Six steps to gauging retirement longevity
Retirement on the horizon? Congratulations – you have a lot to look forward to. Today’s retirees are generally healthier, living longer and more active and engaged with everything their new life has to offer. But all of that good news can also be the cause of some concern: is it possible you will outlive your retirement savings?
Worrying about how far your retirement savings will take you can get in the way of moving forward and enjoying life – so let’s try to put that worry to rest with a six-step plan for determining your retirement income longevity.
Step 1 – Know yourself. The amount and frequency of income you will need (and/or the withdrawal rate from your investments held within Registered Retirement Savings Plans and other non-registered income-producing investments) depends on a number of factors:
• Your investment profile – for example, if you are a conservative investor, you would expect a lower return than a more aggressive investor, and therefore your withdrawals should be lower.
• Your years in retirement – your retirement could span 40 years and, generally, a longer duration requires a more prudent withdrawal strategy.
• Your income requirements – will you need to draw on investment income every month or can your defer or decrease income to offset periodic declines in portfolio value?
Step 2 – Know your income sources. Your retirement income will derive from sources other than your personal retirement savings such as the Canada Pension Plan, Old Age Security (OAS) and company pension plans. Add them all up.
Step 3 – Know your expenses. Add up your expected expenses – both essential and discretionary.
Step 4 – Identify any gaps. Calculate the gap between your income from all sources outside your personal retirement savings and your expenses.
Step 5 – Know your withdrawal requirements. Determine the amount you need to withdraw from your personal retirement savings/investments to bridge the gap between your income from ‘other sources and your expenses.
Step 6 – Make adjustments. If your expected withdrawal rate is not sustainable based on the projected returns from your current savings and investments, you may need to re-evaluate your registered and non-registered portfolio with the aim of improving returns. Consider life annuities if your recurring pension income is likely to be insufficient to meet fixed retirement expenses. You may also need to reduce the scope of your retirement plans.
From the Investors Group library