Monday, November 12, 2012

Sustainability -- is your pension enough for all your years?

We hear a lot about sustainability these days.  Sustainability is said to consist of three pillars: ecological, social and economic.  If you’re nearing or already enjoying retirement, the economic aspect of sustainability is very important to you.  As in, will your retirement income be sufficient to sustain the lifestyle you want for all the years of your retirement.

Here are some strategies that will help ensure the sustainability of your financial life in retirement.
  1. Make a date Decide when you want to retire. If you choose to retire earlier than age 65, you’ll have fewer years to save for retirement and more to finance. If you choose to retire after 65, you can opt to enjoy the tax-saving, income-building advantages of your RRSP until the end of the year in which you turn 71 – and you can even extend those benefits after 71 by continuing to pay into an RRSP for your spouse who is younger than 71. 
  2. Design a lifestyle The shape of your retirement will dictate its cost. If you intend to be a homebody, the costs could be lower. If regular travel is part of your retirement design, costs could escalate. If you decide to continue working fulltime, part time or on a contract basis, or even start your own business, even a modest amount of additional employment income can make a difference.
  3. Add up your income from all sources Your retirement income may come from personal savings, company pensions, your RRSPs, TFSAs and non-registered investments, as well as government sources including the Canada Pension Plan/ Qu├ębec Pension Plan (CPP/QPP) and Old Age Security (OAS).
  4. Add up all the costs Estimate your retirement spending requirements in three categories: essential expenses that can’t be reduced, discretionary expenses that you can control, and the additional costs, such as healthcare, that typically come along with aging. Calculate the income you’ll need to cover your essential and discretionary retirement costs as well as the additional income (or income protection strategies) you’ll need to cover the ‘extra’ expenses of aging.
  5. Find the gap Calculate the shortfall between your expenses and your income from all sources outside your personal retirement savings.
  6. Bridge the gap Establish the level and frequency of income you will need via withdrawals from your registered and other income-producing investments, keeping in mind that your retirement could span 40 years or more.
  7. Reset your strategy If your expected withdrawal rate is not sustainable based on projected returns from your current savings and investments either reset your registered and non-registered portfolio with the aim of improving returns or reset the scope of your retirement plans.
Talk to your professional advisor about these and other sustainability strategies that will keep your retirement income coming for all your retirement years.