5 ways to live the dream

Identify early on how much you will need for the retirement you want

When it comes to retirement planning, most of us focus on how much we need to save without giving much thought to how much we’ll need to spend in retirement.

A $1-million dollar nest egg can provide you with $30,000 to $40,000 to spend each year with reasonable assurance that you won’t run out of money. But if your ideal retirement lifestyle costs $60,000 per year, your million-dollar portfolio won’t be enough to last a lifetime.

The earlier you can identify the amount of income you need to live the retirement you want, the easier it is to build your retirement plan and adjust course.

Let’s say you’ve analyzed your retirement income needs and find that you’re unable to fully fund your desired lifestyle. What to do? Here are five retirement planning options to help you reach your goals.

Reduce your lifestyle

A $60,000-a-year retirement may be out of reach based on your current situation, but maybe reducing your goal to $45,000 a year can still provide a great lifestyle.

This lifestyle adjustment could mean travelling less often, making sure you retire debt free, downsizing your home, replacing your vehicle less often, reducing your hobbies or a combination of all the above.

Don’t forget to include government benefits such as Canada Pension Plan (CPP), Old Age Security (OAS), and/or Guaranteed Income Supplement (GIS) when projecting your retirement income. It’s worth sitting down with a retirement planner to figure out the best way to draw down your assets and when it makes sense to apply for CPP and OAS.

Work longer

It can be difficult to picture yourself working longer once you’ve got retirement on the brain, but a few extra years on the job can drastically alter your retirement projection.

The longer you work, the more you can save (or add to your pensionable service if you’re so lucky to have a workplace pension). But also the more years you’re working and earning a paycheque the fewer years you have to withdraw from your nest egg.

Are you healthy and willing to grind it out at work for a few more years? If so, you may be able to reach that $60,000 a year goal after all.

Earn more from investments

This one is tricky because you might take it to mean investing in riskier assets (e.g. an all-equity portfolio), when in fact you can earn higher returns by reducing the overall cost of your portfolio. That’s the first place to start.

Imagine your $300,000 retirement portfolio is invested in a typical set of mutual funds that together comes with a management expense ratio (MER) of 2 per cent. The cost is $6,000 a year, but you don’t see the charge directly — instead it comes off your returns.

Switching to index funds and going the do-it-yourself route might reduce your costs to 0.5 per cent, or $1,500 per year. That’s an extra $4,500 a year staying in your retirement account instead of going into the hands of your adviser.

There might also be a case for increasing the risk in your portfolio. Say, for example, you tend to hold a lot of cash in your portfolio — you’re not fully invested. Or you hold a bunch of GIC’s and other fixed income products.

Dialing up your investment risk to include a portion of equities could help you achieve an extra 2-3 per cent per year. The power of compounding can make a huge difference to your retirement portfolio and holding even a small portion of equities in retirement can help your nest egg last longer.

Save more

This one is so obvious it should be first on the list. If you’re not able to fully fund your desired retirement lifestyle based on your current projections then you need to save more.

Hopefully your final working years can give you the opportunity to boost your retirement savings. Big expenses, such as paying down the mortgage and feeding hungry teenagers, are behind you. But an empty nest and paid-off home might tempt you to increase your lifestyle now rather than doubling-down on your retirement savings to boost your lifestyle later. That’s fine: see options 1-3.

That said, there’s no better time to enhance your nest egg by maxing out your RRSP contributions, and doing the same with your TFSA, in the years leading up to your retirement.

Be mindful here, though, of strategies to reduce your taxes in retirement. It makes little sense to go wild making RRSP contributions in your final working years without considering how withdrawals will impact taxes or OAS clawbacks later.

Supplement your retirement income

Much like working longer can increase your nest egg, supplementing your retirement income with a parttime job derived from a passion or hobby can prolong the life of your portfolio.

Imagine earning $10,000 a year from driving a shuttle, working at a golf course or winery, writing personal finance articles, doing photography, or working a couple of days a week at Home Depot just to get out of the house.

All of a sudden you don’t need to withdraw $60,000 a year from your retirement account. You only need to take out $50,000 a year. That not only extends the life of your portfolio, but studies have shown that having meaningful work in retirement can extend your life, too.