General Interest - Personal
Are You Ready to Retire? The Answers to These Four Questions Will Tell You Just That
January 03, 2022
Much has been said in recent months about Canada’s current labour shortage. And while there are many factors contributing to this shortfall - including decreased immigration during COVID-19, the Canada Recovery Benefit, and some major skill gaps in select industries – retirement among Baby Boomers is one major contributing reason. There was a 20% drop in retirements from 2019 to 2020, in part courtesy of market uncertainty, but retirements are back on track in 2021. Baby Boomers, otherwise known as the demographic born between 1946 and 1965, are quickly collectively reaching that average Canadian retirement age of 64.6.
While this pending mass retirement boom is bad news for Canadian employers, it is great news for the retirees-to-be. Provided they are properly financially prepared for retirement, that is. Are you considering joining the snowbird ranks in the not-so-distant future? Are you ready to retire on your own terms?
Retirement looks different for everyone, and once you’ve decided how your ‘why’ impacts that you can get down to the nuts and bolts of how it will all work. “Rules of thumb around what age to retire at and how much money to have saved up prior to retirement don’t really work,” WealthCo’s Vice President of Sales, Tim Fox, shares. “There are so many different factors to consider, that there really is no one-size-fits-all answer. It’s a question that requires help from the financial planning experts in order to answer.”
Here we share four key questions that wannabe retirees need to answer in order to determine whether they are ready.
Question #1: Have you been doing retirement planning or retirement income planning?
“There is a huge difference between retirement planning and retirement income planning,” Fox points out. “At its purest form it’s all about disassembling assets that have taken you a lifetime to achieve. These assets vary from person to person. They key word here is income planning.”
Retirement planning can be exciting. Where will you live? How will you spend your days? What bucket list adventures will you embark on? Retirement income planning, carried out by working with your financial planner, will ensure that you can act on your retirement plans.
Question #2: Are you layering your income correctly?
Fox shares a great analogy when elaborating on this second question that potential retirees need to ask themselves.
“I liken it to a combination padlock. Imagine for a second that this combination padlock represents your retirement. What are the two key things that we need to open the lock? We’ll need the numbers for the combination, of course. But that’s only half of the answer - the numbers alone are not enough. We also need, and this is incredibly important, the sequence of those numbers. Without the right sequence, we’re not opening that lock. In retirement, the numbers represent the sources of income you have - your RRSP, CPP, pension, government benefits, etc. But the next step is the key - deciding on the sequence of that income is incredibly important in opening that retirement padlock. How we layer all of your income sources, which ones we take now and which ones we defer until later, are major decisions that need to be considered with your financial planner.”
Question #3: What strategy do you have for drawing income when markets are down?
The harsh reality is that the markets just don’t care about your retirement plans. Fox shares a dim scenario, albeit one that potential retirees need to fully consider. “Imagine that it’s the first Monday morning of your retirement. You sleep in, come to the kitchen for a cup of coffee, turn on the news…only to find out that the market is down 10, 20, or even 30%. What now? What do you do? Go back to work and delay your retirement? Live on less income than originally planned? Take on more risk with your portfolio to try and earn back what you just lost? It’s important to have a strategy in place that can handle market volatility and one that will allow you to continue with your retirement as planned.”
This strategy is a cash wedge. A cash wedge is liquid savings that can be drawn upon in the case of market volatility. This is an incredibly important safety net that will allow you to continue right along with your first Monday morning of retirement without batting an eye at the market that is conspiring to derail your carefully laid plans.
Good retirement planning requires monitoring and updates with your integrated planning team.
Question #4: Do you have a formal documented financial plan to tie this all together?
And finally, do you have a financial plan that ties your income planning, your income layering, and your cash wedge all together?
“The true value isn’t in building the plan, the value is in changing the plan,” Fox explains. “Your retirement plan will need to reflect the things you can’t anticipate. Life will get in the way, so the plan will change. There is such tremendous value in having this financial plan to help guide intentional decision-making, to help you avoid blind spots, and help you to reach your retirement goals.”
It's never too early, or too late, to starting planning for that magical day when you can start living the retirement of your dreams. Connect with your Integrated Advisory financial planner to get started on planning for that day.
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