What Is Your Financial Future?

Why can’t you expect financial prosperity after 40 years of working?  If you’re concerned about your financial future, you’re not alone.  Nearly half of baby boomers fear that their retirement will result in poverty.

As company pensions disappear, many boomers must rely on their RRSPs to generate retirement income but they’re uncertain how long their nest eggs will last.
What Is Your Financial Future?

How much can you spend?

It’s no surprise that your first priority is to prepare a budget.  How much income do you need to fund both your basic living expenses and your desires?

How much can you expect from your fixed income sources – CPP, OAS, company pension, etc?  Any shortfall will come from your retirement savings.

Related: How CARP Benefits Aging Canadians

To know how much money should be withdrawn from your retirement savings each year you’ll need to develop a withdrawal strategy.

Withdraw too much and you’ll likely outlive your assets and may have to rely on social programs.  Take too little and you may unnecessarily sacrifice your standard of living.  A withdrawal of 4% of your savings is usually recommended.

Assess your asset allocation and your risk tolerance.  Holding too much in fixed income can erode your savings with increases in inflation.  Market downturns can reduce your stock portfolio substantially when they occur just when you need the money.

Stick to dividend paying stocks and REITs rather than growth stocks for inflation protection for the long term, and bonds or other fixed income instruments for short-term withdrawals.

Related: Beat Inflation With Rising Dividends

Consider an annuity for a guaranteed stream of income over your lifetime, especially after the age of 80.  This can give you a feeling of safety as long as you’re willing to sacrifice liquidity.

Unexpected events

We all think that we’ll live long and healthy lives.  However, health issues are a major concern as we get older and can really decimate even a well-prepared retirement portfolio.

Retirement homes and assisted living facilities are a large monthly expense and prescriptions and medical supplies can be a drain on the budget.

Long term care insurance and critical illness insurance are two options to consider before you retire.  Details vary but most will cover assisted living, medications and nursing care, upgrades to your existing home, and so on.

Related: Drug Coverage For Seniors

Premiums will be lower the younger you are, and some will reimburse some or all of your payments if the insurance is not required.  It’s worth checking out.

Expenses caused by other unexpected events may be solved by keeping that old standby – the emergency fund, and by making sure some of your portfolio is liquid.

The family home

Unfortunately, many retirees still hold a mortgage on their residence.  Not only is this an unnecessary expense, it will also reduce the equity in your home should you decide to sell or take out a reverse mortgage.

Many people are relying on the sale of their home to cover expenses should they be required to move into a retirement residence.  A reverse mortgage can generate some income to enable you to remain in your home if your expenses increase substantially.

How confident are you about your retirement plans?

According to Sun Life, respondents to a survey are twice as likely to be confident when working with an advisor – 54% are satisfied as compared to 28% who are satisfied when doing their own investing.

A good advisor will consider your lifestyle, your goals and your expectations and provide you with a tax efficient savings and withdrawal plan that will meet your needs now and in the future.

But don’t put all your trust in the advisor.  It is your responsibility to know what you are invested in and why.  You don’t want to find out your portfolio has been mismanaged – even unintentionally – when it’s too late to do damage control.

Related: Can You Trust Advice From Your Bank?

If you prefer to manage your own finances, make sure you have the time, confidence and necessary expertise to make good decisions.  Ignorance will not be bliss when your plan has failed.

Final thoughts

Every working person looks with longing towards retirement and, finally, a life of leisure.  Sadly the majority will not be able to sit with their toes in the sand drinking a fruity cocktail on a tropical island.

Many unfortunately failed to plan.  Many will likely have to go back to work – after retirement, or reduce their leisure expectations.

A thoughtfully prepared spending and withdrawal plan will help alleviate any worries you may have about retirement.

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  1. Joe on January 30, 2013 at 12:21 am

    I’d be more confident about my retirement plans if there wasn’t a lifetime of unexpected events between now and then.

  2. Jane Savers@ The Money Puzzle on January 30, 2013 at 8:12 am

    I restarted my life when I was in my early 40s. I did not have much control of my finances before that.

    I am trying now but I do not have a work pension to rely on. Any type of retirement will be struggle and I do not know if the government will be helping me at all.

    I will not be receiving an inheritance that a lot of my friends are looking forward too or already enjoying.

    All I want is to not be poor and to not be a burden to my sons.

    • Bet Crooks on February 2, 2013 at 10:44 am

      I wish there were simple words to erase your doubts and fears, but I don’t know any. I think you should try to remember, though, that you’re doing what you can. That’s very significant, as so many of us just hide from the truth and ignore it. You certainly will be much better prepared since you know the truth now before 60.

      If you have any time, and you may not, I would encourage you to try to nurture any talents that bring you joy at the same time as they do not cost much. Ones some of my extended family derive joy from include sketching, embroidery (just simple stuff on pillowcases and teatowels), kiragami (cutting paper into very elaborate patterns), origami, bird watching and hiking, and volunteering for Habitat, a hospital and food banks. Almost all of them are voracious readers who use libraries for most of their reading material.

      Sometimes the quality of life depends on having enough moments of joy that it raises you out of an otherwise financially difficult life.

      Be kind to yourself. You matter.

  3. Julie on January 30, 2013 at 9:57 pm

    Assessing your financial future and knowing what your “retirement withdrawal” is before transitioning to retirement is a necessary step!

  4. Bet Crooks on February 2, 2013 at 10:35 am

    I’d like to agree strongly with “Stick to dividend paying stocks.” The trick is to stick with them, even through the rough patches when they go down 25-50% in value. If there’s no reason for the decline other than market flutter, then just dig in your heels and hold on. A relative has some CIBC that has been through the years when they apparently wrote off most of the third world’s debt single-handedly, and through the 2008/9 crash. By never selling, she’s continued to get a very good dividend, especially considering the money was originally invested by HER mother. (Now THAT’s buy and hold!)

    #Joe, you’re right we don’t know what the future will bring. I have some relatives who were always very generous in helping others both in cash, kind, and in time. By the end, they had no money, but they never lacked for anything thanks to others who were only to eager to help them back. And even more importantly, they had people there to help them through their last few months with joy and friendship at a time when in some ways life was “hopeless.” While it’s important to save and plan, it’s also important to give and dream.

  5. Russel James on February 5, 2013 at 5:24 am

    Thanks for the withdrawing tip. I never knew how much to withdraw but 4% seems really reasonable.

  6. David Orr on February 11, 2013 at 8:18 am

    My wife’s parents recently passed away and there will be a respectable inheritance. I am 60 (collecting CPP and still working when I can get contracts)and she is 51 fully employed. My wife has some mutual fund investments but not doing as well as we’d hoped.
    Any suggestions as to where we should be putting her inheritance to aid in our retirement?

    • Boomer on February 13, 2013 at 4:28 pm

      @David Orr: A lot depends on how much income you will need from the inheritance money. There’s no point in taking on unnecessary risk to get a few dollars more.

      You could keep some in money in cash, or an easily redeemed investment for any major purchases you may make in the future, say a new vehicle or vacation, for example. The bulk could be in bonds – high grade corporate and provincial will pay higher than federal for not much more risk.

      If you like, a portion could be used for good quality preferred shares and dividend paying stocks.

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