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In the final stretch and time for a reality check

The five or six years before you retire is a good opportunity to look at the hard numbers


Date: May 14,2014

You’re in the final stretch, just a few years away from your last day of work. Until now, planning and saving for retirement has been a theoretical exercise.

Suddenly it’s for real.

In this penultimate period, it’s important to ensure that you’re in the best shape to retire, not only financially but psychologically and physically as well. The key to all three may be whether the portfolio you’ve built through your working years is ready for retirement.

“The future has become the present,” says Scott Plaskett, a certified financial planner and chief executive officer of Ironshield Financial Planning in Toronto, who specializes in helping people transition to retirement. The “sweet spot” – the five or six years before leaving work – is a good time to finalize a comprehensive financial plan, focus on a series of steps and ask some hard questions.

“Will I have enough money?” is one that’s on most would-be retirees’ minds, Mr. Plaskett says, as well as, “How early can I retire?” The answers, he says, “are just a big exercise in mathematics,” based on life expectancy (plus five years, to be safe). “You need to model your retirement, and understand what the variables are.”

Most people don’t start this retirement exercise early enough, says Kurt Rosentreter, a certified financial planner at Manulife Securities Inc. in Toronto. By 50, most people have not saved sufficiently for retirement, yet they continue to have significant expenses, such as kids at university and house payments to make.

“What’s shocking is that nobody sits down and does any forecasting,” he says. “It’s like you’re driving down the road with your eyes closed.”

Developing a “financial dashboard” is critical, he says, adding that the three variables to consider are how long you’re going to work until you retire, the rate of return on the money you have put away and what new savings you can accumulate.

Most people would like to retire at 60, but many won’t be able to afford to, he explains. One issue is boomers’ visions of their retirement, which have shifted fundamentally from their parents’ generation. “They just made their life fit into a $28,000-a-year pension,” Mr. Rosentreter says. Today retirement expectations are “through the roof,” he adds, including lavish spending on vacations, technology, cars and meals out.

“That costs a lot more,” he says. Meanwhile, most retirees don’t have significant pensions, they are living longer, their returns on investments have shrunk and their cost of living is greater – for example they may still have children in their 20s and 30s living at home or are supporting elderly parents.

Mr. Rosentreter offers some “shock therapy” for clients at any age, getting them to put pen to paper in terms of setting out their post-retirement lifestyle and what it will cost.

“It’s psychological, not just money management,” he says.

In practical terms, anyone edging toward retirement should have less stock market exposure, set realistic expectations of returns and be careful if their only asset is their home, he says, which doesn’t add to cash flow and could be hit by a real estate market correction.

After retirement they might continue to do some work, even a seasonal, part-time job close to home that they love to do. “Nothing will make you unhappier than if your entire cash flow is tied to your returns on personal investments,” Mr. Rosentreter says, which often don’t allow for trips, splurges at restaurants or helping out your kids financially.

Steps to a healthy retirement

Certified financial planner Mr. Plaskett suggests a series of steps in the “sweet spot,” five or six years before retirement:

1. Show me the money! Figure out where you are financially today, including what you own and owe, which is important both for you and your executors.

2. What are your retirement revenue sources? Determine where your retirement income will come from, and whether some sources will last or change in amount, and when.

3. What are your retirement expenses? Your costs for items such as clothing and transportation will change; Mr. Plaskett suggests turning a two- to four-week holiday into a “mini-retirement” to get a sense of what you’ll do post-employment – and what it will cost.

4. Establish a debt management plan. If you’re going into retirement with debts, develop a plan to pay them off as quickly as possible.

5. Examine and tweak your “base plan.” Understand what you’re on track for now and make any adjustments. “Time is your friend,” Mr. Plaskett says, adding that this step answers your most important question: “Can I retire with the lifestyle I have become used to?”

6. Consider the “what ifs.” Build tolerances into your portfolio and give yourself a comfort zone by considering any downside scenarios – for example, if the markets don’t recover or if inflation suddenly spikes.

7. Look at your plan from the top down. See whether you qualify for more robust investment solutions. For example, investors with greater assets might be able to reduce their fees on mutual funds.

8. Help, I’ve fallen and I can’t get up. You might live a long and healthy life. Or you might live long and unhealthily, or die prematurely. Apply some risk management and see what would happen if each of these were to happen, even in the lead-up to retirement. Consider buying or topping up life, disability, critical illness or long-term-care insurance.

9. Do some estate planning. Ensure the efficient transfer of wealth to the next generation; consider tax-sheltered investments if you’ve maxed out on registered plans and have extra cash.

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