Do you have a plan?

Do you have a plan?

Most people are concerned about having enough money to meet their obligations at or in retirement. Using traditional planning methods such as buy term and invest the difference, and live off the earnings and retain capital are the most common methods used today.

This type of planning only works if you follow a regimented plan and you don’t spend the difference.  If you fail to invest the rest… it lessens the quality of life that one should be able to enjoy in the active years of retirement! It is upside down and backwards!

With our low-interest rate environment, it’s difficult to find sustainability in your portfolio. One way to extend the life of your capital is to consider equities in the form of dividend earning stock.

This tends to be a source of hedging against tax, inflation, fees and other wealth transfers, however, using equities means taking more risk.

Who wants to take more risk leading into retirement?

If you would like advice on reducing the risk, or with what type of investment vehicle may be best for your situation please contact us at info@Henleyfinancial.ca

Visit us at at Henley Financial and Wealth Management

If indeed you are investing in equities please understand the risk involved within your investable assets. Investing in equities will depend on your risk tolerance and the reality of the situation. During retirement, you should lower the amount of Equities within your portfolio to protect you against the volatility of the markets. Leading up to retirement Equities can help build your portfolio but you must be able to accept the risk of volatility which the markets will provide.

Guaranteed Lifetime Withdrawal Benefit products offer a guaranteed income bonus and can provide a stable environment for investments moving forward with the option of a guaranteed lifetime income. This takes the guess work out the planning and provides you with a pension like asset.

Another strategy is to have adequate permanent life/asset insurance that frees up other assets such as non-registered savings, investment property equity or retained earnings in a business.

Having enough life insurance allows one to spend down taxable savings RRSP’s or RRIF’s during early/active retirement years (age 60-75) whereby you’re actually reducing the tax burden overall.

By deferring the use of RRSP’s and RRIF’s the tax on these assets is actually growing as invested capital. By using the funds sooner, rather than later, (yes you are paying more tax now) but you are paying a known tax, you have control over what the tax amounts are. If you wait long enough the government dictates the amount of tax owed yearly. Meaning if you defer too long, one conceivably can pay a much greater tax than ever saved by using the registered plan strategy!

Access equity sitting dormant in your paid off or very low debt home could also be a strategy that you could use during retirement. The reverse mortgage has been a component of retirement planning  over the last few years based on the low-interest rates on borrowed money. Again this strategy requires some professional advice.

Life insurance lowers the pressure of the capital to perform and lessens market volatility risk. It also lessens government control risk. Meaning, by using a registered plan strategy you absolutely are in a partnership with the government. RRSP and RRIF products are very much a controlled revenue source for the C.R.A. your strategy will dictate the how much income they will receive on your behalf.

If you are interested in creating more spendable income during the early retirement years without fear of running out of money we can show you how. For the most part, we can increase your spendable income into and during retirement without any additional out of pocket expense!

If we can recover 1%-5% of gross income from dollars that are unnecessarily being transferred away from you through tax, fees and other opportunity costs which can be redistributed to your retirement plan and increase lifestyle along the way. Would you be interested?

Let us provide you with an overall review of your entire investment and financial plan. We will do this with no obligation from you to move forward with any recommendations we may have, or we may find that you are well on your way and continue on that path. Either way, a second opinion never hurt anyone.

Ask yourself these 10 questions? They will help you decide if you are ready…

1. When do you want to retire?

2. What percentage of your current income do you expect to need in retirement?

3. How do you plan to spend your money in retirement?

4. Have you considered your lifestyle needs in retirement?

5. What guaranteed sources of income can you count on in retirement?

6. Do you plan to work part-time or full-time in retirement?

7. How do health and wellness factor into your retirement plan?

8. Are you ready for the unexpected events in life?

9. How will you keep your money working in retirement?

10. Do you plan to leave a legacy?

Like everyone around you saving has become second nature. You have saved wisely and built a sizeable retirement fund to provide for your retirement.  The next question is one that will confuse many… Are you ready?

imagesThink about how you will keep your money growing. Talk to a financial security advisor about investment solutions for retirees.

Let us help you at Henley Financial & Wealth Management.

Contact us at information@henleyfinancial.ca for more information regarding investment solutions.

Above are 10 questions… Questions that need answers so that you can retire into the lifestyle that you have become familiar with living. Studies show us that you spend more money on the weekends (or days off) because these are generally the days you have time to spend your hard earned money. So consider this in retirement every day is a weekend or a day off.

