You started planning for retirement a long time ago – and now, the retirement of your dreams is just around the corner. You worked hard and invested to grow your retirement nest egg so that one day you’d have the money you need to live comfortably and enjoy life. But don’t be too quick to crack your retirement piggy bank without a plan that will ensure your hard-earned investments and other income will last for all your retirement years.
Here’s why you need a retirement investment strategy:
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The average age expectancy is rising. You may need to maintain your retirement income for more than 20 years.
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Even low inflation can damage your purchasing power. For example, $50,000 in 1970 would have only $8,902 of purchasing power today based on an average annual rate of inflation of 4.77% from 1970 to 2007. *
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Your rate of withdrawal must be based on your risk profile and total portfolio value. For example, if your investments are earning a 5% rate of return, they will not support a 6-7% withdrawal rate.
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A market downturn can prematurely deplete your investment portfolio. A negative market cycle just before your retirement or in the first few years of retirement can mean a much lower income than you expected.
Here’s what you need to know to develop an effective retirement investment strategy:
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Know your expenses and manage them. You will have essential expenses -- food, electricity, health care, and so on – that you can’t live without and discretionary expenses – travel, a new car – for ‘fun’ activities. One common rule of thumb is that you’ll need 70-80% of your pre-retirement household income to maintain your lifestyle in retirement, as long as your expenses do not change dramatically as you age.
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Know your sources of income and manage them. In retirement, your income will derive from many sources – your investments and personal savings, government benefits, and employer-sponsored pension programs. Things can get a bit complicated – so plan to stay on top of your income sources.
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Know effective tax-reduction strategies: be aware of potential ‘clawbacks’; take advantage of all your tax credits and deductions; and make use of pension income splitting opportunities (if available).
Here’s how to implement an effective retirement investment strategy:
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The key to a successful investing is maintaining a balanced, diversified selection of investments.
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You can achieve this by dividing your assets into three ‘pots’ to help achieve the following goals as an example:
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Long-term goals – a retirement income that will last 20 years or longer.
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Mid-term goals – replacing your car in five years.
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Short-term goals – making a down payment on a retirement property next summer.
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Money from each ‘pot’ should be distributed among the three classes of investments:
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Cash or cash equivalents such as government savings bonds, T-bills and money market funds.
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Fixed-income securities such as GICs and fixed-income mutual funds.
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Equity investments, including Canadian and international stocks and equity mutual funds.
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Goals will be different but you should assume only as much risk as you are comfortable with in planning to meet goals and at level that matches your personal risk tolerance.
A sound post-retirement investment strategy starts with a good understanding of your sources of income and your goals. As professional financial advisor, I can help you achieve the right balance between risk and reward.
Noël Hémond, CFP
Financial Planner
Investors Group
Courriel: Noel.Hemond@investorsgroup.com
Tel: 514-817-3483