Financial Planning, Retirement Issues

Leaks in your Retirement Savings

April 30th, 2015 ernie Posted in Retirement Costs No Comments »

Leaks in your Retirement SavingsYou have worked hard to save for retirement and have forgone other experiences etc in your life to save for retirement. You expect that there will be enough money at the end of your working years to live comfortably. But what if you found out that there are leaks in your retirement savings in small amounts over the years and that this amount was going to make you have to work a few years longer or perhaps forget about trips that you may have planned for your retirement. This is the subject of this post. How to identify leaks in your retirement savings and to prevent them from making a significant difference in your retirement life style.

Leaks in your Retirement Savings – What are they?

They are divided into two types, some under your control and others that are smaller and sneaky but still have an impact on your total value of your savings when you retire.

  • Hardship withdrawals
  • Withdrawals prior to full retirement
  • Loans from your retirement plan
  • Cash outs from plans
  • Excessive trading fees
  • Mutual Fund fees
  • Administration fees
  • Selling low and buying high

Hardship withdrawals – funds are withdrawn and not repaid to deal with extreme hardship issues such as medical situations

Withdrawals prior to full retirement – funds withdrawn after age 59 to deal with pre-retirement issues and not repaid. Once these funds are withdrawn they are not earning income and you also lose the compounding effect

Loans from your retirement plan – taking a loan from your plan and not repaying it. Not only do you have to pay taxes on the withdrawl, you lose forever any future income that this money might have generated.

Cash outs from plans – employees change employers all of the time and you do not want to lose site of the money that has been set aside for your retirement Transfer the funds into the new employers retirement fund or into a locked in plan

Excessive trading fees – trading fees are expensive and if you are doing a lot of trading you could be eating into any profits that you may have made.

Mutual Fund fees – they charge a fee usually hidden regardless of whether the fund does well or not. Can you afford to pay 1% to 2% every year to your mutual fund management team?

Administration fees – some advisers charge a fee every year to administer your account. Is it reasonable? Can you get the same service or better service somewhere else?

Selling low and buying high – timing the market is extremely difficult. Most people end up buying as the market is increasing and then selling as it is declining because they are afraid they are going to lose everything. Invest in blue chip dividend paying equities and focus on the long term.

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What is the true cost of retirement?

January 1st, 2014 ernie Posted in Retirement Costs No Comments »

cost of retirementIf you are about to retire you might be wondering what is the true cost of retirement? Most financial advisers use a couple of assumptions in assessing how much money you need to save for retirement. The first is that they assume the standard duration of retirement will be 30 years, regardless of your health and retirement date. The second assumption that many advisers will use is that you will need 70% to 80% of your income after retirement to cover your expenses and retirement plans.

As always, with many planning activities, the devil is in the details. Every person, and every couple have different requirements and needs and different situations that they are dealing with. A retirement plan should be customized for the couple or individual to ensure that they have sufficient money available for them in retirement to maintain their quality of life.

What is the true cost of retirement

These two assumptions are a good starting point only.

For example if you are 65 and just retiring, the 30 year life expectancy may be fine for one couple whose immediate ancestors lived well into their 90s. On the other hand if you have a history within your family of only living to 70 or 80 years of age then a 15 year planning horizon might be much more practical.

True Cost of Retirement

With regards to only requiring 70 to 80% of your pre retirement income, there are many variables that should be taken into account. We will cover a few.

For example if you’re still supporting children who are in college with tuition payments and other related expenses you may need more than your 80% for the first couple of years.

Are you retiring debt-free? Is your mortgage paid off? Are you still paying a car loan? These are major monthly expenses that have to be factored into your pre-retirement expense and your post retirement expense to help you decide if you will have sufficient money to cover all of your cash expenses during retirement.

Consumers also need to consider what retirement expenses will increase during the retirement years. For example inflation which has been pretty constant and in a range of 3% for the past 20 years, will eat into your retirement income, particularly if you are on a fixed income. The longer you are retired and relying on your income from savings, employee pensions, and government pensions the more expensive you retirement will be due to inflation.

Healthcare costs must also be factored in based on your family’s history of healthcare needs and situation.

Your consumption will also change over the years and as you get older most people will spend less on clothing, food and other daily expenses.

All of this needs to be factored in to your retirement plan to ensure that consumers have sufficient money during retirement. Start with the 70 to 80% rule and then adjust based on your own personal situation. You may also require the help of a financial advisor to create a retirement income model based on your savings and pensions as mentioned earlier

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Don’t worry about outliving your money!

December 14th, 2013 ernie Posted in Retirement Costs No Comments »

outliving your moneyDepending on who you talk to, someone who retires at age 65 will have another 20 years or so to live. This is a according to the statistics that are published by many government agencies as well as insurance companies. When you hear someone say, Don’t worry about outliving your money, it is difficult to really believe them. It can be a stressful time for many retirees so it is important to really examine the numbers and determine of your savings will out last you.

