Monthly Archives: October 2012

Financing My Retirement Part 1

This blog is intended as a general guide that outlines some of the financial pitfalls that we may experience as we go through life and explore some of the solutions. This does not replace personal advice a reader should obtain from their financial advisor. Professional financial advice is available by contacting Bequest Insurance.

Thursday, 4 October 2012

Will I have enough income?
Many of us don’t have a defined benefit plan to rely on when we retire or the plan we have won’t satisfy our financial needs so we require different investment strategies to fulfill our families needs that will last throughout our retirement years.

In addition, low interest rates are making our investment decisions even more challenging because it takes significantly longer for our savings to grow and a much larger savings base from which to pay our expenses. Some people can afford to take more risk by investing in assets like mutual funds that are not secure, but if you are relying on this money to pay your way as you approach retirement is this really a good idea?

The short answer is a qualified maybe. Here’s why.

For years we’ve been told by people who sell riskier investments that taking on a little more risk means a higher return on your investment. They also tell us that when the market goes down it’s a buying opportunity because the markets will recover and and in time we’ll get better over-all returns. The idea is that the longer you are invested, the higher the probability you will end up with above average returns.  In general this is good advice when you have a time horizon of many many years and/or you have invested excess money you don’t depend on.
Otherwise, the problem with risky investments that you need to provide you with an income is that there are no guarantees. Market corrections will occur at various random times when you are withdrawing your money or in your retirement years and these corrections will decrease the value of those riskier investments. As you take money from your savings and your capital erodes at the same time, it becomes a very serious negative compounding problem that can spiral to zero extremely quickly.
In a very basic example, let’s say you’ve just retired and have $100,000 in savings which then grows to $105,000. You then start withdrawing $5,000 a year. The market corrects by 20% and your savings become worth $80,000. Do you stop taking income and wait for the market to recover? How long will that be for? Can you afford or even want to do without this income?  You know that the average return of the TSX over the past 12 years is a little under 5%. If that rate of return continues your savings would grow to somewhere around $78, 500 before you withdraw another $5,000. Leaving you with $73,500.  An so on until the next correction. I’m sure you can see that, unless you stop taking income, it’s unlikely your savings will ever catch up and you’ll run out of money much faster than you’d care to worry about.

If you wish to avoid this kind of risk or this has already happened to you what are some of the more common solutions available?

Like with most things financial, unfortunately there are no one size fits all solutions because everyone’s family, finances, current and future needs and wants are quite different from each other so proper solutions really depend on the outcomes you want and can afford. In general though, if your retirement income is too low for your needs, or you’d prefer a higher after tax income, your independent advisor can explore with you the assets and/or savings that can easily be rearranged to provide a higher income stream without taking on any additional risks.  In my practice, I find with my clients that it always makes sense to explore whether it makes sense to rearrange a part of their savings to create a personal private pension plan that’s guaranteed for life. It costs nothing to set up, guarantees you income for life and provides a core income you can rely on and can effectively plan around.

Next…Financing your retirement living.

Jack Bergmans, Certified Financial Planner/Founding Partner
Bequest Insurance
jack@bequestinsurance.ca

Phone: 416-356-4511
Toll free: (888) 708-3134 ext. 2

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