How much should you spend when you're retired? Interesting question. Even if you have a high net worth, you will face uncertainty over how much you can afford to spend in retirement, especially if you are a retired business owner or professional because you may have little in the way of guaranteed pension income, thus presenting you with the challenge of determining a sustainable draw on your investments. Factors such as market variability, inflation and taxes only add to the uncertainty.
So, whether you're already retired or soon to shut the office door for the last time, here is a six-step plan to help put your retirement spending concerns to rest by determining your retirement income longevity.
Step 1 - Prepare a personal profile. The level and frequency of income you will need (and/or the withdrawal rate from your investments held within Registered Retirement Savings Plans and other income-producing investments) depends on a number of factors:
Your investment profile - for example, if you are a conservative investor, you would expect a lower return than a more aggressive investor, and therefore your withdrawals should be lower.
Your years in retirement - your retirement could span 40 years and, generally, a longer duration requires a more prudent withdrawal strategy.
Your income requirements - will you need to draw on investment income every month or can your defer or decrease income to offset periodic declines in portfolio value?
Step 2 - Know your income from other sources. Your retirement income will derive from sources other than your personal retirement savings such as the Canada Pension Plan/Quebec Pension Plan (CPP/QPP), Old Age Security (OAS) and company pension plans. Add them all up.
Step 3 - Know your expenses. Add up your expected expenses, both essential and discretionary.
Step 4 - Bridge the gap. Calculate the gap between your income from all sources outside your personal retirement savings and your expenses.
Step 5 - Assess your withdrawal requirements. Determine the amount you need to withdraw from your personal retirement savings/investments to bridge the gap between your income from "other" sources and your expenses.
Step 6 - Make adjustments. If your expected withdrawal rate is not sustainable, based on the projected returns from your current savings and investments, you will need to re-evaluate your registered and non-registered portfolio with the aim of improving returns, or you may need to reduce the scope of your retirement plans.
Work with your professional advisor to develop a personal plan that takes into account all of these factors and provides peace of mind. Very often, a high net worth individual will discover that they can afford to spend much more than they thought.
- Managing Your Money, written and published by Investors Group Financial Services Inc. and Investors Group Securities Inc., presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances.
