Are you ready to retire? (Part 2)

As you prepare your plan, think about what you will be doing through all three stages of retirement, not just the first stage. Imagining your retirement lifestyle also increases your desire to retire, while preparing you mentally for the changes retiring will mean to you. Develop a personalized spending estimate based on your interests and planned activities. You are in control and you decide on the lifestyle you want in retirement, including where you will live, and what you will do. Remember that after the first ten or so years of retirement you will start to slow down and your spending will decrease. Most of us spend less as we age because we are less active For most of us, the first stage of retirement ends at about age 75. So our spending declines for a few years. The problem is that as we age, we may experience more medical expenses and may need long-term care, which is expensive and needs to be planned for while you are young.

Inflation is a reality in our economy and it averages about 3-4% a year. This means that your savings or investments will reduce by this amount unless you have invested wisely. Don’t forget to include inflation in your spending and earnings estimates. Everything we spend money on in retirement will increase in price over time because of inflation.

I remember when I first retired, I sat down with my accountant and he talked about the fact that most of us in most retirement do not plan for medical expenses and long-term care because their timing and amount are unpredictable. My accountant talked to me about many of his clients who underestimated these costs and overestimated what government programs will pay for which resulted in some very nervous clients.

Think about the three pillars of retirement that we have in Canada and may have in other countries. All Canadians are entitled to receive Old Age Security, (OAS) and if you do not have any other income you may be eligible for the Guaranteed Income Supplement (GIS) (The amount will reduce if you have a high income). If you worked in Canada you are probably going to collect Canada Pension (CPP) (This is based on years worked and the amount of money you paid in each year), but should replace about 25% of your present income. Many Canadians may receive a company pension of some sort, or they may invest in Registered Retirement Savings Plans, or Tax-Free Savings Accounts to supplement their guaranteed income (OAS, GIS and CPP). This provides all Canadians with a level of financial security because they will have that income that is guaranteed no matter how long they live.

Do you have a spending strategy for your investments? You need to establish a spending policy. Most people don’t. They “wing it.”  I, like thousands of other Canadians, had to sit down with my planner to decide how I wanted to take out of my Registered Retirement Income Fund (RRIF). I took out 8 percent based on my estimates of my lifespan and the rate of return I expect in my investments. Surveys indicate most people believe they can spend 7% or more of their retirement portfolio each year without the risk of running out of money. But the consensus among financial planners and economists is that the maximum safe spending rate is about 4%. My advisor was certainly strong in pushing me to stay safe and take out only 4%. We will see if she was right or if I run out of money before I die.

As part of your plan, you need to make your Will, complete a power of attorney, in BC you should complete a Representation Agreement or an Advanced Directive or all three. You may also consider completing an advanced care plan and sitting down with your family to discuss your wishes if you become ill.