Base your retirement planning on a simple power of three.
You need to decide on - and you have reasonable control over - (1) the amount you save now, (2) the amount you spend in retirement, and (3) the length of your retirement. The fourth factor, your after-inflation investment growth, is impossible to predict. So you simply choose three (or more) growth rates: a rate based on long-term averages for equities, bonds, GICs, real estate and so on, then both a higher and lower rate to give you a range of how much money you can reasonably expect to have in the future.
If you haven't been doing this so far, start when you make your RRSP contribution this year; enlist the help of the retirement planning specialist at your financial institution or wherever you hold your RRSP.
If a worst-case investment growth forecast shows you'll still have enough money to see you through retirement, congratulations. Keep up the good work - but also keep recalculating the figures each year.
If you find that even with the most optimistic growth rate you won't be able to retire with enough money, go back to the power of three.
(1) Can you save more? If not, can you increase your income to provide the extra investment amount required? Or . . . (2) Can you cut back your spending in retirement? For example, could you move to housing that is less expensive to maintain. Buying a cheaper home could also free up some capital to invest. Or . . . (3) Can you keep working, full-time or part-time, so you can leave at least some of your retirement funds to grow more before you start to draw out the money. "Retirement leaves you with lots of free time, and filling it often costs more than you anticipate," says Pat McKeough, publisher of The Successful Investor newsletter.
"Postponing retirement, or working part-time as long as you are able, can pay off in higher income, more contentment and greater long-term security."
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected].
