Setting a retirement date isn’t so straightforward anymore. Today’s market volatility can make it a little more difficult to estimate future returns. And increasing longevity makes us wonder how many extra years — or decades — of retirement we should account for.
As you try to decide on a retirement date, here’s a helpful way to view the situation: by examining how life events and changes can affect retirement timing.
Three key variables affect the timing of your retirement date:
Financial objective is the dollar value you set for your nest egg in order to live comfortably and securely during retirement.
Investment program is the registered and non-registered savings and investments you designate for retirement funds.
Retirement lifestyle includes all plans involving the way you spend retirement — where you live, how you’ll live, whether you’ll earn income.
All of these areas interrelate, which means that a change in one area can affect your retirement date and a challenge in one area may be met by adjusting the others.
For example, let’s say an investor becomes less tolerant to risk and adjusts investments accordingly. As a result, projections using the more modest potential returns leave this individual short of the original financial objective.
This individual can compensate by adjusting one or more of the other areas:
Retirement date. Postpone the date by a couple of years.
Investment program. Create a budget that allows for greater annual investment amounts, or adjust investments to allow for more growth potential.
Retirement lifestyle. Scale back on luxury travel or work part-time in the initial years of retirement.
Whatever life changes come your way, and however you manage the changes, remember that retirement planning is a fluid, ongoing activity and your plan needs to be maintained. Here are three scenarios to illustrate three different outcomes.
When in her early 50s, Eileen opened a store offering eco-friendly products for the home. Her venture not only proved to be a successful enterprise but she enjoys the entire retail experience. Originally, Eileen and Tom planned a retirement of travel and leisure starting on day one. But the successful retail operation opened up a new possibility — they can keep the store going into their retirement years, hiring staff for store hours.
Now, their retirement lifestyle is changed to include income. That affects the couple’s financial objective because less money is needed for their nest egg. Finally, there’s a change in retirement date — Tom will retire from his full-time position earlier than planned.
A number of years ago, when Deepak and Nina roughed out their retirement plans, they listed a modest amount for inheritance and didn’t even count on receiving such funds before their planned retirement. As it turned out, they received an inheritance well before retirement from Nina’s mother — and much greater than expected, because of the high value of her principal residence.
This change gives the couple multiple options, but they decide to keep their original retirement date and apply the inheritance to retirement lifestyle — they now plan to purchase a vacation property.
When Sylvia, a single parent, first mapped out her retirement plan, she didn’t count on a financial crisis dragging down equity markets and a subsequent recovery period taking place not long before her retirement target. With her original retirement date approaching, Sylvia finds herself with a child headed to university and her plan falling short of her financial objective.
She doesn’t have the inclination or time horizon to alter her investment contributions or portfolio composition. Sylvia will delay her retirement a couple of years and change her retirement lifestyle by working as a consultant during the initial years.
Please feel free to talk to us about any changes in your financial life. Together, we can determine whether changes should also be made to your retirement plans.