Having enough money to retire comfortably is one of the primary goals for many investors. But how do you know if you’re finally ready to take the plunge? Here is what I advise my clients when they are trying to determine if they are financially prepared to retire.
Basic retirement planning should be part of your investment strategy from the get-go, but when it comes to seriously plotting out when you will have enough money to retire, you should consider ramping up your planning about 10 years before your ideal retirement age. This 10-year period will give you enough time to set goals, reduce any debt you may be carrying (because retiring with debt is highly unadvisable), look at how your investments are structured, and implement a strategy to accommodate your potentially changing tax bracket. If you have children, you should also consider how self-sufficient you anticipate they will be upon your retirement.
Consolidate Everything Under One Advisor
In my experience, people at this stage in their lives are quite fragmented with their financial affairs. They have more than one bank, more than one advisor, and their investments or assets may be all over the map. You need time to start consolidating your relationships and accounts. Try to work with one wealth advisor who can guide you through your entire financial goals, not just retirement. A recent study by Mackenzie Financial found that 68% of Canadians who use a financial advisor feel confident about their retirement, compared with 38% who do not have one.
As an experienced advisor, I have seen many, many clients at every stage of their journey to retirement. Most people retire only once so they have very little experience with it; an advisor can guide you through the entire process. Learn from a pro, not from your mistakes, because when it comes to retirement, you only have one chance to get it right.
Crunch the Numbers
You need to ask yourself "how much am I going to need in order to maintain or increase my standard of living?" In order to determine that, you must look at your current expenditures and try to predict what will increase or decrease in retirement. Usually, I find certain things like travel and restaurant expenditures increase, but business expenditures like wardrobe and commuting decrease because you’re not going to the office.
Consider your cash flow in retirement. At 71, you are required to convert your RRSPs to RRIFs, and you must start withdrawing a minimum payment from your RRIFS at 72, though it's usually unadvisable to take out funds before that. Your advisor will plan how your portfolio will be managed to meet these various obligations.
Run "What If" Scenarios
As an advisor, I run through ‘what if’ scenarios with my clients to craft some financial projections, taking into account pensions, planned assets sales, inheritances, elder care, unexpected illness, assisting your children or grandchildren, charitable donations, etc. I try to project out to age 100, because the last thing I'd want to do is project to 90 and see someone outlive their money and struggle in their final years. Also, I make sure their investments are designed to keep up with inflation. Having $5 million in savings may seem like a lot now, but may not be enough in 20 years, so it's important to set up your portfolio to not only protect your capital, but also grow it.
Consider Downsizing or Reallocating Assets
Retirement planning isn't just about budgeting; it's also about determining how much responsibility you want to have. If you’re going to be traveling more, you may not want the responsibility and upkeep of having additional properties or vacation homes. Perhaps you'd rather sell those to deploy your time and energy towards things that are more enjoyable at this stage of your life. Or if you don't want to part with your additional property, you could consider turning it into an Airbnb and using some of that income for living expenses.
Re-examine Your Insurance Policies
In a perfect world, your advisor has discussed these things with you earlier in life, but it is still not too late to get long term care, critical illness or life insurance. This allows you to spend your last dollar and still leave money to your children. Insurance provides instant, tax-free liquidity to your beneficiary after you pass, which gives you the mental permission to spend all of your capital when you're alive.
Seek Out Other Forms of Income
For many people, retirement doesn't mean you completely stop bringing in income; it's just that you transition from a job to projects. Some leave their job but stay on in a consulting role. Others sit on a board of directors. This can help with cash flow requirements, so you don't necessarily have to start drawing on your portfolio for day-to-day living expenses.
You don't have to retire your resume just because you're retired. Some of the leading causes of unhappiness or depression among seniors include feeling isolated because they're no longer in touch with their networks, and lacking anything to motivate them or give them a purpose. It's important when planning retirement to think about what's going to keep you engaged and make you feel fulfilled and secure, not just financially but also emotionally.