A guide to doing retirement right
The Baby-Boom retirement wave is happening now. But just how ready are you if you’re in this bulging demographic? Some have already retired and are enjoying their new “career after their career.” Others are still wondering whether they’ll have enough money to fund their lifestyle, what to do if their health fails, and how to avoid turning their golden years into the rusty years.
Start with a plan. It’s never too late to make a financial plan. In fact, you may be in the best position to do so now, since you’ve already accumulated a nest-egg and you appear to be debt-free. But now you have to deal with the fact that women are living longer than ever – many well into their 90s. In fact, chances are good that you’ll spend just as long in “retirement” as you did in raising a family, working, and building a career. And that raises some very important financial questions.
If you’re getting ready push the retirement button, here are five key retirement planning questions to consider.
1. Will I outlive my money?
As you age, healthcare costs rise, and the question of long-term care can become a problem. Will you be able to afford to stay in your home? Will the income from your savings and pensions cover your expenses? Someone with a good-sized nest-egg in RRSPs and TFSAs and non-registered accounts, and with a home that’s paid off, needn’t worry too much. You’ll probably have a net worth somewhere between $500,000 and $1 million, and possibly much more. Those assets can be effectively allocated to produce both enough income and enough growth to see you through your old age. Those with investable assets of about $300,000 and a mortgage-free home are probably still okay. When you start to get below that threshold, your situation is getting dicey.
2. Will my standard of living fall?
Because of longer life expectancies, women especially will very likely spend 15 years or more in widowhood after the death of their husband. And many worry that this will result in a much lower standard of living. This is a major problem for many women who have done little or no financial planning prior to retirement. But with the right combination of life insurance and estate planning, proper allocation of family investment assets, and a realistic assessment of health and lifestyle, it is possible to keep ahead of inflation and enjoy retirement with no decline in your standard of living.
3. Will I be able to afford adequate healthcare?
Healthcare costs and medical expenses naturally rise as you age. Long-term care down the road is one of the biggest challenges facing retirees as they age. If you suffer a serious loss of functionality through chronic disability, will you be able to afford a high level of quality long-term care in a nursing facility or from in-home caregivers? With private long-term nursing care facilities costing $70,000 or more a year, would your savings last? Again, much depends on your personal situation, and whether you have insurance coverage, but it may be worth looking into long-term care and critical care insurance policies to supplement your other retirement income.
The key here is to develop a plan that matches potential cash flow needs with your future income stream to ensure you are not over-insured, and thus paying premiums needlessly.
4. Will inflation erode my savings?
In July, Canadian inflation was running at an annual rate of 3.7%. Even if that spike in inflation proves to be temporary, over the long term, inflation in Canada has averaged about 2% per year since 1993. That means that every year, a dollar buys 2% less than it did the previous year. In other words, your nest-egg would have to grow a minimum 2% every year after tax, just to maintain your purchasing power. It will have to return more than that if you want your money to keep growing to provide for you as you age. A well-founded financial plan will build-in appropriate investment portfolio asset allocation that ensures a return greater than taxes and inflation. And that should provide a strong level of comfort through your retirement and old age.
5. When do I start drawing on retirement funds?
Stock markets are currently on a tear, setting record highs almost daily, with no end apparently in sight. For retirees looking to convert their growth RRSPs into income-producing RRIFs, this might be the ideal time. Bull markets don’t last forever, and can correct suddenly and deeply, for example when central banks raise rates or otherwise signal monetary tightening. At that point equity-based portfolios lose considerable value – and would be the worst time to do make portfolio changes. For pre-retirees this is a classic example of “sequence of return risk.”
Sequence-of-return risk is the danger that the timing of withdrawals from retirement accounts (non-registered, RRSPs, TFSAs) will have a negative impact on your investment portfolio’s overall rate of return. This cuts into your income stream if you depend on the income from that investment nest egg and are no longer contributing any new capital to your accounts.
When you do retire, you start to withdraw funds from your various retirement accounts. Chances are you are no longer contributing any money to them. During a bull market withdrawals aren’t a real problem. Some of the drawdown will simply fill up again through portfolio growth. But in a bear market, it’s a different story. Your withdrawals deplete your investment accounts, and you’re not making any new contributions.
Sequence-of-return risk is not totally under your control. But even so, you can limit your downside by delaying retirement plans until the bear cycle is over, keep working (even part-time) if you can, and keep saving and investing until conditions improve.