You’re faithfully investing for retirement but still wonder what your retirement paycheque will look like and how you’ll spend it.
There is no substitute for a complete financial plan that will take into account all of the variables your retirement will likely face (changing markets, inflation spikes, health issues and other unexpected events).
But before you create a detailed plan, you can take a self-snapshot to give yourself an idea.
The first step in determining how much you can spend is to understand these basics:
• Your fixed expenses - This includes costs of housing, food, medication, and other life essentials. Getting these numbers right – and being able to estimate changes in them over time – will help you clarify your spending during retirement.
• Your guaranteed income - This may come from government benefits, employer pensions and/or annuities. A basic tenet of retirement income planning is to try to ensure that your guaranteed income will cover your fixed expenses.
• Your life expectancy - Statistics show that life expectancies at age 65 continue to climb, and Canadians are expected to live beyond age 90 on average in the future.
Next, you need to determine a withdrawal method for your investments.
Depending on your situation, some or nearly all your retirement income may come from your investments.
Determine how much you can withdraw each year, to try to ensure your nest egg lasts as long as you do:
• One option is to choose a withdrawal rate in your first year of your retirement (four per cent is the current rate that actuaries advise will provide 30 years of income) to determine a dollar amount that you then adjust upwards by the inflation rate each year. This method does not adjust for market returns.
• A second strategy is to base your annual spending on a percentage of your portfolio’s value at the end of the previous year, regardless of its total value. This method is for those who can handle year-to-year variability, because your annual income is tied directly to market performance.
• Using a hybrid approach, you can take out a percentage of your portfolio’s balance from the previous year (e.g., 4 per cent), and use that as your income for the year, unless market returns bring the value of your portfolio above or below ceiling and floor amounts you have predetermined. If that’s the case, you would use the ceiling or floor amount as your income for that year.
When looking at retirement income strategies, it’s important to understand how specific strategies can impact your cash flow and tax burden. A professional financial planner can help to create a withdrawal strategy that is right for your financial situation.
If the numbers don’t line up, consider reducing your spending now.
When you run the above numbers and find that the amount you can realistically spend each year is not enough to cover your needs, you don’t necessarily need to give up hope.
If you subscribe to a “less is more” philosophy now, you will have more money to put toward retirement, and you’ll need less money when you get there. More and more people, young and old, are living with less to stop “stuff” from ruling their lives.
In many books and blogs out there, converted minimalists describe the social, economic, and personal advantages of cutting back. People who scale down to the essentials report feeling more satisfied and happier. They also usually become wealthier, because spending less increases their chances of staying out of debt and saving more.
But either way the numbers you run play out, it’s important to remember that a proper financial plan will take into account many more variables than what I’ve described above. If you want to have real confidence in your retirement, you owe it to your future self to get a full financial plan in place today.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.