Retirement planning: Don’t put it off

Today’s retirees face a much bigger challenge than the previous generation.

I’m sure plenty of people would agree with this statement, but my guess is most of those don’t really know why. Do people really understand just how big this gap is?

Let’s compare two retirees that have both saved up $500,000 (in today’s dollars), have no pensions and are planning to retire at age 65. If they both have the same amount of money saved and they’re both the same age at retirement, can their retirement prospects really be that different?

Let’s take a look at what each of these retirees is facing:

Retiree No. 1 reached age 65 in 1986. What economic environment does he face?

• His life expectancy is 12 years. He needs his $500,000 to last at least that long.

• 10-year federal bonds are yielding a 10.5 per cent annual interest rate. He can take very little investment “risk” to get a decent rate of return on his money.

• Inflation is at 4 per cent; higher than today but easily sustainable with his 10.5 per cent bond yields.

• He should be able to spend $4,500 per month from his savings (indexed at 4 per cent per year) and still have $154,231 leftover when he reaches his life expectancy date.

Retiree No. 2 reached age 65 in 2016. How does his future look?

• His life expectancy is 19 years. His $500,000 needs to last a lot longer.

• 10-year federal bonds are yielding 1.3 per cent. He needs to take a lot more risk if he wants larger returns.

• Inflation is at 1.2 per cent. This likely won’t last but let’s assume it stays this way for the full 19 years.

• He can only spend $1,690 per month from his savings (indexed at only 1.2 per cent per year) to have his money last 19 years and have the same $154,000 “safety net” built in.

Worse yet, let’s assume that Retiree No. 2 can’t live on $1,690/mo and decides to draw the same $4,500/month income (this is only $54,000 per year and taxes will come off this amount). Based on the same parameters shown above, Retiree No. 2 will run out of money completely after 9.5 years of retirement.

In 1986, the focus of the retirement plan would be on estate planning and the big question Retiree No. 1 would face is who he wants to leave his money to. Fast forward to today and the estate planning question is not on the table for this guy. He’s simply wondering who he will live with at age 75 when he runs out of money.

Pretty scary isn’t it? The retirement planning landscape has changed significantly and a proper plan built by a qualified financial planner is essential to being ready. There are plenty of strategies and options out there to prepare yourself for this “new normal” retirement world, but it’s up to you to take the first step and get prepared.

Brett Millard is the owner of SPEIR Wealth Management in Kelowna Reach him at brett@speirwealth.com.