As part of the retirement income planning puzzle, there are several unique risks or challenges that you must account for in your planning for retirement that are different from the risks when simply saving for retirement.
Unknown Time Frame – Longevity Risk:
- No one knows how long they will need their income to last, but they are certain they don’t want it to run out. In general people are living longer today, so most will have to plan for their income to last a greater time period than previous generations.
- For couples aged 65 today, the FP Canada guidelines suggest that CERTIFIED FINANCIAL PLANNER® or CFP® professionals plan to age 98 for them (25% chance one of them will be alive then).
Inflation
- Inflation risk is the risk of not being able to maintain your purchasing power during retirement. Over time everything can become more expensive and can have spikes like in 2022.
- To maintain your purchasing power you need to be able to increase your income in retirement, much like an annual pay raise while you were working.
Taxes
- Taxation Risk is the risk of your tax rates increasing over time and paying more in taxes than you otherwise might have if you had organized your investments in the most tax-effective manner.
- One of the best ways to increase your income (and to make your money last longer) is to reduce the amount of taxes you have to pay by structuring your income sources tax effectively.
- This is needed because retirees can have numerous sources of income that need to be coordinated to reduce current and potential future taxation.
Investment Risk
- Market crashes (known as “bear markets”) occur on average about every 6 years, so with a 30-year retirement time frame a retiree could live through 5 such “bear markets” or market crashes.
- Retirees must develop an asset allocation (investments) that provides them with the ability to meet their income requirements over their lifetime and fits their risk profile with the ability to navigate the inevitable market turmoil.
Sequence of Return Risk
- The years just prior to retirement and after retirement are the key times for planning to create retirement income. If you have poor market performance just prior to and in early retirement, it can dramatically reduce long-term income.
- Your income strategy should take into consideration that you will not receive consistent investment returns each year.
Health
- Health care can be a significant cost for retirees, and yet many retirees have not factored in extra health care costs as part of an aging-in-place strategy or even considered long-term care costs in their plans.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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