“Am I saving enough to retire comfortably?” It’s a question that is being asked more and more as the baby boom generation heads toward retirement. Today retirement is no longer measured in years but in decades. The biggest cash flow drain for many retirees may not be an extravagant lifestyle but their own healthy longevity. The rule of thumb that says you will need about 70 per cent of your pre-retirement income is a good starting point for your retirement planning, but whether it will be enough depends on how you envision your retirement lifestyle. For instance: What kind of lifestyle do you envision for yourself?
Today, more so than ever before, we can’t properly calculate what we will need to retire on until we first determine the kind of lifestyle we want to enjoy. It’s one thing to say you’re going to golf every day; it’s another thing to pay for it. Even if club initiation fees were paid long ago, the annual membership sustaining costs won’t go away during retirement and will likely increase with frequency of use. Even pastimes and hobbies such as gardening can represent significant expenses when they become daily pursuits. The annual costs of the recreation and leisure activities you expect to make up an important part of your retirement need to be properly factored into your financial plan.
Where do you want to retire?
Give some thought as to where you intend to live in retirement. The equity in your home represents a sizable personal investment. If your retirement plan is to move to warmer climes or travel extensively, then the sale of your home will play a crucial role in financing those goals.
If you intend to stay where you are, downsizing to a smaller home or condominium is one financial planning strategy. The difference between the sale price and replacement housing cost represents a new pool of capital that can be invested. Another possible option is a reverse-mortgage. This is a deferred payment loan that uses your house as collateral. This strategy can free up the equity in your home and turn it into a source of tax-free income while you and your spouse continue living in it. Of course, you are effectively giving up ownership and the house will not form part of your estate after you are gone.
How many dependents will you be supporting?
This is a new consideration for soon-to-retire baby boomers. Many will still have living parents along with their own adult children and their own children. Your parents may require financial assistance for health care. Your children may in fact be still partially dependent on you for supplemental income needs particularly in the care and education of your grandchildren. So all in all, there may be more people than just you and your spouse to consider in your retirement planning.
When do you intend to retire?
It is not uncommon for retirement to be a gradual process. Entrepreneurs and business owners often work out a transition phase between their final years at the helm and when their replacement takes over. Business professionals often seek consulting opportunities or part-time contracts with their former employer after they have officially retired. Charitable and not-for-profit organizations and even some large corporations are all targeting the retired sector as a source of volunteers and part-time employees.
Keep in mind a working retirement is not just a matter of extra income. The real value may be found in having something meaningful to do with your time and having a reason to get out of the house for a few hours every day.
Your ability to phase in your retirement will clearly affect your financial planning. Among other things, you will be able to continue growing the investment value of your RRSP until the year you turn 70. If your 60s are your peak earning years, it will make a big difference in the eventual investment value of your RRIF or retirement annuity.
Putting a price on retirement?
It may surprise you. A realistic assessment of how you see your retirement evolving helps reveal both the hidden sources of income and potential expenses that may await you. Review your lifestyle choices with your financial advisor.
Fine-tuning your investment strategy today—whether it is reviewing the asset allocation in your portfolio, considering a deferred annuity, or other investment tactics—may be necessary to ensure the retirement income you want will be waiting for you when you get there.
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DISCLAIMER: Chris Mills is a financial advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd., member — Canadian Investor Protection Fund.