Planning for Retirement Part II
Last month I covered the pension benefits offered by the government. Will they still be there 20 years from now? I am not sure, so perhaps we should be asking what our sources of retirement income are and how much we will need.
Common sources are pension plans, RRPS and other investments, savings and work. Typically, it is recommended that we will need 70% of what our earnings will be in the years just before retirement.
Currently, a retired couple receives an average of $25,000 per year from CPP and OAS. If you estimate that you will need $60,000 per year, then you need to provide for the difference of $35,000.
If you are fortunate to work for a company that offers a pension plan (not many do anymore), some or all of the difference will be made up from your pension plan.
The income from your RRSPs will also provide for the difference. Review the risk level of your mutual fund plan annually and ensure that it is well diversified. The dot.com bubble in 2000 and the recession in 2008 have not been kind to my plan and my risk level was conservative. Making contributions is great but you need to review the performance of your plan.
Retirement income can come from other sources of investment. If you invest outside of your RRSP plan, make sure to do your due diligence. If the return on a proposed investment seems too good to be true, consult a professional or walk away. The investment scandals with Bernard Madoff in the United States and of Earl Jones in Montreal robbed many retirees of their retirement income. Real estate is an attractive investment, which can be sold or can provide rental income.
The family home and the children … The sooner your children are independent, the better for your retirement plan. As soon as the children have left, sell your home and downsize (they won’t be tempted to move back). The additional income can then be invested and retirement will become more of a reality!
Let’s not forget about work! Maybe not full-time, but part-time work is a good transition into retirement and getting used to being with your spouse more often.