When do you want to retire? This is a personal question with many variables being attached for each individual. How much money do you have saved? Do you like your job? Are you healthy? When we change over from a saving to spending cycle the timing of your retirement is crucial to building a fund and assessing how long you will need it to last. If you like your job you may want to work longer as a consultant, this will help fund your retirement income. Although health will be the biggest factor to your retirement date, many workers are forced into retirement, not because of age but health issues. I guess it comes down to want to retire or need to retire hopefully the decision is yours to make.

What percentage of your income today will you need in the future to retire? This is a number that needs to be calculated into the retirement plan. Most financial advisors will show you a figure of 75% of today’s income going forward. To be honest that is a generous figure. Most of your big-ticket items will have been paid for by this time. You must remember however that you will are likely to make the most income in your lifetime during the last 5 years of employment before you retire. So your final valuation is something that must be continually updated while planning for the future.

What are your current spending habits? Are you a saver or a spender? Because these habits will not likely change in retirement, and as always you must plan for the unexpected events which will be out of your control. It goes without saying savers are more likely to save more and have more than the spenders, so spenders must work to save more now to have more in retirement. This is a common sense approach but you would be surprized by the lack of respect for compounding interest and how it works in your favor over time.

imagesHow many days a year will you travel or play golf? If you retire at age 65 and live till the age of 90… meaning you will have less than 10,000 days or 9,125 days to be exact. That would be a fair amount of travel and golf for anyone; some planning will have to be involved regarding the answer to those questions. I believe these answers to be the top answers to the question of… what do you want to do when you retire? So to live that lifestyle you will have to plan for future expenses that you may not already have. If you buy a condo in Florida you will have to account for the condo fees and associated upkeep costs of two homes to allow for the travel and golf adventure you have planned. If you plan to travel the world you will have to account for the currency exchange rates and the costs associated with travel to the exotic locations you want to visit.

Calculate how much income you’ll receive during retirement – from sources such as Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) payments. Then, determine how much additional income you’ll need and where this will come from. While investment income is a nice bonus, you shouldn’t rely on it to pay for necessities.

When you consider retirement planning, make sure to account for unpredictable events – both financial and personal. As we said before plan for the unexpected. Make sure your retirement savings are strong enough to support you through a future economic downturn, and a rise in the cost of living and a long life.

If you plan for the future you will be able to enjoy life to the fullest, if you fail to plan for the future it will get away from you and your plans will have to be alterred. The choice is yours choose wisely.

 

 

Caught in the cross fire of Oil.

Caught in the cross fire of Oil.

As they say, the cure for high prices is higher prices.

That always seems to make the high prices more reasonable, Its called sticker shock we become acclimatized to paying a high price for our consumer goods.

But the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year, is that we will become acclimatized to these low gas prices. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

The downside of cheap gas is the upside to other expensive consumer goods across the board. So much for the savings established at the pump

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to make sure their costs stay below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. Today it’s trading under $35, two-thirds lower.  If you think about that in terms of your household, how would you fare if your family income was cut by 69 percent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that the U.S. lifted a 40-year ban on the export of domestically produced oil. That is because fracking is making the U.S. almost energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis seeing a long-term threat to their oil power have ensured that OPEC continues to produce at the same pace to keep up market share. The Saudi goal is to drive the higher-cost fracking industry under. Our, even more, expensive oil sands are caught in the crossfire.

OPEC shows no signs of standing down.

The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for one American dollar. Today, it was at 72 cents, a drop of 22 percent. Which is $1.38 to $1 at the consumer level!

If oil rebounds, so will the dollar; if not, it may fall further which is something Canadians living close to the borders care a lot about. Even if you don’t live close to the border that cheap flight or vacation in the U.S. is no longer an option.

Canadian stocks

Toronto share prices are down 9.8 percent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 percent.

If oil prices improve, these shares will too.

Inflation

We climbed out of our 61-cent-dollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again.

Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing starts will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, and’s and maybe’s here and, as always, beware of forecasts. Between now and this time next year, anything can happen. As I stated in a previous article no one can predict the future but much speculation will spin these storylines moving forward. All we can do is live life have fun and enjoy the day as it comes.

