How to Avoid Anxiety About Your Future Retirement

A recent survey by CPP Investments reveals that around 61% of Canadians worry about running out of money in retirement, a concern especially pressing for those in their 40s and 50s. If you're approaching retirement, it’s natural to feel uncertain about whether your savings will last, but with thoughtful planning and a clear roadmap, you can face retirement with confidence.

Here’s how to address these concerns and build a secure, reliable retirement plan.

1. Identify Your Retirement Goals

Knowing what you want from retirement will help you build a realistic plan and reduce the fear of running out of money. Start by identifying your priorities:

• Income goals: How much income will you need annually in retirement? A good place to start is to take your households after-tax income and subtract any expenses that won’t exist in retirement, such as mortgage payments, childcare costs, and retirement savings.
• Lifestyle expectations: What kind of lifestyle do you envision? Do you want to buy a cottage? A second property down south? Extensive travel plans? All these expenses need to be accounted for
• Family obligations: Is there a chance you’ll need to support adult children or aging parents?
• Legacy plans: If you want to leave a legacy for family or charities, clarify this goal.
• Age of retirement: How long will you work for?

Also, make sure to plan for longevity.

People are living longer. A couple where both spouses are age 40, have a 50% chance of one of the spouses living until they’re 95.

For prior generations, retirement lasted maybe 10 or 20 years. Today, retirement can last upwards of 40 years.

This is a good thing but presents a strain on retirement planning as your assets need to last a lot longer than they used to.

2. Create an Investment Plan That Will Allow You to Reach Your Goals

For simplicities sake, there are 3 main types of asset classes you can invest in.

There are risk free assets, like GICs and then there are stocks and bonds.

Risk free assets protect you from short-term volatility but have lower expected long-term returns than stocks and bonds.

Stocks offer the highest expected returns but conversely will experience periods of short-term fluctuations.

Almost everyone will need some combination of stocks and bonds in their portfolios.

Over long time periods, a portfolio of GICs will result in your portfolio losing serious purchasing power due to inflation.

Your appropriate mix is determined by several factors, including but not limited to:

Risk tolerance

How much volatility can you tolerate in your portfolio?

This is largely an emotional question. Every individual will respond to market volatility differently. Some are indifferent. For others, it can make them lose sleep at night.

This is why financial planning can’t always be reduced to numbers. The numbers tell you that a 100% stock portfolio has a higher expected return than one that includes bonds.

But the right investment strategy isn’t necessarily the one with the highest expected long-term returns. It’s the one that you can stick with during times of market volatility.

Risk Need

This measure identifies the level of risk necessary for you to achieve your financial goals. Risk need is best determined through a detailed financial plan that calculates your minimum required rate of return. If, for example, your financial goals demand a 4% annual return, you will need to build a portfolio that can be reasonably expected to earn that.

4. Put it All Together in a Detailed Retirement Income Plan

One of the best ways to reduce financial anxiety is to create a comprehensive retirement plan. This plan should cover:

• Your savings plans: How much will you save each year until retirement and to what accounts?
• Projected Expenses: Your projected annual income needs in retirement coupled with any other expected one-off expenses
• Inflation: Your purchasing power will erode over time, so make sure expected inflation is considered
• Income Sources: Including CPP, OAS, pensions, RRSPs, TFSAs, and non-registered investments
• Your portfolios expected rate of return
• Taxation: Don’t forget about taxes. If you have a $500,000 RRSP, you don’t actually have $500,000 because part of that will be taxed on withdrawal. If you have several different income sources, also consider the most tax-efficient way to draw out your income

5. Have A Buffer

Even if you have no desire to leave anything in your estate, your plan should have a buffer.

The idea of spending every dollar you have can sound nice in theory.

However, in practice, it’s not a good feeling to have your assets dwindling every year while you’re not drawing a paycheque.

There’s also the unfortunate reality that life can be full of unpleasant surprises. 

Home repairs/modifications, healthcare costs, long-term care etc.

Make sure your plan has enough of a buffer to handle the unexpected.  

5. Stress-Test Your Income Plan

Sequence of return risk is one of the most overlooked parts of financial planning.

Retirement income planning requires you to assume of how much your portfolio will earn.

Even if the number ends up being right, it’s still a linear number. And markets don’t work that way. Let’s say you project your portfolio to earn 4%. You’re not going to earn exactly 4% every year. There will be ups and downs.

When you get those returns can have a substantial impact on your retirement income plans viability.

For example, a prolonged period of poor market performance at the beginning of your retirement when you’re starting to withdraw from your portfolio can significantly reduce your portfolio’s longevity.

To address this, you should stress-test your plan.

Avoid straight-line return assumptions and use a Monte Carlo analysis to evaluate how your portfolio might perform under different market conditions. Monte Carlo simulations run thousands of possible market scenarios to calculate the probability of your retirement plan succeeding under real-world volatility.

By stress-testing your financial plan, you’ll gain valuable insights into its durability, ensuring it can withstand market ups and downs during the decumulation phase, when such fluctuations have a bigger impact.

 

6. Review It Regularly

A retirement plan isn’t a one-time thing. It needs to be regularly reviewed as your needs, wants, and the world around you changes.

With a well-structured roadmap that you review and adjust regularly, you can create a plan that evolves as your needs and circumstances change.