The first problem with retirement is that we could live too long. A mountain climber's goal is to reach the top and come down safety. Most accidents happen on the way down a mountain. There are two parts of retirement, accumulation and distribution. In the accumulation phase asset allocation is important. In the Distribution phase, Income Allocation is important. The problems are health, taxes and longevity.
Everyone changes in a 3 year life cycle. So focus on the next 3 years and then the 3 years after that. We need to manage risk and lifestyle risk is a concert as is longevity. Consider that 50% of people will lie beyond the standard life expectancy.
As far a health goes, we need to have assets for long term care. Two thirds of retirees over 65 will need some form of long term care. This could come from family or an institution. Institutional care can cost $3,000 to $5,000 a month.
There is a liquidity risk. The concern is that there will be no flexibility when needed. Change is constant. This can be help with a Tax Fee Savings Account. There is a risk of the death of a partner. This will cause lifestyle changes. There will also be a reduction in income. We also face a legacy risk. We may not be able to leave a legacy. We may fail to leave a lasting impression.
There are financial risks such as inflation. This causes the costs of goods to increase. The impact might be the value of our income may not keep pace with inflation. There is the financial risk of low interest rates. This can erode our capital. The impact might be that we run out of money or take more risks.
The presenters believed that fix income products are a component of a good asset allocation plan. If the market has significant loses in the first 5 years of retirement, this could deplete a portfolio. If you have $100,000 portfolio and lose $50,000 in the first year, this is a 50% loss. You will need 100% gains to get it back.
Some pensions are having solvency issues. Because of this income could be cut. Many pension plans are having problems.
Taxation can be a problem. The tax laws can change and this will effect income planning. In Ontario, there were big tax changes made in August of this year.
The average length of retirement at age 65 is 20 years. Men at 65 have a life expectancy to age 83.7 and women at age 65 to age 86.7.
You should write down your lifestyle goals. You should get a bucket list, like climbing a mountain, learn to scuba dive, or take the Queen Mary around the world.
There are random acts of kindness days in November. If you are miserable before retirement, you will probably be miserable after retirement.
If you retire at age 55, you could life for 30 years until 85. You should be active and positive and plan to live until 100.
What do you expect from your nest egg? Retirees often know how much they have but not how much income they can expect. You need a Pay Cheque and a Play Cheque. The Pay Cheque is what you need to spend on fixed expenses. It is a good idea if these are covered by CPP and Pension money. You need to consider what you will spend on such as
- Health Care
- Personal spending
- Grandkids or Adult kids. (That is you could set up a trust to pay kids $1,000 on their birthdays.)
- Non-registered money
- Company pension
- Part-time work
You need to protect your retirement security. Get the facts about your defined pension plan. What is the solvency ratio? What is the wind-up valuation? How many members and what are their demographics?
You need to understand your retirement options. Will you take a monthly pension or the commuted value? Will you use the commuted value to buy an annuity? Buying an annuity will be a 100% tax free transfer as you transfer the pension liability from the pension plan to an insurance company.
There are no so subtle changes being made to pension plans. Some plans are changing to Target Benefit Plans and this could be a game changer. Mortality tables are being updated. Some plans what to take out or change COLA benefits.
You should do a review in 3 years' time from today and see what has happened both personally and financially in that time. Do you feel like you made any progress?
Look at for new tax rates. The government is also looking at changing RRIF withdrawals rates.
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This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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