Canadians have one fundamental question when they are thinking of retirement

How much capital must I have by the time I retire so that I won't outlive my money?

There are two things to consider here:

1. How much will be needed to finance the retirement I want?
2. How long will it last?

How soon can I retire?

Well that depends upon several things, your objectives, other assets you currently have accumulated, how much you are currently investing and how long you want the money to last.

Here is a fun, interactive calculator that can give you an idea of how Ready you are to Retire

Suffice it to say many people are surprised at the amount of capital they will need for even just a modest retirement.

One challenge all Canadians face is Longevity Risk. We are living longer than ever and Canadians are concerned about whether they will outlive their money.

Retirement will be the second longest part of a person't life. Historically we built plans that lasted for 15-20 years. Now we must have plans that produce income for 30 years or more.

Every day I sit with people and help them answer the question: How much money is it going to take for you to retire comfortably and to remain comfortable retired?

Here is a simple process we follow at the outset with clients. Is it a complete analysis? No. That comes later.

Answer these 4 questions for yourself. I am using an example of a real life client

1. How much money do you want in that first year of retirement?

My client said it is $70,000

The capital required at 4.5% to generate the income without encroaching on capital is: $70,000/4.5%=$1,555,555 (This is a ball park number and deliberately ignores government benefits)

2. How much capital, ball park, do you have?

He stated he had $150,000.

3. How many years before you retire?

My client said 15 years or 180 months.

4. In the next 180 months in addition to all the things you will or will want to buy, how much every month without fail could you add to your capital as an investment?

My client stated $200/per month.

I stated that over 15 years he would invest an additional $36,000 in capital. I asked if he thought this amount with his accumulated savings would give him the capital he was seeking. He saw the point, unless he earned an extremely high yield, that wasn't likely or probable, he was going to fall short.

I said he had several choices, defer retirement age, reduce his income goal, save more, improve returns or some combination of all of them. What did he think he should do?

This simple exercise should help you focus on your situation and how realistic your expectations are for retirement. In 10 minutes my clients can see the issue in terms of the size of capital needed and their lack of resources.

Risk Number 2-Inflation-Purchasing Power

We really are as Boomer's our parent's children even though our behaviors are often different. Our attitudes about money are informed by what we heard many years ago from our parents who went through the depression, protection of capital was their primary consideration and this has been handed down to us.

There is an old phrase in investing that as you approach retirement that you become more conservative in your investing approach. This phrase is assumed to be a fundamental of investing and investing advice. It is regularly posted in journalistic articles. But is it good advice?

Loss of capital will be crucial the saying goes as you have little time to recover. (In fact you will have more time than you think because of increases in life expectancy.) So retirees focus on products where there are guarantees on principal but in return they trade off returns and settle for 3, 4 or 5% yields. 

Adjusted for taxes and inflation you will suffer a diminishing lifestyle overtime.

If you have a fixed retirement income when you retire of $40,000 and inflation is 3%, then after 20 years you need $72,237 of income to maintain your purchasing power. This is an 80.6% increase. 

Check it out for yourself

In fact loss of capital is not the primary risk for retirees, but loss of purchasing power.

The third main risk is the sequencing of investment returns

We all know the market rises and falls over time. If when you retire you have an increasing market your yields may  be enough to support your withdrawal rate and even add to capital.

However what if the first or second year in retirement your yields were negative? Or even in the year or two before retirement. This would have a negative impact on your capital and you might find your ability to provide lifetime income might be compromised.

Today, sophisticated retirement planners are employing a concept called Product Allocation when planning for their client's retirement.

Just as people employed asset allocation during the accumulation phase, product allocation is critical in the drawdown phase.

It can help you with the three main risks identified above.

Cell: 416-254-8270

Off: (905) 202-8430 ext.626

Fax: 1-866-287-9152

1700 Langstaff Rd. Suite 1001

Concord, Ont. L4K 3S3