Since gas is cheaper in your area fill up and enjoy the ride as it will not last. We know  all too well that things go up and down over night. This soon shall pass and we will be talking about something completely different in 12 months time.

www.henleyfinancial.ca

 

What can we learn from our past?

What can we learn from our past?

1987 was our first experience with a violent correction in financial markets since 1929 and it taught us a few things about investing. Or so you would think!

The crash of 1987 was a violent correction in financial markets. Share prices had been on a tear during the first half of the year. Year-over-year through August, the Dow Jones was up 44 per cent. The TSE, as it was called then, was up 34 per cent year-to-date. Good times were rolling. Although this is nothing like what has happened in the last part of 2015 and the beginning of 2016. Good times have been rolling since the correction of 2008 -2009.

In October of 1987, things fell apart. The psychology turned on hints that interest rates might rise and a sense that prices had galloped ahead too far, too fast. Markets trembled on Fri., Oct. 16. Monday, Oct. 19, saw a record 23 per cent drop for the Dow Jones Industrial Average, and 11 per cent drop for the Toronto Stock Exchange. Sounds and looks familiar to all things we hear today.

The scale of the collapse was well beyond anyone’s ability to measure; the damage was the worst since 1929. Early forms of computer trading, which sold blocks of shares as prices fell, helped pile on the downward pressure.

Ever wonder what tycoons like Jim Pattison or Warren Buffet did when everyone is screaming that the world will end in the face of market corrections. They bought shares, mostly in blue chip companies. In the face of a total market collapse, they would be diving in. Why not, opportunities like this didn’t come along very often — great companies with great businesses at a bottom of the barrel prices.

When I started in this business I would hear the seasoned veterans at round table talks advocate for buying low and selling high. Which sounded like reasonable advice to me, and if I followed their advice I would create a sound financial investment portfolio for my clients.

Markets always seem to recover, regardless of the pessimists. The Dow ended 1987 with a small gain, as did the TSX, which was up 3 per cent on the year. It takes a while for the lessons to sink in, but here’s how to look back on that experience

imagesNobody can predict the future though many claim they can. How long or lasting will this setback be is only a guess by anyone claiming to know. In 1987 and in 2001, the corrections were short and sharp.

In 2008-09, it lingered. But when prices took off in mid-2009, it was a four-year spree. One reason was record low-interest rates; the other was an expectation of a global recovery that would fuel profits.

But the recovery has been weak and share prices have run ahead of the profits behind them. The rise in share prices has not been supported by growth. The issue for Canada is the rapid fall in commodity prices. Our resources are not all we have going for us, but the global war for oil dominance has caught us smack in the middle. Companies that are dominant with a history of profitability are good bets in good times and bad. Sentiment can turn quickly. Irrational exuberance can give way to irrational pessimism. The TSX is down again, as is the price of oil and the loonie. It may go on for a while yet. There’s no question it hurts, but where we are in the last week of January isn’t necessarily where we’ll be at the end of the year.

What does this mean for Canadians

What does this mean for Canadians

If history is any guide, a win by Justin Trudeau and the Liberals bodes well for Canadian stocks.

Stretching back to 1922 and the time of William Lyon Mackenzie King’s first term in office, stock returns have been three times higher under Liberal prime ministers than with Conservative leaders, this according to monthly data up until August 2015 compiled by Bloomberg from TMX Group Ltd., operator of the Toronto Stock Exchange.

Over about 63 years in power, the Liberals of Pierre Elliott Trudeau, Jean Chretien and Louis St-Laurent witnessed a weighted compound annual growth rate of 6.8 per cent for the Standard & Poor’s/TSX Composite Index and its predecessor TSE Index. That compares with a 2.2 per cent annual gain for the Tories of Stephen Harper, John Diefenbaker, Brian Mulroney and others.

Is it timing? Have the Liberals been lucky over 100 years to do so well? Over 100 years there does seem to be a pattern.  It could be that when economic growth is poor, people want austerity and think Conservatives are better managers.  Then when things improve people get tired of that and they vote for the Liberals.  Or has change always come at the right time?

The data, which covers the tenures of more than a dozen prime ministers of both major parties, compares the compounded annual growth of Canadian stocks weighted relative to the amount of time a particular leader was in office.  The longer the time served, the greater the impact on the resulting figures.

