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To know how much money should be withdrawn from your retirement savings each year you’ll need to develop a withdrawal strategy.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