Financial Planning 2

Using conservative assumptions for returns and inflation will give you a better idea if you need to adjust your spending or saving, as you don't want to outlive your portfolio. (What is a conservative assumption about returns, you may ask--I think returns that average 2-3% would be conservative. What is a conservative rate of inflation, you may wonder. I think a conservative rate of inflation would be between 3 and 4 percent a year

Phase 2: Staying Retired: Being that retirement can last 30 or more years, this phase likely requires the most skill and regular reassessment. A requirement to staying retired is to have a good strategy that focuses on ensuring your money lasts at least as long as you do.

Here you need to account for the five types of risk: market, inflation, longevity, withdrawal rate and sequence of returns. Make sure your investments don’t run into trouble with any of the above risks. Working without a crystal ball means you have to depend on yourself and/or a financial professional to navigate you through the twists and turns of the economy and the interest rate environment.

Don’t forget surprise expenses such as extensive health care-related costs. Ignoring potential surprises means you are living a “what if” retirement. Try to wipe out the what-ifs and try to plan for an “as if” retirement. An as-if retirement is to live as if you have no financial worries. That alone may help you live a long life.

Many investors wonder how they will actually get the income they need from their portfolio. This will come in various forms such as dividends and interest. If you have a conservative outlook you may be able to pull between 3 and 5% from portfolios without including any growth potential or dipping into principal. 

If you are retired then you won't have time to make up a big loss in your portfolio. This is why it is important to make sure your advisor uses an exit strategy for your holdings, be they stocks or bonds, should markets turn negative.

The difficulty in Phase 2 over Phase 1 is that you have to account for the unknowns. In Phase 1, you merely need to make sure you have enough income now. Here you have to account for inflation and unpleasant scenarios such as a spouse passing away. What will the surviving spouse do and who will they turn to for guidance?

Phase 3: Planning For After Retirement: No one lives forever, so what happens to your investments when you no longer have a need for them when you’re gone?

One of the biggest concern for many retirees  is having just one spouse manage all investments or being the point of contact for the financial advisor. If something happens to this spouse, then the spouse who doesn't follow the investments can feel very overwhelmed from this new duty. It is important to have a strategy in place for this type of situation to ensure there is minimal decision making and the transition is easier for your spouse

With proper planning, you can help to ensure most or all of your life’s savings goes to your family versus the provincial/state or federal government. However, you must plan in advance while you are still alive. There are a handful of time-tested strategies that exist today that can help you preserve your nest egg for those you love who will live on after you.

What may be more interesting is that certain assets, such as life insurance proceeds, passing to these same beneficiaries are not subject to the inheritance tax. Work with your professional advisers to help steer you in the right direction.

It may be important to you to pass on your wealth to your beneficiaries with the lowest amount of tax possible. There are ways to properly set up your estate to reduce taxes and avoid probate fees and you need to have a talk with your financial advisor about how to do this.

Joel Steele is co-owner of Steele Financial Solutions, recently voted Best of South Jersey. Reach him  www.steelefinancialsolutions.com 

Lori Pinkowski is a portfolio manager and senior vice president, private client group, at Raymond James Ltd., a member Canadian Investor Protection Fund. She can answer any questions at lori.pinkowski@ raymondjames.ca