Insurance companies tend to exaggerate on the longevity and will suggest that you may live between 20 and 25 years longer than the average person. They also put fear into consumers wondering whether your money will last during your retirement years and until you pass away. This to encourage you to invest with them and use their investment products.

Many people worry about whether they will outlive their savings and end up being destitute. They worry about having to sell her house, and live with family or worse living conditions that are not acceptable to them.

The reality is that most people will not outlive their savings.The statistics of living 20 years beyond your retirement age of 65 are actually quite generous and most people will not live that long.Planning to live 20 years beyond your retirement age is quite substantial.

The reality for most people is that they should look at how long their parents lived after age 65 and then add five more years because we are more healthy and look after ourselves better than her parents did and that will be an indicator of the real age that you can expect to live.

Based on these calculations you can then figure out how long your money needs to last after your retirement. This is one of the ways that you can calculate your longevity.

Don’t worry about outliving your money

There are actually many other factors that will determine whether you have sufficient retirement money in your savings to last your lifetime.

For example the stock market may go up or down, your pension from your company may last or not and you may have health issues which dig into your retirement savings. These factors and others are things that you should be thinking about and considering in terms of how much money you spend during your retirement years.

At the same time while you’re healthy you will want to enjoy your retirement years and spend some of your money on travel or some of the other things that are attractive to you.

Living on the income that is generated from your investments is one way to protect your retirement savings. At the same time if you have a significant amount of capital in your retirement plan making sure that you’re diversified and well invested in blue-chip stocks and bonds will also ensure that you do not suffer from crashes in the market.

The average withdrawal rate of 4% appears to be the industry norm of how much money should be withdrawn from your retirement savings plan. If you can generate income from the interest income from bonds, and from stocks to dividends this will help to achieve a significant amount of that 4% and protect your capital through your retirement years.

We are writing many articles about these subjects and look forward to comments from people who are going through and planning their retirement and thinking about the same issues. Your comments and suggestions are welcome.

For more about retirement planning, click here.

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Retirement Planning Services

August 21st, 2013 ernie Posted in Retirement Costs No Comments »

Retirement Planning ServicesHave you ever taken advantage of retirement planning service offered by a financial adviser? My adviser wants to sit down with me and go through all of my finances and assess whether I am ready for retirement or not and what steps I need to take if any to ensure that there is less risk and a higher probability that we will be comfortable in retirement. His offer certainly intrigues me and I like most people would like to know the answer to this question, “ am I ready for retirement?”.

But at the same time I am reluctant to share all of this personal information with someone who I trust but he is not family. In fact I do not even share this kind of information with my family other than in broad terms. We discuss details between my spouse and I when I can get her to listen, but we do not share with our kids even these kinds of details. It is just too personal and I am not sure that I want someone who is trying to sell me more and more products to know all of my personal financial details.

Retirement Planning Services – Too Personal

Having mentioned all of this we do have a detailed spreadsheet which I have discussed with my wife which plots all of our investments, the income they will generate and the growth they should average over the next 10 years. It also takes into account all of our income as well from pensions and investments from our savings.

We are focusing on living off of our income and not touching our principal which is a pretty good strategy. We wonder about when we should begin using our principle and enjoying it, but as long as we are comfortable I would prefer to wait and not touch our principle just yet.

Develop Your Own Strategic Investment Plan

Speaking of strategy, I have developed an investment strategy and I have reviewed this with my investment adviser to get his thoughts and even guidance. We kept it to one half page to keep it manageable and we keep it at the strategic level vs. discussing specific stocks unless there is some action we want to take on this stock.

We discuss this strategy twice a year and update it accordingly to ensure that it is current and reflects current conditions. The job if implementing this strategy is up to me with the help of my adviser and I do not feel that I need to go beyond that in terms of sharing financial information.

We are wondering if other readers have this same approach to investments and retirement planning services. A review is a good thing; however we just do not feel that it is appropriate to share everything with your adviser. This is a personal thing and we wonder how other people feel about this approach. If nothing else, make sure that you have an investment strategy and plan of your own. If you are not the type to do your own plan, then having someone else do it for you with all of your input might actually be a good thing.

Let us know what you think about retirement planning services. For more about retirement costs and planning, click here.

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Retirement portfolio to match your expenses

August 14th, 2013 ernie Posted in Retirement Costs No Comments »

Retirement portfolioI have heard many seniors talk about how they are living on a fixed income. Inflation is increasing and making their income not go as far as it once did. They worry about whether they will have enough money to do some of the things they want to do as they get older on the same level of income. When many of these people complain about being on a fixed income they are actually receiving a small increase every year on their pensions which usually have a small inflation increase every year.