Under Harper, Canada’s leader since 2006, the benchmark gauge has posted compound annual growth of 1.5 per cent, the second-worst performance of any prime minister since Richard Bennett. Bennett, a Conservative who ruled during the time of the Great Depression from 1930 to 1935, is the only prime minister with a negative stock return of 9.7 per cent.  Pierre Trudeau’s second term was weaker than Harper’s for stock performance but his overall tenure was better.

As with other leaders, Harper’s stock market record reflects events that are beyond his control. The incumbent Conservative led the country through the worst global financial crisis since the Depression and more recently witnessed a 50 per cent drop in the price of oil, one of the nation’s biggest export products.  As a result, Canada’s economic growth will be about 1.1 per cent this year, one of the weakest in the Group of Seven countries.

Markets are, at least in part, a reflection of confidence or a lack thereof.  It is interesting that the Liberal legacy of sound economic management, jobs and growth, is something we don’t hear about during election campaigns.  But it would appear that they have delivered and can contribute to the economic growth of a country.

Typically if you get more money into the hands of people with a higher tendency to spend it that’s good for economic growth. The market will do better if the Liberals are seen as more of a middle of the road player that encompasses all, as opposed to the Conservatives which have been linked to business and benefiting corporate entities.

Liberals returns

The 13-year Liberal dynasty that came before Harper, led by Chretien and Paul Martin, presided over combined compound annual growth of 8.3 per cent from 1993 to 2006.

Martin, who held power for three years through a minority government, posted the best compound growth rate of any elected Liberal at 18 per cent. Resource stocks in the S&P/TSX surged as the Canadian economy wrestled with a weakened currency for much of their rule, along with the rise of China as a global economic power and the rapid rise of commodities prices from crude to gold.

Again we must understand that the Harper government went through the financial crisis of 2008, which certainly was not his doing.

All is not lost for the Conservatives, however.  The best performance of any prime minister was the nine-month rule of Joe Clark from June 1979 to March 1980. Canadian equities surged 33 per cent during his time in office, for annualized compound growth of 47 per cent. Elected at age 40, Clark was the youngest prime minister in Canadian history.

This is not to say that Trudeau will not go through a financial crisis, or market correction over the next four years.  But while in power the results from the markets going forward are in his favor.  2015 has been flat year with minimal gains and as we have seen in the past there is a calm before the storm approach in the markets.  We cannot predict markets going forward but we do know that they will go up and of course go down.  Timing may once again in favor of the Liberals.

For all those who believe that the Liberals will only raise taxes, we have an answer at Henley Financial and Wealth Management that helps remove the threat of tax.  To understand our Onshore Tax Shelter

visit us at http://www.henleyfinancial.ca

or email us http://info@henleyfinancial.ca

When should you invest?

When should you invest?

We as humans tend to get caught up in media hype about when that next stock market plunge will come. Especially now when the markets have been in the midst of the best run in its history.

At some point what goes up must come down…

In nearly 90 years of market history, if you bought stocks on the absolute worst day the point where the market is at it’s highest peak. The average time to make your money back has been three years. It shouldn’t make you shy away from investing in the markets. But we hear time and time again, “Stay away from the markets because you will lose your money”.

Nobody likes to lose their money but it does not stop us from going to the casino or buying lottery tickets.  We gamble with a chance of beating the odds, so why is it that most people believe that they should always beat the markets on performance.

Of course, while we can tolerate three years to get our money back. You’re probably thinking, what if the big one comes and the world ends?

Let’s look at the 2008 financial crisis we thought that was the end, I remember people talking about how we are going back to the Great Depression. If you got in at the peak of the market the worst day, it would have taken 5.5 years to recoup your money.

Not bad considering if you invested the day before the 1929 crash, it would have taken you 25 years to be back in the positive. That’s a long time, even for a long-term investor. Many of the people I’m writing this for did not even have parents who were born when that happened. We are 86 years past that historic fall in times, and the media has no problem reliving that moment in history if the market shows any signs of correction.

So in 90 years of stock market history, only the Great Depression took longer than a decade to recoup your money. And only four times since did it take longer than 5 years to get back to gains.

The Facts:

While economists might disagree over the exact definition of a bear market, most financial professionals consider a 20 percent drop in the market from its previous high to be a pretty good indicator that the market is down. The problem is, few investors actually pick the bottom, and those that do are probably more lucky than smart. The primary factors that drives market prices up or down, and the stock market is no exception. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, driving the stock market down. Plenty of factors can influence this, company performance, positive or negative news about specific companies or industries, world events and political changes. So once again media creates frenzy as doom and gloom sells, and seriously who wants to hear about the good times being had by all invested in the market.

