There are lots of unknowns when it comes to retirement planning. Most of us focus on how much we need to save for retirement without giving much thought as to how much we’re going to spend in retirement.
A $1 million dollar nest egg can provide you with $30,000 to $40,000 to spend each year with reasonable assurance that you won’t run out of money. But if your ideal retirement lifestyle costs $60,000 per year, your million-dollar portfolio won’t be enough to last a lifetime.
Once you determine your magic spending number, the rest of the variables start falling into place. The earlier you can identify the amount of income you need to live the retirement you want, the easier it is to make your retirement plan and adjust course, if necessary.
Let’s say you’ve analyzed your retirement income needs and find, based on your current financial situation, that you won’t be able to fully fund your desired lifestyle. What to do?
Here are five retirement planning options to help you adjust course and reach your retirement goals.
5 Retirement Planning Options
1. Reduce your lifestyle
A $60,000/year retirement might be out of reach based on your current situation, but maybe reducing your goal to $45,000/year can still provide a great lifestyle in retirement.
This lifestyle adjustment could mean travelling less often, making sure you retire debt free, downsizing your home, replacing your vehicle less often, reducing your hobbies, or a combination of all the above.
Don’t forget to include government benefits such as CPP, OAS, and/or GIS when projecting your retirement income. It’s worth sitting down with a retirement planner to figure out the best way to draw down your assets and when it makes sense to apply for CPP and OAS.
2. Work longer
It can be difficult to picture yourself working longer once you’ve got retirement on the brain, but a few extra years on the job can drastically alter your retirement projection.
The longer you work, the more you can save (or add to your pensionable service if you’re so lucky to have a workplace pension). But also the more years you’re working and earning a paycheque the fewer years you have to withdraw from your nest egg.
Are you healthy and willing to grind it out at work for a few more years? If so, you might be able to reach that $60,000/year retirement goal after all.
3. Earn more return from your investments
This is a tricky one because you might take it to mean investing in riskier assets (i.e. an all-equity portfolio), when in fact you can earn higher returns by reducing the overall cost of your portfolio. That’s the first place to start.
Imagine your $300,000 retirement portfolio is invested in a typical set of mutual funds that together comes with a management expense ratio (MER) of 2 percent. The cost is $6,000/year but you don’t see the charge directly – instead it comes off your returns.
Switching to index funds and going the do-it-yourself route might reduce your costs to 0.5 percent, or $1,500 per year. That’s an extra $4,500/year staying in your retirement account instead of going into the hands of your advisor.
There might also be a case for increasing the risk in your portfolio. Say, for example, you tend to hold a lot of cash in your portfolio – you’re not fully invested. Or you hold a bunch of GIC’s and other fixed income products.
Dialling up your investment risk to include a portion of equities could help you achieve an extra 2-3 percent per year. The power of compounding can make a huge difference to your retirement portfolio and holding even a small portion of equities in retirement can help your nest egg last longer.
4. Save more
This one is so obvious it should be first on the list. If you’re not able to fully fund your desired retirement lifestyle based on your current projections then you need to save more.
Hopefully your final working years can give you the opportunity to boost your retirement savings. Big expenses, such as paying down the mortgage and feeding hungry teenagers, are behind you.
But an empty nest and paid-off home might tempt you to increase your lifestyle now rather than doubling-down on your retirement savings to boost your lifestyle later. That’s fine; see options 1-3.
That said, there’s no better time to enhance your nest egg by maxing out your RRSP contributions, including unused contribution room, and doing the same with your TFSA, in the years leading up to your retirement date.
Be mindful here, though, of strategies to reduce your taxes in retirement. It makes little sense to go wild making RRSP contributions in your final working years without considering how withdrawals will impact taxes or OAS clawbacks in retirement.
5. Supplement your retirement income
Much like working longer can increase your nest egg, supplementing your retirement income with a part-time job derived from a passion or hobby can prolong the life of your portfolio.
