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An investment advisor’s look at retirement options

The great news is that Canadians are living longer, largely due to medical advancements. Those of us who are retiring today at age 65 can anticipate living more than another two decades on average, so it’s important to put some thought into how we can avoid outliving our retirement savings over this twenty + year stretch.

What is the best strategy for retirees to ensure they will have adequate savings throughout retirement? That is a great and important question. When you factor in the significant and steady flow of baby-boomers moving into retirement, you can see why people need clarity on what they can expect from their retirement income and the best strategies to help maintain a rewarding lifestyle.

In order to determine your future income needs, you should ask yourself:

  •          Will I want (need) to work part time in retirement?
  •          Will I be travelling?
  •          What type of lifestyle do I want?
  •          What health and medical related expenses do I anticipate?

And things will change as you get older. Retirement income expectations may vary from the first year as compared to the 15th year of retirement. Reviewing these questions and trying to answer them will start to give you a better idea of what level of income would be required and how that may vary throughout your retirement years.

So what are the possible income streams available in retirement?

Look first at what you could expect in retirement, from Canada Pension Plan (CPP) and Old Age Security (OAS) and other sources of income, which could include rental income on real estate properties as well as any additional income from continued employment.

Next, you would look at your employment pension plan, if your employer or union offers one, which could be a defined contribution plan or a defined benefit pension plan.

In Canada, Defined Benefit pension plans account for over 80% of pension assets, and are prevalent in the public sector (provincial, federal and municipal government, healthcare and education sector) while defined contribution pension plans are much more common in the private sector especially for small to mid-size employer groups. Defined benefit pension plans will pay an ongoing retirement benefit for life, whereas defined contribution pension plans and group RRSPs, created through your own savings and sometimes employer matching, will yield an income based on their value at the time of retirement.  

When managing an investment account, whether registered or non-registered you may ask:

  •          How diverse do my investments need to be to protect me from market drops and how much risk am I willing to tolerate to ensure my investment return?
  •          What is the most tax efficient way to invest and what is the best way to access the income?

One common myth is that at age 65 investment portfolios should be completely risk averse. While it is true that investment portfolios need to be properly risk-managed for the appropriate time horizon, considering the limited ability of a recently retired person to withstand downward shocks to their portfolio, some risk is necessary to generate enough income to sustain a long retirement, so risk-managed is appropriate, whereas risk-absent is not.

You may need to work with a financial planner or professional to help with estate planning and round out the retirement strategy, do your research and have those conversations with family. Any time spent in examining these key considerations will be time well invested.   

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