How to use your money to fund your retirement
Last weekend we asked a friend how her grandmother was doing. We still care about her for a variety of reasons, one of which is that she was an instructor and mentor to my late father 60 years ago when he returned to college in his middle age.
“She is still working,” one replied, “although she claims she gets tired more often now.” She is 101 years old and was still traveling halfway around the world giving sold-out talks before the pandemic stopped such shenanigans.
Meanwhile, the television show 60 minutes recently did an update on the American National Institutes of Health funded research study on aging called “90+”. It started in 2014 with a group of 90 and regularly tests them on factors such as mobility, cognition, memory and dementia.
Most of the participants are still going strong. The first findings were that exercise, social engagement, and adding a few pounds as you age were all contributing factors to longevity. Not surprisingly, but the shock was when the lead researcher said that “half of all children born today in the United States and Europe will reach their 103rd or 104th birthday”.
So, Dave, you ask, “What does this have to do with my finances?” ”
The stories should remind you of a concept called “longevity risk” to add to your many other financial concerns.
Are you worried about outliving your money? Lots of people do. It turns out that legitimate worry can be measured and a plan made to address it.
The concepts for accumulating money are well known and often discussed. The concepts of “decumulation” or using your money to fund your retirement are not as well known or widely implemented.
When you retire and start living on the income from your accumulated capital, one of the biggest risks you run is the sequence of returns. For example, if you retired in 1976 and took out four percent a year from your investments (60 percent stocks and 40 percent bonds) and increased that amount each year with inflation, you would have more money today than at the beginning.
However, if you had retired in 1974 and gone through the same process, you had no more money until 20 years had passed. The problem was not adjusting when the markets fell significantly in years one and two of retirement and continuing to withdraw the same amount of dollars, forcing you to sell low. Once you’re so far behind …
So the first concept is to avoid selling investments when they are low. This means always having enough cash and guaranteed investments in place to fund at least two to three years of spending. Replenish that cash reserve whenever your equity investments are high.
Also optimize the tax efficiency of your portfolio and focus on investments that provide regular and reliable income, so that you are not dependent exclusively on capital gains and growth.
We always do this planning using measures of each client’s unique income needs, total resources and required rate of return, tolerance for psychological and financial risk, and likelihood of surprises. Our prescription could therefore be very different for someone with a generous pension plan compared to someone who lives entirely on their accumulated savings.
I recently attended a webinar with speaker Moshe Milevsky, professor of finance at York University and a respected researcher on the science of disbursement. He spoke of some people being “longevity risk averse” (fearful of being old and broke) while others are “longevity risk tolerant” (not afraid of living long or not afraid of running out of money). ‘silver).
People with solid pensions should be more tolerant of longevity risk because, objectively speaking, they are less likely to run out of money. But there are certainly other factors, such as a person’s desire to spend more money during the early retirement years and their propensity not to worry about having extra money in the following years.
It turns out that, like everything else, it can be measured. This is another important factor to know about yourself when planning your financial disbursement plan.
Dollars et Sens is intended as an introduction to this subject and should in no way be interpreted as a replacement for personalized professional advice.
David Christianson, BA, CFP, RFP, TEP, CIM is the recipient of the FP Canada ™ Fellow (FCFP) and has been repeatedly named one of the 50 best financial advisers in Canada. He is a portfolio manager and senior vice-president at Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.
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David has been a financial planner and life advisor since 1982, specializing in helping clients identify and achieve their most important goals, and then helping them manage all of their financial affairs, including investments.
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