One of the most common questions we hear from our clients is ‘Will I outlive my money?’ and the answer is getting more complicated.

 

Historically, retirement has lasted about two decades on average, but more people are now living into their 90s and beyond and retirement could now be twice as long. 

 

There are so many questions about your retirement. How long will I live? How many of those years will I be healthy? Will my adult children need financial help? What happens if my spouse passes away and I now have to navigate my golden years alone? Will it affect my tax rates? How will inflation impact my ability to support my lifestyle?  How many of those questions are you assuming you have the answer to?

 

You know what happens when you assume...

 

One of the challenges for people trying to plan for retirement on their own is they simply do not know what assumptions are reasonable, particularly when it comes to their finances.

 

Typically people underestimate their spending and overestimate their retirement income. They do not realize how much money it will take to maintain their lifestyle let alone face any changes to it. They misunderstand what their primary sources of income will be and how much they will receive. They do not know what returns to expect from their portfolio or how inflation, and tax changes, will impact their savings. They have no contingency plans if, for example, they need to retire early because of a health problem, a change in their company, or a family member that needs help.

 

The consequences of guessing wrong are costly...

 

If the assumptions you are basing your financial plan on are off, even by just a little, it could have a big impact on your retirement.

 

Consider this: If you have annual living expenses of $60,000 today and you are operating on the assumption that inflation will average 2%, in thirty years you will need an annual income of $109,272. However, if inflation actually averages 3% over that time period, you will have underestimated the income you need by about $38,000 a year.

 

If you have planned for your portfolio withdrawals to last until you turn ninety-five and you celebrate your ninety-sixth birthday, your plan has failed and you will have likely run out of money.

 

The bottom line ? If your assumptions are off by even 1% or one year, it can make a big difference to your retirement lifestyle.

 

What’s the solution?

 

Work with an advisor.  You can't avoid using assumptions in the financial planning process, but assumptions based on research, data and facts instead of feelings can make them much more accurate.

 

As advisors, we have a deep understanding of the markets and the economy, and we have helped hundreds of Canadians retire. We can use that knowledge and experience to help you estimate inflation rates, rate of returns for your investment portfolio, and how much income you may need in retirement.

 

But you have information we do not have. You know your family history, your health and wellness, and your lifestyle goals. By working together, we can build your financial plan on reasonable assumptions, giving you a greater chance of success.

 

Test your plan:

 

We are big believers in the stress test. It is a great way to ensure your plan is realistic and achievable. Check your plan against any potential issues or life events, such as health issues, an early retirement, the loss of a spouse. Check it against different market conditions throughout history. Will the plan still hold up under these circumstances? If your plan fails, it is time to go back to the drawing board. If it succeeds, you can retire knowing that you are most likely covered no matter what comes your way.

 

Don’t set-it-and-forget-it

 

Whether you are retired for ten years or fifty years, a lot can happen over that period. Your goals and priorities may change. You may have an unexpected expense. Someone in your family may receive an unfavourable diagnosis. That’s why your plan should be flexible, dynamic, and regularly reviewed and updated with your advisor.

 

Reach out to anyone on the PKAG team with any questions you may have.