Potential:

It is possible to make greater returns during a down market than in an up market, for the simple reason that stocks have the potential to move higher from a lower starting point. For example, a $1,000 investment at the stock market’s peak in 1929, just prior to the start of the Great Depression, would have been worth only around $170 by the time the market bottomed out in 1932. But if you had held on to your stocks until 1959, around 27 years, your original investment would be worth more than $9,500, for a total annualized return of around 7.8 percent. If you had waited and invested that same $1,000 at the bottom of the market in 1932, your total annualized return by 1959 would have been 16 percent return on investment. Not bad, but who would have done that because certain doom was happening.

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So should we invest when the market is down? That seems obvious but human nature does not allow us to invest in a market going down, as we believe the end will happen. But history shows us that what goes up must come down and what comes down will definitely go up! The graph clearly shows how a market goes up and down… If we follow the market from 1900 we see a steady increase from the beginning to now, yes the market drops but it always rebounds within certain time frame to better than average returns depending on the cycle of the fall.

Whether you buy stocks in an up market or a down market, you are more likely to earn strong, positive returns if you buy stocks for the long haul. Just remember that buying in down markets present opportunities. Holding your investment during a down turn is vital to coming out ahead; as we know if you don’t sell in haste then you have lost nothing. But if you sell because of emotion you must accept the consequence of your losses. You cannot lay blame as history dictates the value of investing for the long term.

The purpose is to show you that you should buy low and sell high but regardless of your timing. You must have a secure financial plan that does not include emotion.

contact us http://info@henleyfinancial.ca

How much money will you need to retire the way you want?

How much money will you need to retire the way you want?

We talk of retirement when you put away your cares and worries, kick back and enjoy the wealth you’ve worked so hard to accumulate over the years.

Retirement for many is an exercise in calculating odds and balancing one probability against another. Should we go on vacation? Or should we stay at home because we need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

The problem is that we are living longer with new technologies and drugs thus increasing our life span. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 84, that is a 19-year difference and means more money is needed. Our parents and grandparents didn’t spend a lot of time thinking about retirement! Why? They had a pension plan that would take care of them. Well we all know where those pension plans are going, in many cases they no longer exist or have been taken away as cost saving measure for the employers. Meaning you now have to budget and plan for those years after retirement.

A lot can go wrong over time, we don’t have a crystal ball to predict the future. Even if you set things up perfectly for a nice retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past your best before date.

Most people do believe they will live to life expectancy. What you need to know is the average life expectancy is just the median in a huge range of possibilities that the actuary calculates on your behalf.

Life expectancy figures are usually expressed in terms of what a newborn child can expect. It assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 84 and past.

The problem, from a financial perspective, is that there are no guarantees. A 65-year-old man who retires today faces an 10% chance of dying before he turns 70. He also faces the same 10% chance of living past 95. So how do we plan for that discrepancy?

So what if our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences— only to find that, Oops, he has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and save his money to ensure he will have enough to last until he meets his maker in years and years to come. But finds himself in a hospital bed at 68 or 69, with a life threatening diagnosis, and cursing because he did not enjoy life more when he had the chance. We all know someone who was waiting to retire to go out and explore and they never made the trip.

So how must you approach retirement?

A smart approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate this figure by adding up how much you spend in all areas, then deducting the expenses that will disappear in retirement— no more mortgage payments, no more child care or tuition payments, no more retirement savings. You should also deduct any luxuries that you could live without in retirement, such as eating out frequently or having a second car.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement—and that figure is probably a lot lower than you think. Most middle-class couples are delighted to discover that they arrive at a must-have figure that amounts to just $40,000 to $50,000/ couple a year in after-tax income.

What will you do in retirement?

We all have dreams and you need to budget for them. Maybe you want to golf every day, or winter down south. How much will it cost to retire with these dreams? Figure that out as the second part of your budget for retirement planning.

Remember when assessing your dream list, age takes its toll. Right now you may dream of travelling all the time. Once you’re past your early 70s, however, the lust to travel maybe diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So might I suggest when budgeting for luxuries, it may make sense to set a larger budget for your early retirement years, and a smaller one for the later years.

