For our younger, millennial readers you can probably skip today’s blog since I’m going to focus on some of the factors needed to ensure a successful retirement. So you younglings can get back to discussing the benefits of cryptocurrencies, the importance of social responsibility in investing and the best hair products for your beards.
For our older readers in or nearing retirement, grab a cup of coffee and settle in as I’m going to review some important pieces and considerations for a stress-free and rewarding retirement.
First up is knowing how much investments and assets you need to fund your retirement. Of course the main determinant of this is how much ballin’ you anticipate doing in retirement. Are you going to go on many trips? Will you have a secondary property or rental that you have to account for? How much will you give to family and charities? Determining your lifestyle and expenses in retirement is key so it requires a lot of thought and planning. A detailed financial plan is critical to this, which I’ll cover later.
On how much you need let’s start with the ‘Rule of 4’, which is a general rule-of-thumb that with a 4% annual withdrawal rate from the portfolio, there is a very low probability of exhausting or outliving your money. I covered this in a past blog and I believe a 5% withdrawal rate is totally doable and still conservative, but let’s use the 4% withdrawal rate as our starting point.
You can determine how much assets you will need by dividing your estimated yearly income by 4%. For example, if you forecast your spending in retirement of $50,000/year, you would need a portfolio of $1.25 million. Double that ($2.5 million) to support retirement spending of $100,000. This gets you a quick, back-of-the-envelope calculation for your retirement nest egg. But now you need a detailed financial plan to really get into the numbers.
Investments required to support Income Streams
Source: Turner Investments
During the planning process we review our client’s different income sources including CPP, OAS, pension income, and any income from investments/businesses. We also review all the different investments to come up with a detailed forecast of how much we can draw from the portfolio. This is essentially the ‘plug’ in the retirement calculation, as we compare expected expenses with the client’s incomes to then determine the amount of investments we draw from over time to support the monthly or yearly draw.
The financial plan maps out all the different income streams and our financial planners employ strategies to help minimize the tax hit while trying to maximize government benefits. The plan also addresses the future estate and reviews key documents and strategies to deal with the estate process and distribution of assets. The plan is very detailed covering all key aspects of retirement planning and our planners can stress-test the portfolio for different scenarios (e.g., if clients want to assume a higher rate of inflation in their planning).
And the numbers show that retirees with a financial plan feel much more confident and at peace with a completed financial plan. According to a Charles Schwab survey, 65% of people with a financial plan say they feel financially stable, while only 40% of those without a plan feel the same level of comfort.
Why? Because financial plans help address the key risks to retirement. In Fidelity’s annual retirement report, they always highlight the five key risks to financial security in retirement – inflation, health care costs, withdrawal risk, longevity, and asset allocation. The financial plan helps address all these issues.
The Five Key Risks to Financial Security in Retirement
Finally, retirement is not just about the numbers and dollars and cents. There’s a whole psychological component to retirement, which arguably is just as or more important than the numbers.
We spend roughly a third of our lives at work and from this we derive a lot of our personal identity and purpose. So when you transition from working five days a week to zero days, there’s a big adjustment you will go through psychologically. In fact, according to Dr. Riley Moynes, there are four key phases of retirement, which he covers in an interesting TEDx Talks.
He calls phase one the ‘vacation phase’, where you “wake up when you want, do what you want with no set routine.” This phase represents people’s ideal retirement but is short-lived, lasting a few years or so. After you’ve gone on the third cruise and multiple trips down to Florida you ask yourself “Is that all there is to retirement?”
Now you’re in phase two, which is a period of feeling lost and wondering what’s next. Many new retirees struggle with the loss of a routine, that sense of identity and purpose and those relationships you had to give up when you were working. This is a period of “fear, anxiety and even depression” for some.
But after this period of uncertainty and contemplation you move on to phase three, which is experimentation and trial and error. We ask ourselves how can I make my life meaningful again? How can I contribute? During this period you try different things from volunteering, joining a club, and helping look after the grandkids.
Finally, if successful, then you move on to phase four of ‘reinvention and rewire’. According to Dr. Moynes not everyone gets to this phase but based on his studies and experience, these are “the happiest people he’s ever met”. I don’t think my dad’s at this phase yet so I’ll be forwarding this blog off to him.
So there you have it.
A successful retirement will require detailed planning and a deep consideration of both the financial and psychological aspects of retirement. So get to work and start the dialogue with your financial advisor. That’s what we’re paid for!
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.
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