In this example we will illustrate how to develop an investment and savings strategy to meet your retirement income objective. If you are comfortable with calculations and computer software you can do this yourself. Many financial planners have access to retirement income planning software.
The first thing to do is come up with a planning time horizon. Decide when you would like to retire and make an assumption for how long you will live. Due to modern medicine and healthy lifestyles an estimate into your nineties is not unreasonable. You may find that you will need to fund your retirement income for thirty years or longer.
The next step is to come up with a retirement income objective. This is the lifestyle you want after retirement. Most people say they are comfortable living a similar lifestyle as they had before retirement. Look at your current expenses and decide how they may change at retirement. For example, if you currently pay on a mortgage and you expect to be mortgage free at retirement then this will reduce your income need. On the other hand, if you expect to do more travel or take on new hobbies then this may increase your income need at retirement. Go through your current spending on a monthly and annual basis and draw up a workable estimate of your income need at retirement. Do it as if today is the first day of retirement. Don’t concern yourself with inflation yet.
Itemize your savings accounts that will be used to fund this objective. These could be RRSPs, TFSAs or non-registered accounts. Plug in the value of your current savings and add in an estimate for monthly or annual savings. Decide on a reasonable rate of return based on your investment policy. Add in an estimate for pensions if applicable. You can also include the government pensions of Canada Pension Plan and Old Age Security if you feel confident that you can count on these income sources.
Inflation will be your most fierce enemy in all these calculations. You will want to make an estimate for the rate of inflation. Appreciate that the same basket of goods and services that you buy today for a $1.00 will cost you close to $2.50 in thirty years at 3% inflation. That’s no change in lifestyle. It’s just maintaining your current lifestyle.
At this point it’s time to run the calculations and see how close or far you are from meeting your objective. Hopefully you are on track and only minor adjustments will be needed to meet your goal. If there is a shortfall you may have to change some of your assumptions such as working longer, or saving more. You could strive for a higher return however that may mean taking on more risk.
Once you have completed this process and have a working document it should be kept and reviewed on a regular basis. When changes occur you will want to review and update your plan.
If you find this exercise too daunting you may want to consult with a professional. Many financial planners provide this service for their clients. Some will charge a fee and others will provide it free of charge for their clients.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail email@example.com. Mutual Funds provided through FundEX Investments Inc.