April 20, 2021
What's required to sustain your lifestyle into retirement? Here are some considerations to better estimate your retirement savings goals.
Reaching retirement goals is one of many important financial goals for Canadians. These goals come in different shapes and sizes, but they all share similar characteristics which can help us better understand retirement planning.
What does it take to retire?
In my previous article on retirement planning, I explained how your personal net worth was directly linked to your ability to retire. In essence, retirement planning is the practice of progressively increasing your personal net worth to a point where it can comfortably support your estimated lifestyle costs which won’t be covered by pensions and other future income streams. It’s taking proactive actions to determine what kind of assets you plan on accumulating and figuring out how and when you plan on growing them effectively. Then, once you have enough assets available to cover your lifestyle costs, it’s a matter of planning how and when you will dispose of these assets over time to pay for these lifestyle costs.
How much will retirement cost?
Estimating and tracking your personal net worth is usually straightforward - add up the market value of your assets and subtract the amount of debts and obligations you have outstanding. The challenge of retirement planning is estimating your future cash flow needs and then calculating the net worth required to fund them. First you need to take a look at each of your sources of income as well as your expenses and determine which ones will continue, which ones will end, which ones will start and when this is expected to happen. This will give you a better sense of the potential income gap expected between income and expenses which will need to be filled in by gradually selling your savings and other assets. Another very important consideration when estimating retirement costs is how inflation will erode future purchasing power and lower the value of each dollar over time.
Am I saving enough?
Whether or not you are on track to retire depends entirely on the gap between your current net worth and the net worth needed to cover your future expenses, the amount of time you have to bridge that gap as well as the expected growth rate of your assets. You should also be aware of whether you are aiming to save assets as opposed to building assets. We often think of retirement accumulation in terms of savings like RRSPs and TFSAs but other assets like businesses, your home and other real estate can be a large part of building up one’s net worth. To determine if you are on track to reach your goals often requires the use of quality financial projections.
At the end of the day, retirement planning is an ongoing process and should be handled with care. The method you choose to build your net worth is less important than taking the time to properly assess your need for proper planning and projections, and adjust the plan as needed when life’s curveballs are thrown your way. Taxation, liquidity, risk tolerance, time horizon and inflation are all tremendously important factors in determining your path to retirement, as is the optimal mix of assets for your unique situation.
Author:
Marcel LeBlanc, CFP®, CIM® is a Financial Planner and associate portfolio manager with Louisbourg Investments. You can find more from him on Facebook and LinkedIn. Comments or questions may be submitted to Marcel at marcel.leblanc@louisbourg.net, or he may be reached at (506) 383-5204
Read more articles from Marcel:
How To Create a Retirement Plan (3min read)
This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.