by Deneen Cunningham, McVagh Cunningham Group Ltd. –
Worried about outliving your retirement income? You’re not alone.
There are lots of things that could affect your income in retirement. The best you can do is be prepared for these seven risks:
1. Pre-Retirement Market Risk – Five years before your retirement date, make sure you have looked at the risk factors that could derail your plan. Have contingency plans in place. A market correction may have a long-term negative effect on your retirement income.
2. Longevity – Canadians are living longer, healthier and more active lives than ever before. Retirements of 25-plus years are now the rule, not the exception. As a result, you should plan for the possibility that you’ll need 25 to 30 years of retirement income.
3. Withdrawal rate – Longevity also factors into how much money you should withdraw each year from your retirement income plans. Taking out too much, too early can significantly deplete your savings. Try to make withdrawals as close as possible to your retirement income products’ minimum withdrawal guidelines.
4. Inflation – An increase in the cost of living, or inflation, is one of the biggest threats to your retirement income. Even a modest two percent inflation rate over a 25-year retirement can erode your purchasing power by 40 percent. Be sure to calculate for inflation when you’re planning your retirement.
5. Taxes – Make the best use of the tax shelters we have, RSP, TFSA and your principle resident. Losing some or all of your OAS benefit is like paying more taxes. Make sure your long-term plan ensures this doesn’t happen to you.
6. Asset allocation – This is a fancy way of saying “don’t put all your eggs in one basket.” A diversified portfolio, that includes stocks, bonds and cash, can help provide growth and protection against market volatility.
7. Health care –While everyone in Canada is covered for basic health care expenses, be aware of what you’re covered for so you can plan for potential out-of-pocket health costs.
As you get closer to retirement, you may want to discuss your financial strategy and determine if there are ways to mitigate the above risks. Your financial planner can create for you a customized report showing where you can be more tax efficient today, tomorrow and in your estate.
For more information, visit www.mcgltd.ca.