Imagine earning $10,000/year from driving a shuttle, working at a golf course or winery, writing personal finance articles, doing photography, or working a couple of days a week at Home Depot just to get out of the house.
All of a sudden you don’t need to withdraw $60,000/year from your retirement account. You only need to take out $50,000/year. That not only extends the life of your portfolio, but studies have shown that having meaningful work in retirement can extend your life, too.
Retirement planning is critical and the earlier you start planning the easier it is to make these course adjustments and reach your desired outcome.
Even late starters need not despair. The first two options – tempering lifestyle expectations and working longer – are on the table. Everyone can try to save more and earn more from their investments. And, finally, a little retirement side hustle can give your lifestyle a boost and enhance your overall quality of life.
President’s Choice Financial will end its 20-year banking agreement with CIBC beginning November 1st. CIBC, which managed the personal banking services for Loblaws under the PC Financial name, will now take direct control of the roughly $2 million PC Financial bank accounts under the new name – Simplii Financial. PC Financial is keeping its credit card(s) and loyalty program intact.
The news caused a bit of an uproar in online communities but because CIBC essentially ran things behind the scenes anyway the transition should be painless. Here Rob Carrick explains five things to know if you’re a PC Financial client. The bottom line: Give CIBC a chance to keep your business. They might surprise you.
Carrick ends with a jab at the name – Simplii Financial “sounds a bit sillii”. That sentiment was echoed online in the personal finance community Reddit:
This Week’s Recap:
Over on Rewards Cards Canada this week I wrote about my latest travel points hack that earned me more than 43,000 Aeroplan miles.
Do you always get what you pay for? Earlier this week I discussed some instances when higher prices didn’t mean better value.
Just because you haven’t saved for retirement yet doesn’t mean it’s too late to get started. Marie lays out a step-by-step action plan for retirement.
On Friday I explain the problem with a core and explore investing approach. Sorry, but play money doesn’t belong in your retirement account.
Finally, thanks to Will Ashworth at The Motley Fool blog for mentioning one of Marie’s posts in his latest article on why DIY investing beats owning mutual funds.
Kate Smalley asks a good question: When did we decide being “good at money” meant not spending it?
A great article from ESI Money, a blogger who retired at 52 with a net worth of $3 million, with his best advice to stop working in the next 10 years.
One of my favourite writers, Norm Rothery, with the case of the time travelling money manager:
“Sticking to an investment strategy through adversity can be hard for investors, even if they know what’s going to happen.”
Here’s an excellent podcast on business vs. investing with two of the best – Jason Zweig and Morgan Housel.
A Wealth of Common Sense blogger Ben Carlson listened to that podcast and disagreed with them about a la carte financial advice being a good business model.
Preet Banerjee goes back to Money School with his latest investing video. This one’s all about asset classes:
Million Dollar Journey blogger Frugal Trader lists eight key sources of income during retirement.
Des Odjick knocked it out of the park with this one: four real-life ways you can save money on food.
Alyssa at Mixed Up Money has some strong words for people who buy their lunch every day. Just stop it.
I love Wealthsimple’s Money Diaries series and in this edition former Pro Bowl cornerback Nnamdi Asomugha talks about his transition from the NFL and why he still drives a ’97 Nissan Maxima:
“That car is the one thing that everyone makes fun of me for. Even after I started earning good money, I was still in the mentality of “I know this is all I need so I’m doing fine.”
‘Hey Siri, what’s the best mortgage rate?” Rob McLister explains why people are turning to their phones for mortgage advice.
My Own Advisor Mark Seed has a housing dilemma: A move into the city (Ottawa) gets him and his wife closer to amenities they enjoy, but the likely more expensive home could impact their plans for early retirement.
My advice: Make the move, Mark. Your happiness, including a shorter commute, is worth it even if it means a few extra years of work.
Why relying on your T4 slips to calculate income could be a big tax mistake.
Finally, forget Amazon. Here’s the real reason why retail stocks are slumping.
Have a great weekend, everyone!