Video Transcript: Are you on track to retire?
Today, we’re going over how we determine whether clients are on track to retire.
Let’s jump into an example.
First Thing to Determine
Debbie is 57 and looking to retire in five years.
The first thing that she needs to determine is how much her lifestyle will cost during retirement. Or, to put it another way, how much will she need monthly to do what she wants to do? For this example, let’s say it’s $6,000 per month.
The next thing we need to look at is her timeline. As mentioned, she would like to retire in five years, which would bring her to age 62. She also expects to live until age 90.
Next, we need to look at how Debbie will generate $6,000 per month.
Sources of Income in Retirement
What sources of income is she going to have in retirement?
Her sources of income will include the Canada Pension Plan, Old Age Security, a work pension, RRSPs, TFSA, and in this case, she’ll also have equity in her home which she can access.
Lastly, we need to project how her assets will grow over the years, such as her RRSPs, TFSA, and home.
Debbie has been investing for 30 years and has had a moderate or balanced approach to investing. She expects to make 6% on her investments and assumes her home will grow by 4% per year.
Once we’ve compiled this data, we’ll have what we need to put together a retirement plan.
Is Debbie on Track?
The retirement plan will be able to tell us whether or not Debbie is on track.
If she is, great! Debbie will not have to make any adjustments to her plan.
But let’s say she’s only on track to spend $4,000/m in retirement. This is where she’ll need to make some tough decisions.
Her first option is to simply revise her spending and be okay spending $4,000 per month.
If she’s set on spending $6,000 per month, her next option, which tends to be unpopular, is to work later. Rather than retiring in 5 years, she might need to work another 8-9 years.
If she doesn’t want to work later, her third option is to find a way to save more money, thus growing her nest egg.
If she doesn’t have the cash flow to save more, she would need to increase her rate of return on her investments. As mentioned, Debbie has been investing for 30 years. To increase her rate of return, she would need to be comfortable with more volatility in her portfolio.
To get her to where she wants to be, Debbie has three variables that she can adjust to answer the question: Am I on track to retire?
- Money Saved
- Investment Return
Debbie will need to determine what levers she would like to adjust to get her on track.
This is the first step in creating a retirement plan. We must first determine if someone is relatively close to achieving their goals.
The second step would be to make the plan as tax efficient as possible. This step involves determining things such as:
- When to start CPP & OAS
- When to start drawing on RRSPs
- How to drawdown portfolio as tax-efficiently as possible
- Setting up your investments for tax efficiency
- Avoiding the RRSP Tax Bomb
If you’re interested in finding out if you’re on track to achieve your retirement goals, click on the link below to go through our complimentary retirement analysis.
It takes 5 minutes to complete, and you’ll receive a snapshot of your current and future financial position.