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What assumptions are you making about retirement?

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Seniors in a financial planning meeting

One of the most common questions that we hear from clients is ‘Will I outlive my money?’. And the answer is getting more complicated as people are living longer.

Historically, retirement has lasted about two decades on average. However, as more people are living into their 90s and beyond, that period could be twice as long. Many of us do not know what is happening next week, let alone for the next forty years!

Retirement: The great unknown

There are so many unknowns when it comes to your retirement years. How long will you live? How many of those years will be healthy? Will your adult children need extra financial help? What happens if you unexpectedly become a solo retiree instead of navigating your golden years with your spouse? Will tax rates go up? How will inflation impact your ability to support your lifestyle?

With so many unanswered questions, how can you build a realistic, achievable retirement plan?

You know what happens when you assume

Financial plans are founded on assumptions, and the tricky thing is that you will not know how accurate they are until it is too late. One of the challenges for people trying to plan for retirement on their own is they simply do not know what assumptions are reasonable, particularly when it comes to their finances. 

Typically people underestimate their spending and overestimate their income in retirement. They do not realize how much money it will take to maintain their pre-retirement lifestyle. They misunderstand what their primary sources of income will be and how much they will receive. They do not know what returns to expect from their portfolio or how inflation will impact their savings. They have no contingency plans if, for example, they need to retire early because of a health problem, a change in their company, or a family member that needs help.

The consequences of guessing wrong

If the assumptions you are basing your financial plan are off, even by just a little, it could have a big impact on your retirement. 

Consider this: If you have annual living expenses of $60,000 today and you are operating on the assumption that inflation will average 2%, in thirty years you will need an annual income of $109,272. However, if inflation actually averages 3% over that time period, you will have underestimated the income you need by about $38,000 a year. 

And if you have planned for your portfolio withdrawals to last until you turn ninety-five and you celebrate your ninety-sixth birthday, your plan has failed and you have likely run out of money.

The bottom line is that if your assumptions are off by even 1% or one year, it can make a big difference to your retirement lifestyle.

What’s the solution?

You cannot avoid using assumptions in the financial planning process, so how can you make them more accurate?

Work with an advisor

As advisors, we have a deep understanding of the markets and the economy, and we have helped hundreds of Canadians retire. We can use that knowledge and experience to help you estimate inflation rates, rate of returns for your investment portfolio, and how much income you may need in retirement.

But you have information we do not have. You know your family history, your health and wellness, and your lifestyle goals. 

By working together, we can build your financial plan on reasonable assumptions, giving you a greater chance of success.

Test your plan

We are big believers in the stress test. It is a great way to ensure your plan is realistic and achievable. Check your plan against any potential issues or life events, such as health issues, an early retirement, the loss of a spouse. Check it against different market conditions throughout history. Will the plan still hold up under these circumstances? 

If your plan fails, it is time to go back to the drawing board. If it succeeds, you can retire knowing that you are covered no matter what comes your way.

Don’t set-it-and-forget-it

Whether you are retired for ten years or fifty years, a lot can happen over that period. Your goals and priorities may change. You may have an unexpected expense. Someone in your family may receive an unfavourable diagnosis. That’s why your plan should be flexible, dynamic, and regularly reviewed and updated with your advisor.

Want to learn more about planning for your dream retirement? Register for our upcoming seminar here.

David Popowich and Faisal Karmali are Investment Advisors with CIBC Wood Gundy in Calgary. The views of David Popowich and Faisal Karmali do not necessarily reflect those of CIBC World Markets Inc.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change.

CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.

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Can I afford to retire? Will inflation and volatility ruin my retirement plans? How do I ensure my family is looked after? What happens if I have an unexpected health event? Can I support the lifestyle I want in retirement?

When it comes to preparing for a fulfilling and financially stable retirement, there are so many questions you need answered.

Dave and Faisal’s seminar will give you the practical tools and advice you need to bring your vision for retirement to life. Dave and Faisal cover topics like investment and tax strategies, financial and estate planning, and lifestyle goals to help make sure you’re ready to take the next steps toward retirement.

Sign up for their seminar today!

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