Will the Government contribute?

Yes Canada Pension Plan (CPP) will be around for a while to come. Old Age Security (OAS) will also be around, although OAS benefits have been delayed until age 67 for those born after 1962. If you’ve worked in Canada all your life, you and your partner are each eligible to receive approximately $18,000 a year from those two sources, this will depend on what you earned during your working years, and how early you start collecting your pension. You can start collecting reduced CPP as early as age 60. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with and what you figure your minimum retirement needs will be. If you and your spouse estimate you can maintain the needs parts of your current life, of $50,000 a year, the good news is that retirement becomes a very affordable proposition. You and your partner may have to add only $32,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Pensions and RRSPs

You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a defined benefit pension. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations—your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those contributions will simply increase your security, not determine your retirement lifestyle.

Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a defined contribution plan that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

What is your risk tolerance?

No portfolio, though, can guarantee a given return. What makes planning during retirement so difficult is that you’re drawing down your portfolio at the same time as the markets are moving up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge—as they did in late 2008— your withdrawals combined with market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually end up increasing your net worth in retirement. Unfortunately, this is something you can’t control.

If you want to make your money last for 30 years, count on withdrawing no more than 5% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $5,000 a year for each $100,000 you start with. If inflation were running at 2% a year, you would withdraw $5,100 the next year, $5,202 the following year, and so on.

The 5% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. At such an aggressive withdrawal plan you would need to assume more risk in your portfolio to make up for any shortfall that may happen during the retirement years. This may not be advisable, as you would have to time the market well to support a continued 10% rate of return.

You will require balance.

Here’s where individual preferences become important. While a 5% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years. Chances are that things will turn out better than the worst case scenario. If they do, you will be leaving behind a small inheritance. Your heirs will no doubt like this arrangement, and if you want to leave them something, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 5% withdrawal figure to your entire portfolio, you’re probably living on a lower income than you could during your retirement years.

An alternative idea is to treat the needs and wants of your portfolio in different ways. When it comes to your needs portion, play it safe and count on a 5% withdrawal rate. If you calculate, for instance, that you’re going to need $30,000 a year on top of CPP and OAS to provide you with the necessities, you should accumulate at least $600,000 in RRSP savings, or the equivalent in corporate pension plans. That $600,000 should be able to fund an inflation-adjusted withdrawal rate of $30,000 for as long as you live.

If you don’t want to worry about the volatility of the market, you can use some of your needs savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available—some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse.

Once you’ve built a fortress around the needs component of your portfolio, you can treat the wants portion with more freedom. You can and should plan to run through a chunk of your wants budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for luxuries is likely to diminish, and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your wants money is running low at that point, so be it—you will have extracted maximum value from your wants money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your needs are well covered.

contact us at http://info@henleyfinancial.ca

Note: The numbers used in this illustration are for the purpose of easy calculations. We do not suggest that these numbers are hard facts but just guidelines to show you how you should think about your retirement and accumulation. The value of your portfolio is directly related to how much you want to save and what your needs and wants will be in the future.

How much money will I need to retire the way I want?

How much money will I need to retire the way I want?

We talk of retirement when you put away your cares and worries, kick back and enjoy the wealth you’ve worked so hard to accumulate over the years.

Retirement for many is an exercise in calculating odds and balancing one probability against another. Should we go on vacation? Or should we stay at home because we need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

The problem is that we are living longer with new technologies and drugs thus increasing our life span. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 84, that is a 19-year difference and means more money is needed. Our parents and grandparents didn’t spend a lot of time thinking about retirement! Why? They had a pension plan that would take care of them. Well we all know where those pension plans are going, in many cases they no longer exist or have been taken away as cost saving measure for the employers. Meaning you now have to budget and plan for those years after retirement.

A lot can go wrong over time, we don’t have a crystal ball to predict the future. Even if you set things up perfectly for a nice retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past your best before date.

Most people do believe they will live to life expectancy. What you need to know is the average life expectancy is just the median in a huge range of possibilities that the actuary calculates on your behalf.

Life expectancy figures are usually expressed in terms of what a newborn child can expect. It assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 84 and past.

The problem, from a financial perspective, is that there are no guarantees. A 65-year-old man who retires today faces an 10% chance of dying before he turns 70. He also faces the same 10% chance of living past 95. So how do we plan for that discrepancy?

