The Retirement Dilemma (Part 1: Money)

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I was leaving Shoppers Drug mart and looked at the magazine rack. It’s funny how there are far more Special Edition Guides, or “Best of” magazines versus regularly scheduled editions. And of course, the price of these “Special Editions” are closer to $20 rather than $7.99. One magazine in particular caught my eye. It was a “Guide to Retirement”. I thought this would be a good read and there may be some helpful pointers that I could pass on to our clients. However, as I read through, I realized that it only focused on one part of “retirement” – the financials.

While the financial component is important, there is one issue that most don’t realize. By the time most start thinking seriously about retirement, it is too late to have a significant financial impact on their retirement cashflow. Most people start planning for their retirement within 5 years of their target retirement date. A 5 year period will have less of an impact than a 20 year planning period. Within 5 years of retirement, the majority of your retirement cashflow has already been determined with your current portfolio. 5 years is insufficient to drastically increase your expected retirement cashflow.

In those few years prior to retiring, the financial component that is best to focus on is spending habits. When you are earning employment income, you can spend freely. It feels as though you are spending someone else’s money. When you are retired there is no question, you are spending YOUR money. The more you spend, the less you will have. For some, it is a very difficult concept to wrap their head around. To prepare people for retirement, I often recommend they execute a virtual retirement.

A virtual retirement entails setting your expected retirement lifestyle budget (likely to be less than your current lifestyle budget. Once done, set a pre-authorized savings plan for any cashflow over and above the set retirement lifestyle budget. Then, try to live and see how it feels. Either it is going to be comfortable and you are building a nice addition to your retirement nest-egg. Or, you may discover a potential issue. Many people do this and realize they may have underestimated their spending habits. It is not as if people are willing to have eaten their last steak on the day they retire. They also may not be ready to go from driving a Lexus to a Ford.

Essentially, you are providing your financial planner with better data. As financial planners, we are already estimating rates of return, inflation, life expectancy, etc. If we can at least have a handle on your spending habits, we are in a better position to build a good plan. I’ve only ever had issues with financial plans not working well when people have unrealistic expectations of how much they will spend in retirement. So, help your financial planner build a successful plan for you by completing a Virtual Retirement. It may make the difference of how you spend the rest of your life.

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