Last month we highlighted a simple way to figure out what you’ll need in monthly, indexed and after tax retirement income. Here’s a link to our previous article. The methodology assumes that you want to have the same lifestyle in retirement that you have today while you’re working. Once you know your number, you need to figure out what you’ll be receiving in recurring retirement income, which could come in the form of a pension, rental income or annuities.
The difference between your monthly income goal and what your recurring income in retirement is what you’ll have to finance from your retirement savings.
For example, if your goal is to have a $7,000/m lifestyle for your household in retirement and you’ll be generating $3000/m, between you and your spouse, of recurring income in retirement, you’ll need to finance $4,000/m from your investment portfolio from the day you retire until the day you die. Fortunately, we know when you are going to retire, or at least plan to, but we are thankful, and I’m sure you are as well, that we don’t know when you’re going to die; there lies the first of two major challenges of retirement planning. The second is that we don’t know what kind of markets you’ll be exposed to during your retirement years.
Given that the most common goal amongst folks approaching retirement, regardless of their income level or net worth, is that they don’t want to outlive their money, we feel it appropriate to build retirement plans that are designed to do just that. Because we don’t know how long you’ll need your investment portfolio to finance your lifestyle for, nor what kind of markets you’ll be exposed to, we need to assume you’re going to live a long life, say 95, and have challenging markets to contend with. In other words, when it comes to retirement, we recommend that you plan for the worst.
The best way to approach this is to look back in history at what the markets, both stock and bond, and inflation have done and test to see how your plan would’ve stood up against those times. The big advantage with this approach is that we don’t need to assume anything that you don’t have control over, such as rates of return and inflation rates. The less assumptions that you need to make in designing your retirement plan, the more effective your plan will be which will in turn increase the probability that your plan will succeed.
We only want to assume inputs into your retirement plan that you can control or that are as close to constants as possible, such as: your retirement age, your recurring income in retirement, your retirement lifestyle, the size of your portfolio and how much of your portfolio is exposed to stocks and bonds. Remember from earlier that we’re going to assume you live until your 95. The question that we’re going to answer is how much would a 65 year old couple need to have saved in their RRSPs so that they could spend $7000/m, $3000/m of which is pension like income, and have their retirement succeed in 90% of the times that history has provided us starting in 1900. The answer to that question is roughly $1.6m in today’s dollars.
The problem with this approach is that if your retirement is exposed to market conditions that are better than the bottom 10% we’ve seen since 1900, then you’ll die with money in hand. The simple solution is to constantly review and update your plan throughout your retirement so that you can adjust your spending/gifting upwards if conditions warrant.
Retirement has a different meaning for everyone and requires ongoing maintenance. Call us to discuss how we plan to make yours successful.
Mike Preto and Jason Del Vicario are Investment Advisors at HollisWealth, a division of Scotia Capital Inc. Based in Vancouver, BC, Canada, they work together in bringing a unique approach to managing money to ensure their clients are financially prepared for their retirement. They can be reached at 604-895-3349.
This article was prepared solely by Michael Preto & Jason Del Vicario who are registered representatives of HollisWealth® (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Mike & Jason’s alone and not those of HollisWealth. ® Registered trademark of The Bank of Nova Scotia, used under license.