Welcome to the new retirement
Baby boomers are redefining retirement. Here are some tips to ensure your nest egg is sufficient.
Baby boomers are at an inflection point. The people who make up the demographic bulge that reshaped everything from working life to family to business, politics and the arts, are on the cusp of retirement. As they consider leaving the working world, you can be sure that boomers will reshape retirement too.
Experts no longer expect Canadian retirees to hang up their business suits and watch the days go by while relaxing at the cottage or on a beach. In fact, the ideal retirement for many boomers is one in which they can continue to work! Their careers will not come to a full stop. Instead, they'll pursue consultancies or part-time opportunities. Of course, this will supplement retirement income. Perhaps more importantly for boomers, it will continue to provide a sense of professional fulfillment.
Does that mean retirees won't spend as much time with their families? It might. But in the new retirement the focus will be on quality of time spent with loved ones. Retirees will also use their time to pursue personal hobbies, activities and aspirations.
This will lead to a continued focus on maintaining good health in retirement. A healthier retirement will provide boomers the option of pursuing a more active lifestyle than previous generations.
Boomers will be giving back like no generation before them. And I'm not just talking about money. I'm talking about volunteer time too. I think many boomers have a strong desire to help their communities and the charities that are close to their hearts. Those charities will benefit from years of professional expertise. The legacy for the next generation will be a mix of wealth and values.
Do you need to tweak your retirement plan so you are ready for the new reality? I recommend revisiting your financial plan with your advisor.
Generally speaking, living a long, healthy, active and engaged retirement will necessitate the need for a bigger nest egg at the time of retirement. Boomers need to take a fresh financial approach to both saving for retirement and spending in retirement.
How do you know if you are financially ready to retire? Most people will never think they have enough money to retire, just like they never thought they were financially ready to buy their first home or get married. The key is to ensure that the family's after-tax income is large enough to support the desired retirement lifestyle and reasonably safe from market fluctuations.
On the liability side of the balance sheet, according to Russell Investments Canada's "Retirement Rule of $20", for every $1 of annual income you expect to need over your retirement, you will need $20 saved at the day of your retirement (with inflation indexing). This provides a good starting point for families to customize and work their own personal retirement number.
On the asset side of the balance sheet, the onus is gradually shifting to the retiree to write their own retirement paycheques. We are more dependent than ever on our investment portfolios to create a retirement income stream.
To be sure, CPP, OAS & GIS (for some) are pillars of retirement planning. But they will likely fall well short of covering your income needs in retirement. The annual amount of a CPP retirement pension is only equal to 25 per cent of the Yearly Average Pensionable earnings.
In their investment portfolios, boomers will have to strike the right balance between having enough cash flow to fund their active retirement and retaining purchasing power while keeping downside risk at manageable levels. This means that volatile equities play a key role in a retirement portfolio, far more than in a traditional retirement portfolio.
What if you're already retired? You'll need a secure income stream and protection from the potential double whammy of declining markets at a time when you are withdrawing funds from your portfolio.
An income and moderate growth portfolio with 45 per cent bonds, 45 per cent equity and 10 per cent money market/cash is a good starting point for most. The equity component can be further diversified into Canadian, U.S. and international equities depending upon risk tolerance and ability to absorb currency fluctuations. As you age, gradually tilt the allocation to bond and money market funds as the shrinking time horizon will reduce the ability of your portfolio to recover from volatile markets.
Or you could consider the 100 per cent guaranteed income approach. Divide your annual estimated expenses in retirement into needs + comforts + luxuries. Ensure that your needs and at least a part of your comforts are covered by guaranteed sources of income such as CPP+OAS and a registered pension. If there is a shortfall, this needs to be covered with annuities, investment grade bonds, money market and GICs. Depending upon your risk tolerance, the balance can be invested in a mix of equities and fixed income. Be conservative with your estimate for expected returns from your investment portfolio.
As boomers prepare to redefine retirement, the thing I'm most excited about, is how this new retirement will reshape everything from working life to family to business, politics and the arts.
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