Make investments that can earn the rate of return you need for retirement
With spring soon upon us on Vancouver Island, some of us think of golf.
In a game of golf, if I am 300 yards from the green, you know that I am not going to use a sand wedge to get there. Retirees make this common mistake in calculating their retirement income.
If you want a high income and are risk-averse investors, don’t base your assumptions on an 8% return. Expecting a higher return from your investments almost always comes with higher risk. Even if the investment has produced high returns in the past, don’t gauge your retirement based on past performance.
Understanding what realistic rates of return you can expect over your retirement horizon should be understood first before you set up retirement income. This will help calculate the amount of income you can expect and how long your money will last. It is a good idea to enlist the help of your financial planner for this exercise.
Suppose you want to aim for a yearly income of about $50,000 in retirement. Assuming a conservative annual return of 6.5 percent during your retirement, you would need to save about $800,000 by the time you retire assuming you want to keep the same amount of capital in retirement. (Because at 6.5 percent, $800,000 would produce an income stream of $52,000 a year).
At retirement, you may want to have your income last for twenty-five years. In that case, then you would need $650,000 based on a 6.5% return annually. Instead of specifying a particular return figure, such as 8 percent, it makes more sense to choose the amount of risk you’re comfortable with. The amount of your risk can be attributed to several factors. The most important factor is asset allocation or diversification. Remember the saying don’t put all your eggs into one basket. The basket may contain stocks, bonds, and GICs or short-term deposits. Each one in your basket generates a different rate of return and different risk characteristics. If you are uncomfortable with the daily ups and downs of stock markets, then a more conservative bond, income, and GIC portfolio may be appropriate. Plan on finding out what you can expect from a portfolio of 1/3 income equities 1/3 bonds and 1/3 GICs, and the rate of return it will bring you and the types of fluctuations you can expect. Be realistic and don’t expect double-digit returns. Then make sure you enjoy the retirement income plan you created and make the most of what you have to work for you.