Retirement planning: How not to outlive your money
Retirement is ultimately an exercise in risk management – and dealing with risk involves an educated understanding of how unforeseen events can sabotage your golden years.
The greatest single hazard is what planners call “longevity risk” – the possibility that you may outlive your money.
Actuaries tell us that a woman who is now 65 can expect to live, on average, to 88, while a man can look forward to reaching nearly 86. Remember, though, that those are averages – about half of retirees will outlive those figures. In fact, if you are now a 50-year-old woman, there is nearly a 10 per cent chance that you will live to celebrate your 100th birthday.
How do you plan for a retirement that may be as long, or longer, than your working life? For the dwindling number of Canadians who are members of defined-benefit plans with automatic cost-of-living adjustments, there’s little to worry about. For most of us, though, there is a lot of risk in planning three decades ahead – especially given two additional hazards.
A good retirement plan should address longevity risk, inflation risk and market risk. Here are the pros and cons of three key risk-management tools:
Annuities
An annuity is essentially a contract with an insurance company, which guarantees to pay you a steady stream of income until the day you die.
Work
Taking a part-time job in the early years of your retirement can make a big difference to your financial picture. Earning even $4,000 a year replaces the income you could reasonably expect to generate from a $100,000 portfolio. It also provides a buffer against unexpected inflation.
Your portfolioare
Many people can achieve big gains from simply adjusting their portfolios to reduce the cost of investing and to ensure the right mix between income producers (like bonds) and more inflation-proof investments (like stocks).
The bottom line
It all sounds very intimidating – but doesn’t have to be. Despite their challenges, Uncle Jim and Aunt Mary never complained, but simply found ways to live on less.
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