Planning for retirement can be overwhelming because your financial future and legacy likely depend on it and because there are so many variables to consider.
One of the biggest risks an investor faces is running out of money in retirement. This can happen when investors don’t adequately plan for retirement. People may work their whole lives, believing they are saving enough money for a comfortable retirement, only to live longer than they had originally planned or face higher prices on common retiree purchases, such as hospital services or a grandchild’s education. To help minimise this risk, you should begin the process of retirement planning sooner rather than later.
Depending on your circumstances, your working salary alone may not be enough to enjoy a comfortable retirement or achieve your long-term goals. You may need to invest your savings and set a long-term retirement plan. The earlier in life you recognise this need, the more you can increase your chances of enjoying more freedom and flexibility in your later years.
There are many factors to consider when planning for retirement. Many of these factors can be boiled down to some fundamental areas. We explore these below to help you enhance the effectiveness of your retirement planning.
Establishing a primary objective for your portfolio is an important step. It can help you create a roadmap for your investing and retirement strategy.
What do you wish to do with your retirement? Will you pursue a lifelong passion you have been too busy to commit to during your working life? Perhaps you wish to travel, or to invest time and money in your grandchildren? Maybe you don’t want to fully retire and would rather continue to work part-time?
However you want to spend your retirement, it is crucial to understand your goals and begin retirement planning. Here are some potential retirement planning and investing goals to consider:
Once you’ve established your goals, your investment time horizon is the next consideration for your retirement plan. However, retirement investors commonly underestimate their investment time horizon, because most retirees can reasonably expect to live longer than any generation that has preceded them.
When planning your retirement, it is not enough to assume your investment time horizon should just last your projected lifespan. You also have to consider your spouse’s projected life expectancy—which may be longer than your own—any dependents you have and any necessary legacy planning. All of these factors have to come together to create a comprehensive investment time horizon for your retirement plan.
Investors often have unrealistic expectations about how much money they can sustainably withdraw from their portfolio throughout retirement. Many assume they can withdraw as much as the annualised rate of return from their account without drawing down their principal, but this does not account for the fact that the actual return in a given year can be well above or below the average.
Withdrawing more than your account generates, especially when your portfolio is down, may shorten its sustainability and reduce the probability that you achieve your long-term goals. This scenario can have consequences, potentially meaning you have to change your lifestyle or your goals.
Inflation is the rate at which the prices of goods and services rise over time. Long-term, this affects your purchasing power—the amount of goods or services that your money can buy. This means in order to maintain your current lifestyle you may need to increase your cash flow over time. Your money today is not worth what it was 10 years ago, and it may be worth even less in another 10, 20 or 30 years' time. Your retirement planning strategy needs to account for this factor.
The level of cash flow you require in retirement combined with your portfolio growth objective may require certain trade-offs to minimise the risk of running out of money. You may have to tolerate equities’ higher short-term volatility to capture their higher long-term returns and remain disciplined enough to endure fluctuations without steering off course from your overarching retirement strategy. Your retirement planning strategy should help you clearly understand what is affordable and realistic in the context of your long-term goals. Depending on your financial situation, you may have to balance your cash flow needs—such as discretionary purchases, living expenses, and desired income—against your return expectations. It is also important to remember that many of these outgoings will change overtime. Understanding these trade-offs will help you work toward your goals.
While there are many important questions to ask when approaching retirement, a few of the most common questions are the following:
Your retirement planning should be built around a fundamental understanding of the above factors and, hopefully, a desire to work towards retirement by starting your planning now.
Fisher Investments Canada can help you answer some of these questions and begin your retirement planning journey. To learn more, download any of our guides or speak with one of our qualified representatives today.