If you’re approaching retirement or are already retired, you likely wonder how to make the most of your savings and investments.
Why Focusing on Investment Returns is Not Enough
Some retirees make the mistake of asking the wrong questions when it comes to their investments and retirement plan. In this article, I will discuss the critical shift in perspective retirees must make to gain more financial confidence and peace-of-mind in retirement.
The questions you should be asking
Retirees routinely ask and worry about running out of money and short-term market performance, which is understandable. But it would be helpful if they also asked themselves the following:
- What are my minimum spending needs?
- What are my maximum spending needs?
- What is the minimum long-term investment return I need to maintain my existing lifestyle for the rest of my life?
This shift in perspective is crucial to creating a retirement plan that reduces risks and is aligned with your personal goals and objectives.
Developing a Customized Investment and Retirement Strategy
Focusing and evaluating only your annual investment returns – or worse - always reaching for the highest return - can be tempting, but it may also mean taking on unnecessary risks that could jeopardize your financial security.
By focusing on your minimum and maximum spending needs and the minimum investment return you need, you can make more informed decisions about your investments and retirement strategy.
By focusing on these variables, you will also sleep well at night even if your investment return falls short of your desired return in any given year and as long as your spending habits remain within your spending range.
So, while actual investment returns are still important when developing and evaluating your retirement plan and strategy, they are only part of a much larger puzzle.
Assessing Your Spending Needs and Minimum Required Return
So, how can you determine your minimum and maximum spending needs and minimum required return? The first step is to assess your current spending and estimate your future spending needs based on factors such as inflation, anticipated healthcare costs, and potential travel or leisure expenses. A good wealth advisor can also help you determine your spending needs in retirement.
When it comes to the minimum return needed in retirement, you’re better off leaving this to the experts. They have the financial projection and planning software that will calculate this number (typically within a range) based on your personal circumstances such as your total investable assets, age, pension income, tax situation, and type of investments account (ie. RSP, TFSA, non-registered, etc.).
Final Thought
As you approach retirement or if you're already in retirement, it's essential to ask the right questions about your investments and retirement plan. Instead of focusing mainly on investment performance and generating the highest returns possible, focus on your minimum or maximum spending needs and discover the rate of return you need to maintain your existing lifestyle for many years to come.
An expert wealth advisor can help you answer these questions and develop and implement a comprehensive investment and retirement strategy for you that meets your retirement goals and objectives while balancing your risk, which will give you more confidence and security for you and your loved ones.
