If only there were a compromise-free path to retirement, with regular vacations, endless dinners out, days spent with family and no concerns about financial security. It’s possible to get to the retirement you’re dreaming of, but it takes careful planning and saving. Unfortunately, there’s no one-size-fits-all way to achieve financial freedom. What you need and how you’ll get there are different for everyone.
A 2019 Scotiabank survey revealed that 50 per cent of Canadians have no retirement plan in place and 70 per cent worry they are not saving enough. Regardless of where people are in their planning, many have the same retirement-related questions. Here are the top queries from Google Trends, fielded by three wealth advisors: Julie Shipley-Strickland from Wellington-Altus Private Wealth in Calgary, Kimberley Jensen from Sun Life in Carmen, Man., and Ron Halik from Nicola Wealth in Toronto.
How much do I need to retire?
Julie Shipley-Strickland: It depends on what kind of lifestyle you want in retirement, but a rule of thumb that we follow is a five per cent withdrawal rate. If you’re looking at a portfolio of $2 million, then you can withdraw $100,000 a year in retirement, with the standard retirement length being 20 to 30 years. That five per cent rate seems to work and it’s easily manageable.
Kimberley Jensen: Retirement planning is not cookie-cutter. Some clients want to travel; others want to continue working in some capacity. I look at identifying the gaps and how best to address them. For example, if government benefits are projected to provide $15,000 per year of income and the goal is to have $50,000 of retirement income per year, we have a $35,000 shortage. Over 25 years, this is $875,000. This total ignores inflation, taxes and returns, so it’s complex.
What returns can I expect from my portfolio?
Ron Haik: The answer lies in the portfolio’s composition, your risk tolerance and your access to different types of asset classes. A traditional portfolio comprising a 60:40 equity-to-fixed-income ratio (stocks to bonds) would have yielded an average of five per cent annually between January 1, 2000, and December 21, 2021. Today, investors have access to real estate, private debt and private equity among other asset classes that can generate returns that don’t move in line with the stock market. That kind of portfolio has generated returns north of seven per cent per year on average during the same period of time.
Jensen: Some clients are content with an average return of five per cent and low risk. Some prefer a higher average return and are willing to accept more risk. Going through the planning process allows clients to see the impact of risk, as well as inflation and taxes, on the overall plan.
When is it too late to start investing?
Jensen: The earlier the better, but it’s never too late. Starting later in life requires larger contributions to reach the same result because of the loss of many years of compounding. The sooner a client engages in the planning process, the greater the chances of reaching their goals.
Shipley-Strickland: There’s never a bad time to start investing. However, the biggest indicator of having a comfortable retirement is time—interest compounds year after year. But your 30s and 40s can be your most expensive years with kids and mortgages, and most people don’t reach their peak earning years until they’re in their 50s. So you can start ramping things up when you’re 45, when some of the childcare expenses start to come down. But it’s still better to start investing in your 20s, and then even if you pull back in your 30s, you can pick it up later. If you’re in your late 40s and haven’t saved, then open an account now and put in what you can—waiting longer isn’t going to help.
How can I create a retirement budget?
Haik: Look at everything from a cash flow perspective. Expenses can be fixed or variable, or needs versus wants. For example, you may need a car, but both a Honda and a Porsche can get you there. You will also have some income to take into account. That could be from guaranteed sources, such as pensions and government benefits, and some might be from variable income, such as returns from a portfolio.
Shipley-Strickland: You need to see what’s coming in and where you’ve saved. Are you getting Canadian Pension Plan funds? Do you qualify for Old Age Security? What pensions might you have? Then there’s your tax-free savings account (TFSA). Is that included in your $2 million, or is it just registered assets like the registered retirement savings plan (RRSP)? If it’s not part of that amount, you could say, “I’d like to take one big trip every year for $10,000, and I’m going to pull that out of my TFSA.”
How does one put ethical and sustainable investments in their portfolio?
Jensen: If someone is interested in ESG funds, the first step is to learn more about their preferences and objectives. This can be done by understanding how a company’s methodology adheres to strict environmental, social and governance standards. ESG is a great way to diversify a portfolio with monetary gains and feel good about supporting companies that align with your values. A financial advisor can help invest in funds that have mandates that meet expectations.
How should I invest when I’m retired?
Shipley-Strickland: We’ve all been told you need conservative, low-risk investments in retirement. The problem is that over the past 13 years or so, we’ve had very low interest rates, so certain fixed income investments have been flat or negative. We’ve also had high inflation this year. When you have a two per cent return and inflation is four per cent, you’ve lost two per cent of your money. It’s not true that a conservative investment portfolio is correct for everyone in retirement anymore. Some of my retired clients have been in blue-chip dividend-paying stocks for the last decade because they’ve had steady rates of return, whereas bonds haven’t.
Do I need a financial advisor to invest? Why?
Shipley-Strickland: The question to ask yourself is whether you’ll do the same thing as a financial advisor on your own. A lot of people are busy with kids and careers. Will you actually get it done? If you think you won’t, consider getting an advisor to hold you accountable. Do you value their advice, professionalism, portfolio construction and planning? Do you find value in the fees? Some products are only available through licensed professionals. Is that of interest to you? People can do a bit of their investing on their own, but I’ll make sure you can retire.
Jensen: I don’t believe the question is whether someone needs an advisor to invest, but rather do they like what an advisor can do for them. An advisor’s role is to equip people with adequate information to make informed decisions. There are so many variables around investing and planning for retirement. We have invested in exceptional tools to run complex projections and have the expertise to use those tools, to run sensitivity analysis and provide strategies on implementation. Our ability to analyze the data, provide implementation guidance and have regular reviews to monitor results provides significant value to a client’s overall retirement plan. It is not just about how much someone should save per month, but how to save and also pivot when life changes.