When people start to think about when to retire, all kind of images can come to mind. Long holidays, days spent on the golf course, extra time with the grandkids, etc. The big questions though is, will you be able to afford your retirement dreams? Because many of us are living longer thus spending more years in retirement, you may need to consider a number of planning approaches such as increasing your RRSP contributions or working beyond age 65 so that you can afford the retirement you dream of.
Those are not complete solutions though. For true financial security you need to have a plan for when you retire that is based around a simple framework. Separate your retirement financial goals into four broad categories:
Basic living expenses: Food, clothing, housing, vehicle, recurring healthcare expenses
Contingency reserves: Home repairs, vehicle repairs, unanticipated healthcare expenses
Discretionary spending: Holiday travel, dining out, leisure activities
Legacy planning: Bequests and charity
First prioritize your retirement goals to help ensure that you will be on track to achieve your highest priority goals first before assigning resources to those lower on the list. Your next step will then be to evaluate risks that could stand in the way of achieving your financial goals. In particular, factor in the risks related to the markets, health, longevity, unexpected events, and future changes in tax and government policies.
One important factor will be to understand your sensitivity to risk. For example, if your portfolio is aggressively invested in equities, it’s exposed to more market risk than one that is invested heavily in bonds. However, an overly conservative portfolio could increase the chance of you outliving your retirement savings.
The investment you select should be based on your own individual risk tolerance, in particular, your ability to deal with a worse-case scenario. This is where a financial stress test should be done to determine your individual risk tolerance.
Lastly, look at identifying financial resources that can help you achieve your goals and mitigate risks. Retirement resources include assets such as stocks, bonds, and cash; income sources such as salary, pension, annuities, trusts and rental property; and other financial products such as insurance.
Going through this process you will be able to identify three broad categories of retirement resources: guaranteed income, liquid investments, and additional resources such as rental income or real estate. In many cases, using only one resource to mitigate a risk may actually increase a different risk. This is where a sound retirement plan balances the benefits and trade-offs of your lifestyle choices while staying focused on achieving your high priority goals.
We live in a complicated world, so don’t wait too long to start into a plan to ensure that you will have a comfortable retirement. The longer you wait to start your plan, the bigger the problem becomes to catch you up on you retirement savings goal. You may need to get professional advice to help you look at all of the various ways you can address this issue.
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