following information: What will your set bills amount to? (That includes housing costs such as property tax, utilities and maintenance, and insurance premiums.) What will you spend on food, clothing and transportation? What will you spend in discretionary income? (That includes travel, hobbies, entertainment.)

One of the pillars of retirement income is government benefits. You’ll have to decide when to start receiving Old Age Security and Canada Pension Plan or Quebec Pension Plan benefits.

Second, you’ll need to review your optimal asset allocation based on your portfolio, lifespan estimate and attitude toward risk — for each of the four spending zones.

Third, you’ll need to look at your withdrawal strategy that is primarily tax efficient and practical for your living expenses and needs. Finally, discuss and carefully consider your investment portfolio mix with your advisor/CFP. For example, if you’re 10-plus years away from retirement, you could be looking at a growth-oriented asset mix. If you’re between 3-9 years away from retirement, you may consider a more “balanced” portfolio. In the final two years before retirement, safety may be paramount.

In conclusion you should know you are ready to take a hard look at your retirement goals and needs; work with your advisor/CFP to build a solid retirement plan that takes into account your spending estimates and life risks and focus on having enough retirement funds for the rest of your life.

For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com

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