Most feel that these small increases are clearly not enough and worry that inflation will really overtake them. Some are used to salary increases when they were working that increased their salaries faster than the inflation rate. Those types of salary increases are long gone but that is no consolation to the many seniors who live on a fixed income even if there is a small increase every year. Bottom line, we all need to evaluate all of our expenses and reduce where we can to counter the effects of inflation.

Increase Your Income

One way to gain increases in your income most years is to invest in dividend stocks that increase their dividend every year and also have a growth component in their stock value. Although there are no guarantees, these stocks pay a dividend so you do have income from your investments and if your invest in the right companies, you may get an increase every year. In fact some companies have a record of increasing their dividends for many years. This is an enviable record and can be an important component of a retirement portfolio.

With dividends increasing every year your income is increasing and if the stock does well the value of the stock will also increase. When it comes time to sell your investment to be used as part of your retirement, you will be selling a stock that has also increased in value and will help deal with the increasing inflation that we all know is there and will continue for many years.

Retirement portfolio – Avoid Cashing in Your Principal

Consumers who are retired and living off of pensions may find that they can live on the pension income they receive and also the income they generate from their investments without having to touch their investment principal. If this is the case, they are in an excellent situation to live into their late years without having to worry about having enough money to live on. In fact your investment adviser can calculate the income rates and the rate seniors may want to withdraw their money to ensure they can enjoy it in this situation.

Many people are not in this position. This is one of the reasons we urge people to save for their retirement regardless of whether they have a pension or not. It is an additional safety margin in case your pension is not as large as expected or inflation is much higher than anticipated.

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Retirement Costs Confuse Soon-to-be Retirees

March 7th, 2013 ernie Posted in Retirement Costs No Comments »

Retirement Costs Confuse Soon-to-be RetireesRecent retirees are confused about what the costs are going to be when they retire according to recent surveys. Those people who are about to retire and those who suddenly find themselves push out of jobs before they were ready are often worried about whether they will have enough money to last them through retirement and what kind of quality of life they will have while retired. Most of us want to maintain our present lifestyle as a minimum and since we now have more time on our hands we want to be able to the things we never had time for. But the big question everyone wonders is, will they have sufficient income to live that life that they may be dreaming about.

What Are Consumers Concerned About

There are lots of things on the minds of people who are retiring these days that will affect how well they will live during retirement. We will list a few of these:

  • ·        Property taxes seem to keep going up
  • ·        Price of food is going up
  • ·        Fluctuation of their investments
  • ·        Cost of utilities continues to rise
  • ·        What medical costs will they have
  • ·        Have they set aside enough savings
  • ·        Are these savings well invested

These are just a few of the items people worry about and there are a lot more. There are options that can be considered, such as working longer and spending less. These may not be the preferred options, however if there is not enough to go around, then some tough decisions sometimes need to be taken.

Impact of Inflation

The longer you are retired, the more inflation will creep into the picture and impact your purchasing power. Most people do not even think about inflation and are suddenly shocked when their indexed pensions if they are lucky enough to have them do not keep up with the rate of inflation. They have no choice but to cut back in other areas. Inflation will play a large impact even more since people are living longer than our parents ever did.

Start Saving for Retirement Now

If you are young and expecting social security in the US to pay for your retirement or CPP and OAS in Canada, think again. While this income certainly helps, it does not keep up with inflation and the amounts provided are not enough to live comfortably on. Retirees need to have either pension income or savings income to help them top up their annual income to live on. If you are young and reading this start saving now, if you are close to retirement evaluate your situation and make a decision to keep working or live on what you have. Avoid surprises if you can.

Get Help with Your Retirement Planning

Not everyone has the knowledge or the skills to plan their retirement. They may lack information about investments, yields, savings rates, payout strategies and investment strategies designed for the long term. They may not understand the impact of inflation or the various tax rates that apply in their situation.

Retirement Costs Confuse Soon-to-be Retirees – Tools

There are lots of tools available online that can assist some readers with their decisions. However there are really only two choices that you can make if you want to plan for retirement. The first is to find a retirement investment adviser that you trust and begin discussing your retirement objectives and goals, the assets you have and the assets you will need to achieve the kind of retirement that you want to have. Some people will just go on blind faith and let the adviser make all of the decisions. We do not encourage this at all. Be informed and learn as much as you can, which leads us to the second option.

The second option is teach yourself. Read everything you can about retirement planning and investing. Attend seminars, read books, talk to advisers and learn to use the tools that can be purchased to help with investment planning and retirement planning. It may take effort, but it will be interesting and challenging which is something that we can all use while retired.

Personally I like a combination of the two. I have spent a lot of time investigating and learning about retirement strategies as well as investing. I make all of my own decisions, but before I act on them, I always run them past my adviser first and listen to his ideas and counsel, then, I finalize my decision.

This is by far the best approach for me and I get a lot of satisfaction out of the effort, especially when these decision pay off. Sometimes they do not but that is part of the risk in life.

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