Jane Doe

Formulating the Best Approach to a Successful Retirement

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Retirement planning can be a bugbear, especially for those of us who struggle with strategic planning. For the majority of folks planning their retirement, it’s all about hitting retirement age with a fat lump sum of cash ready for the golden years to begin.

However, in many of these retirement calculations there is one factor that is usually sidelined: What your retirement nest egg will be doing while you are living through your retirement. In other words, that $300,000 or $500,000 will likely be invested somewhere and earning a fixed-interest-bearing yield or be invested in stocks and funds with variable returns.

The S&P 500 index features an annualized average return of 7% per annum, which will help to prolong the lifespan of your retirement nest egg. Rather than guessing your way through to a figure, you can simply use a retirement calculator to evaluate all of these criteria. Remember to factor in any government pensions or assistance that are due to you as this will help to boost your available funds.

If you have a $500,000 portfolio available for retirement, you could withdraw $20,000 per annum and enjoy an uninterrupted income stream for 25 years. If you are generating an annual return from that money, it will last much longer. 4% of $500,000 a.k.a. $20,000 per year will get you through a quarter century. If your portfolio was earning 7% per annum on average, you would be able to withdraw $3250 monthly for over 32 years.

So how do you create a viable retirement fund and make it last?

There are several options available to you, notably investing your retirement nest egg in higher-income investments rather than fixed-interest-bearing savings accounts. A 2% interest rate hardly compares to a 7% (on average) yield with the S&P 500 index. A word of caution is advised: stock-market returns are not guaranteed and you could face several years of negative growth, zero growth, or slow growth. Historically though, this has not been the case.

There are also many accounts where you can store your nest egg. Accounts like RRSPs and TFSAs are tax-advantaged to promote saving. How much should you save? A good starting point is to use some of the many free retirement tools available online. For example, Wealthsimple offer a Canadian retirement calculator that makes it easy to unravel all of the unknowns. A rudimentary tool, this calculator helps you figure out about how much you should save and when you can retire based on inputs like your age, income, the part of Canada where you reside and what you’re putting away for retirement. The calculator takes into account the returns your nest egg will provide during your working life and retirement, how much you have in tax-advantaged accounts and any salary increases you might have throughout life. Tools like this are useful starting point to find out if you’re prepared for retirement, but experts also recommend that you consult with professionals on retirement planning.

Follow Sage Advice: Invest Early in Life

It is quite possible to have a multi-million-dollar nest egg setup by your 40s if you start retirement planning as soon you leave college. Various options make this possible such as auto-deposits with up to 10% – 20% of your income going towards retirement every month. Pension matching schemes are a great way to fast-track your retirement planning in Canada.

Remember that savings and investments should work together to facilitate an effective retirement strategy. Savings generate fixed yields which may or may not be inflation-beating investments. The name of the game is short-term sacrifice for long-term benefits.

Set up a Personalized Investment Portfolio

There are many other ways to boost your available funds heading into retirement, notably living well beneath your means. If you live according to your means, you will likely simply meet your expenses on a monthly basis. If you live beyond your means, you’re going into debt, but if you live beneath your means, you will have excess funds available for retirement.

An option which many people eschew, but one which is increasingly popular nowadays is retiring later in life. Those extra few years of work beyond 65 or 67 years old can certainly pay dividends. If you work until 72 or 73, that’s several years less of retirement you need to take care of and you have funds available to finance a better retirement for those remaining years

Various wealth retirement strategies are available to investors, including the following options:

  • Invest in ETFs which track the performance of an index or an economic sector, thereby generating returns on a broad-based set of companies.
  • Invest $5,000 annually from the age of 20+. By doing this, you will have well over $1 million by age 65, thanks to the historical annual rate of return on the S&P 500 index and other stock markets. The earlier you start investing, the better.
  • Pick a wealth management company which minimizes the fees, commissions, fixed costs, maintenance charges et cetera. These marginal percentages can eat into your retirement nest egg.