Bill Blog | May 19, 2021
Let’s talk retirement. So you want to retire someday, which is a worthy objective for many. However, others have no plan of retiring (primarily entrepreneurs), or some foresee partial retirement. So there is no correct answer to retirement, just options. So what is your plan, and most importantly, how will you get there? There are many hurdles, and many things need to go right to achieve your goal. So, let us take an honest look at several of the most critical factors.
- You need to calculate how much wealth you need to accumulate before slowing down or fully retiring. Is it $250,000, $500,000 or 1 million or 5 million or more? We all dream of being a multi-millionaire, but the real stats show that most Canadians only have a networth of just over $500,000 at age 65. Lower, if you have been a renter, $400,000. From age 56 to 61 years old, the average Canadian has saved $163,577, and the number goes down in the age bracket of 65 to 74.
- I covered how hard it is to create sizable wealth for most people in a previous blog. For example, only 2% of Canadians have between 1 to 5 million or 764,033 as of March 3, 2022.
- What matters in retirement is consistent income. How much income will you need to retire comfortably and achieve your goals? The goal should be to have several buckets (4 or more) and the best, well-diversified income sources. For example, you may qualify for the Canadian Pension Plan (CPP), OAS at age 65, have a company pension plan, RRSP, TFSA, savings, real estate or business income, annuity, and whole life insurance policy, dividends or other sources. The more, the better to ensure stable income. Often people never consider that an income source can fail or be seriously impaired. Yes, be optimistic, but never naive. There are many risks in all asset classes and investments.
- One of the most important factors is not taking a big hit on your asset values in retirement. Participating in a significant market crash will reduce your income and the duration of how long that asset will last. For example, you built up 500K of assets and planned to draw 4% per year for 20 years (20K per year or 1666.66 per month, pre-tax or $1333 per month after-tax). In a 50% crash of the markets, you just cut the duration of the asset to 10 years, or you have to take a 50% cut in income. Unfortunately, this has happened to 100s of thousands of Canadians in the 2000 and 2008 crashes. As warned, we are overdue for another significant market event, and it may have already started in 2022. Warren Buffet has two rules for his capital, “Rule number one, don’t lose my capital. Rule number two, do not forget rule number one!”
- Please make sure the person, yourself or the institution managing your wealth knows what they are doing in all market conditions and can protect your capital. If you are not confident, consider finding someone competent and knowledgeable who knows what to do. Most advisors/wealth managers can do well in an upmarket. You find out how skilled a person is in managing your money, not when markets are going up but when markets are going down or crashing. Having your wealth in one or two asset classes is never a good idea. Instead, be well-diversified into non-correlating assets.
- What are you going to do in retirement? This question may be the most crucial. Many people dream of endless trips, cruises, and pina colada’s on exotic beaches, but even if you could afford this, is this how you want to end your life? If you have your health, your post 60’s and 70s and beyond can be your most productive and contributing years. Why? You have a lifetime of skills and experience you can pass on to others. Mentoring others can be rewarding and provide purpose in your later years, whether you do it for income or love helping people.
- Statistics prove that most people cannot save much pre-fifties if married with children. Why? Having children is very rewarding but also very expensive. Also, with rising inflation, life is costing all of us far more. So, for most people, you have 15 to 20 years to build up a sizable nest egg. The new reality over the last decade is people are putting off full retirement much later. The new 65 is 68 or 70! 50% because they have to (can’t afford to retire), and over 30% because they want to. Truthfully, most people find significant meaning in their work and to stop and not have a well-thought-out plan can be very challenging to your life and others.
- So, what is your plan? Please do not go about this hap-hazard. Talk with other trusted friends or a counsellor and your spouse for months or even several years. Develop a well-thought-out plan, work on your plan for a couple of decades or more, and be willing to adjust it when necessary. Having the fortitude to change your wealth plan is critical (make course adjustments), as our world is rapidly changing.
- In conclusion, I encourage you to have a well-balanced plan: including spiritual/giving back activities, solid social connections with family and friends, health and fitness commitments and hobbies/travel.
If you need help in retirement planning or a second opinion, please reach out to me at email@example.com or connect through my website: fivefoldfinacial.ca