As far as Gaetan Ruest is concerned, you can rule out many of the rules of thumb you might have heard about retirement income and investment planning.
Take, for example, the rule of thumb that you should have 70 per cent of your working income in retirement. Or the other one that says the amount of fixed income in your investment portfolio should match your age: 60 per cent fixed income at 60, 70 per cent at 70 and so on.
“Rules of thumb might work on average, but they don’t apply to everyone,” said Ruest, assistance vice-president of strategic investment planning for Investors Group. “Each individual has individual circumstances which need to be understood and recognized when developing a retirement income or investing strategy.”
This year, an estimated 344,000 Canadians in the first wave of the baby boom generation turn 65 and, as retirement newbies, will be confronting a whole range of new financial and lifestyle challenges, many of them with individual circumstances and objectives that need to be considered.
“The key thing to know is how much you expect to spend in retirement,” said Ruest.
“You’ve really got to have a good sense of your expenses.
“Once you know them then you’ll know how much income you need to meet your spending.”
Ruest advises new retirees to itemize all expenses. In doing so, they might find that many of their expenses actually will go down in retirement and some may disappear altogether.
“Work-related expenses, saving for retirement or for the children’s education, and mortgage payments may disappear, but with more spare time, other expenses on travel and hobbies actually may increase, particularly in the early years of retirement,” Ruest said. “It’s crucial to get a handle on what you expect your expenses to be because then you’ll know how much income you’ll need to cover them.”
Once you’ve got an idea of the income you need to live the lifestyle you want, then you can develop a retirement income and investment strategy.
When it comes to managing money in retirement, many people take the traditional view that they should invest for security only and not for growth. The trouble with that view is that life expectancy is growing. People are living longer and easily can expect a retirement of 20 or 30 years, or more.
“Longevity is a major factor in retirement planning,” Ruest said. “If your family has a history of long life, you may plan to live a long time and may want to draw on your financial resources more moderately. However, if you retire later and don’t plan for a long life, you may be able to live it up more.”
Ruest recommends keeping anywhere from one to three years of income in assets that are less likely to be affected by economic and market volatility so you will always have a stable financial source to draw from. The rest of your money can be invested, depending on your tolerance for risk and desire for growth.
Other considerations include the longevity of your spouse and/or partner and their need to rely on your income to live, and how much money you might want to leave to your estate and children.
If you’re nervous about out-living your money, you can consider buying an annuity or an income fund with a lifetime benefit option, especially if you are one of the many Canadians without an employer pension plan or a new immigrant to the country who might not receive the Canada Pension Plan.
Inflation is another big factor to take into consideration.
“With inflation, the purchasing power of money decreases, and if you have a high level of fixed income, like that rule of thumb says, you may not get enough growth to cover inflationary expenses,” Ruest said. “That’s why planning has to be done on an individual basis.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.