So what if our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences— only to find that, Oops, he has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and save his money to ensure he will have enough to last until he meets his maker in years and years to come. But finds himself in a hospital bed at 68 or 69, with a life threatening diagnosis, and cursing because he did not enjoy life more when he had the chance. We all know someone who was waiting to retire to go out and explore and they never made the trip.

So how must you approach retirement?

A smart approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate this figure by adding up how much you spend in all areas, then deducting the expenses that will disappear in retirement— no more mortgage payments, no more child care or tuition payments, no more retirement savings. You should also deduct any luxuries that you could live without in retirement, such as eating out frequently or having a second car.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement—and that figure is probably a lot lower than you think. Most middle-class couples are delighted to discover that they arrive at a must-have figure that amounts to just $40,000 to $50,000/ couple a year in after-tax income.

What will we do in retirement?

We all have dreams and you need to budget for them. Maybe you want to golf every day, or winter down south. How much will it cost to retire with these dreams? Figure that out as the second part of your budget for retirement planning.

Remember when assessing your dream list, age takes its toll. Right now you may dream of travelling all the time. Once you’re past your early 70s, however, the lust to travel maybe diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So might I suggest when budgeting for luxuries, it may make sense to set a larger budget for your early retirement years, and a smaller one for the later years.

Will the Government contribute?

Yes Canada Pension Plan (CPP) will be around for a while to come. Old Age Security (OAS) will also be around, although OAS benefits have been delayed until age 67 for those born after 1962. If you’ve worked in Canada all your life, you and your partner are each eligible to receive approximately $18,000 a year from those two sources, this will depend on what you earned during your working years, and how early you start collecting your pension. You can start collecting reduced CPP as early as age 60. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with and what you figure your minimum retirement needs will be. If you and your spouse estimate you can maintain the needs parts of your current life, of $50,000 a year, the good news is that retirement becomes a very affordable proposition. You and your partner may have to add only $32,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Pensions and RRSPs

You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a defined benefit pension. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations—your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those contributions will simply increase your security, not determine your retirement lifestyle.

Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a defined contribution plan that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

What is your risk tolerance?

No portfolio, though, can guarantee a given return. What makes planning during retirement so difficult is that you’re drawing down your portfolio at the same time as the markets are moving up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge—as they did in late 2008— your withdrawals combined with market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually end up increasing your net worth in retirement. Unfortunately, this is something you can’t control.

If you want to make your money last for 30 years, count on withdrawing no more than 5% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $5,000 a year for each $100,000 you start with. If inflation were running at 2% a year, you would withdraw $5,100 the next year, $5,202 the following year, and so on.

The 5% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. At such an aggressive withdrawal plan you would need to assume more risk in your portfolio to make up for any shortfall that may happen during the retirement years. This may not be advisable, as you would have to time the market well to support a continued 10% rate of return.

You will require balance.

Here’s where individual preferences become important. While a 5% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years. Chances are that things will turn out better than the worst case scenario. If they do, you will be leaving behind a small inheritance. Your heirs will no doubt like this arrangement, and if you want to leave them something, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 5% withdrawal figure to your entire portfolio, you’re probably living on a lower income than you could during your retirement years.

An alternative idea is to treat the needs and wants of your portfolio in different ways. When it comes to your needs portion, play it safe and count on a 5% withdrawal rate. If you calculate, for instance, that you’re going to need $30,000 a year on top of CPP and OAS to provide you with the necessities, you should accumulate at least $600,000 in RRSP savings, or the equivalent in corporate pension plans. That $600,000 should be able to fund an inflation-adjusted withdrawal rate of $30,000 for as long as you live.

If you don’t want to worry about the volatility of the market, you can use some of your needs savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available—some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse.

Once you’ve built a fortress around the needs component of your portfolio, you can treat the wants portion with more freedom. You can and should plan to run through a chunk of your wants budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for luxuries is likely to diminish, and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your wants money is running low at that point, so be it—you will have extracted maximum value from your wants money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your needs are well covered.

Note: The numbers used in this illustration are for the purpose of easy calculations. We do not suggest that these numbers are hard facts but just guidelines to show you how you should think about your retirement and accumulation. The value of your portfolio is directly related to how much you want to save and what your needs and wants will be in the future.