Financial Security in Retirement

Term Deposit and Savings Account rates have dropped to 50 year historic lows.  The Federal government is talking about adjustments to various pension programs.  How do you ensure that you have a financially secure retirement with all of this uncertainty?

Establish your financial foundation - Many people have an idea of when they would like to retire but have little idea how much money they have already saved up.  Between work pension plans, mutual funds, term deposits, RRSPs and TFSAs, people can have money spread out among many investment options.  Before you decide when to retire you should know how much you have available to you today as a starting point.

Determine how much you need in retirement - Some people plan to do a lot of travelling in retirement and others plan to stay close to home and family.  Some will still have debt going into retirement and others will have been out of debt for years.  Your retirement can sustain any of these choices if you have planned and prepared for it.   To begin planning start by figuring out how much you will really need to live on during retirement.  Take into account that your health costs may increase over the years. Once you know how much you will need to live on each month you can work those numbers back to determine how much you will need to have saved upon retiring.  A financial planner can help your numbers be realistic and they can help determine any potential OAS and CPP cash flow into your monthly budget.

Evaluate your risk tolerance - The markets go up and down, sometimes rather dramatically, but over the long term they tend to go up.  If the ups and downs of the current market keep you awake at night, your investment portfolio is probably too heavy in the markets.  Everyone wants a great return, but a great return also means a great risk.  Low risk means low returns, so you want a balance.  You need some risk if you want to earn better than inflation returns.  Before you invest anything a financial advisor should go over what kind of risk you are comfortable with for your investments.

Look at your time frame - If you are retiring in less than 5 years, than you should not be putting much of your portfolio at risk because you may not have enough time to recover if the markets have a bad few years.  A good financial advisor will warn you of this.  If you are planning to continue to invest or do business for at least 10 years then your portfolio can hold the riskier investments (with higher potential return) because it is more likely if the markets go down that your portfolio will have time to recover.  By looking for returns over the next 10 or 15 years you can afford to take a little more risk today.  Concentrating too much on the short term means you will be constantly anxious about what is happening.  Investing is best done over the long term, not in a short burst of a couple years before retirement.

Diversify your investment portfolio - This is something your advisor should be doing with you annually.  While certain industries have had a great run (technology stocks in the 90’s, oil from 2002 to 2008) they also have crashed in big ways.  By placing too much of your portfolio in specific industries that have good returns, you are also placing your investments at risk of a serious drop.  By diversifying your portfolio you can have some money in high risk/high return areas, but also protect yourself from the downside with steady dividend stocks, bonds and term deposits.

It is natural that the older one gets the less risk they tend to take, however a lack of a proper retirement fund by some baby boomers, or having lost and not regained investments from the downturn in 2008, has encouraged many people to try and “catch up” by taking more risk to get better returns.  Investment portfolios are not best designed to provide good 1 year returns.  They work best providing solid returns over a long period of time.  Don’t try and take more risk to get ahead, and you shouldn’t over-react by going to zero risk either as the returns are very low when risk is minimal.  It is a balance of having some secure and some risk in order to earn solid returns over the long term. 

This is why it is important to have an advisor help in the investment process.  A third party without the emotional involvement will provide an objective, more realistic opinion than you have when you are feeling a lot of anxiety.  Decisions should rarely be made in an emotional state, whether in distress or exuberance, we tend to emphasize too much of the good or the bad and not make a rational decision.  Third party advice can help avoid many emotional decisions.

Finally - using the above information to create a plan and act on it.  Knowing where you are and how much you need will do nothing for you without the action.  A retirement planner can help remind you of your destination and the steps to get there, making it possible for you to have the retirement you have planned for.  Jerry