For most of our working lives Canadians focus on saving and accumulating assets for retirement. Once retired, the focus shifts to the decumulation of those assets. During this phase, retirees must figure out how much income to draw from their investments to live comfortably now; but still leave enough money to sustain them for the rest of their lives.
The challenge of Retirement Income Planning exists because it is based on two unknown factors: how the investments and/or market will preform, and how long you are going to live. If you spend too much money in the early years, you run the risk of running out of money. Spend too little and you may deprive yourself of a lifestyle you have always desired.
Financial Planners have been helping people deal with this calculation for years. As baby boomers age, public policy is also shifting to help address this issue. For example, the federal government recently opened the door to variable payment life annuities (VPLA), a plan similar to the Income for Life products currently available through insurance companies like Sun Life and Manulife. The plan allows investors to pool resources in a professionally managed, actuarially sound investment fund that guarantees a monthly income for life.
One strategy for retirees would be to deposit a portion of their retirement savings into such a plan which would in turn guarantee them a certain amount of income for life. Knowing they have a guaranteed amount of income, retirees are free to spend a little more in the early years without worrying they will run out of money later in life.
The notion VPLAs and similar retirement income planning alternatives are slowly becoming more popular with retirees. Whether you use these plans or not, Canadians must do their best not to sabotage their own decumulation plans.
Three common mistakes include:
Taking Canada Pension Plan too early. The simplest way to ensure you don’t run out of money when you are older is to defer your CPP payments for as long as possible. The standard age to start collecting your CPP is 65, but every year you put it off will increase your monthly benefit. By waiting until age 70 your benefit will increase by 42%, this alone can go along way in securing your financial well being later in life.
Paying excessive fees. Many forecasters are expecting market returns to be lower than normal over the next few years. Getting proper financial advice is crucial for the success of your retirement income plan, make sure the person you hire is a qualified professional. As for your investments, include low cost alternatives like ETFs for certain portions of your portfolio, and use fund companies that offer reduced fees for pooling assets under one umbrella.
Not having a financial plan. Improvising can be fun if playing a musical instrument. But when it comes to retirement planning? Not so much. Work with a Certified Financial Planner to develop a personalized decumulation strategy based on your assets and lifestyle. Everyone’s plan will be different; a cookie cutter approach won’t cut it.
Like never before, aging Canadians need strong leadership and financial advice to ensure they are able to fund a long and happy retirement. If you would like to review of your retirement income plan give me a call.
Have a great weekend,
Tracey
Source: Original article by Ian McGuan, the Globe and Mail 07-17-19.