As you sit around and watch family and friends talk about the retirement lifestyle they wished they’d have, it may cross your mind if you will outlive your retirement funds. Now is the best time to start implementing ways to avoid doing so. You can get a jump by following these 9 tips and comfortably retire.
Develop a Financial Plan
Your very first step to avoid running out of money during retirement is to develop a financial plan. This financial plan should be detailed. It should describe where you want to be financially and the path you need to take to get there. Take into consideration the following while developing this plan:
- Any outstanding debts you may have
- The location you will retire in
- Any new debts you may incur
- The lifestyle you want to lead (private clubs, vacations, sports cars)
- Your assets
You can outline this information on your own. However, meeting with a financial planner can help you create a well-thought out plan. They can explain the tools you need to get you where you want to be.
Stop Living above Your Means
You may have heard the term “live below your means”. Many people aren’t able to stick to that so well because it implies living under extreme frugal circumstances. Even cutting back a little on your luxury items can make a major impact.
So if you stop living above your means, you’ll start to see the positive impact on your financial future and be more willing to cut back more. A few examples include:
- Stop purchasing items on credit if you don’t have the cash
- Borrowing items instead of purchasing them
- When you do need to purchase something, buy it used
- Order takeout pizza instead of going to the Italian Restaurant
Take these baby steps and gradually work your way up to a more frugal lifestyle. If you start to become discouraged, remind yourself that you are saving for a better tomorrow.
Save at a Steady Rate
Another way to save money fast is to “ignore” any additional lump sum of money. Immediately put it into your savings or investment account. For example, if you get a bonus at work, a raise, or income tax refund, you’ll want to put it away immediately.
Avoid the temptation of purchasing yourself something nice, because you deserve it. Wouldn’t you rather live in comfort while you are retired because you deserve it after working those 45+ years?
You can’t expect to live off your Old Age Security benefits and pension alone. The government is only going to issue you so much, and as pensions are nice, they are not guaranteed to be around until you retire. A company can cease their retirement plan at any moment. And you are already aware of how volatile the stock market is. Though not to scare you, it is possible all stocks could go plummeting down the drain, just when you need it the most.
Avoid depending on these factors; depend on yourself. Start focusing on what you can do for yourself in terms of a savings plan. You’ll want to save your money at a steady rate while you are working.
Many financial experts advise to save enough so that you can withdraw about 4% from your portfolio each year when you are retired. You’ll want to max out your RRSP plan each year, and then move on to other savings options. Take advantage of the tax benefits while you can.
Purchase Annuities with Inflation Protection
While there are all sorts of calculators helping you decide how much money you will need during retirement, there is always the looming question: “Will I outlive my money”. Sure, it’s possible.
There are other options available should you not feel comforted in your investments or savings plan. This is also another great alternative to depending on a pension plan. Purchase yourself an annuity and add in inflation protection if it’s not included. So what does an annuity do for you?
- You’ll receive a fixed income for the remainder of your life
- You could receive increasing income payments
So when you retire and start to draw from your annuity, you can take comfort in knowing you will have a steady form of income.
The consumer price index (CPI) will rise yearly, so be sure to add the inflation protection. You want your money to go further and as it grows with the CPI, you can guarantee your money won’t let you down.
Make Frequent Adjustments
When you set your annuity up, don’t just let it sit there and forget it. Go back annually and speak with your advisor so you two can make adjustments.
For instance, when they get your annuity set up, you may start with the 4% withdrawal rule. This rule is simply a guideline that states you should expect to withdraw 4% of your balance a year.
However, to keep up with inflation, you want to adjust your annual savings. Your annuity is a great source for guaranteed income when you retire. So watch it closely.
Pay Your Mortgage Off Before You Retire
Right now, your mortgage, student loans, and auto payment may be your largest bills. Some seniors manage to pay their mortgage off before retiring; however, it’s not a common practice.
If you can pay your mortgage off before you retire, do so. That’s hundreds or thousands of dollars instantly back in your pocket. Once you have paid it off, you can place that money into an aggressive investment plan. The younger you are, the more risk you can take.
Downsize or Rent Out Your Home
Another way to bring in income besides working is to downsize or rent out your home. If you have a nest egg, why spend a portion of your retirement income on maintaining a large home? You have to consider any housekeeping costs, lawn work, and heating and cooling costs. If your home is paid off, you can sell it for a profit.
Now, if you simply can’t part from your home or feel you won’t be able to sell it for what you need, rent out a part of your home and share the expenses.
Don’t Retire or Take Your Payments Early
In Canada, you’re allowed to retire at the age of 65. However, you can receive your benefits, such as your Canada Pension Plan (CPP) as early as age 60.
If you don’t have a good reason, such as a medical reason, to retire early or receive your benefits, then don’t. If you take your payments too early, such as age 60, your benefit payment will be reduced by up to 32.4%.
You could retire from your full time job and receive a part time job. Your retirement years are supposed to be enjoyable moments for you. This is the perfect time to work in the industry you’ve always wanted to. You can start your own business if you want.
In fact, almost 40% of Canadians plan to start their own business
when they retire. They are capable of working full and part time hours. Many seniors retire and lose their sense of self-worth. Working on the side keeps your mind active and improves your quality of life.
Be Prepared to Take Your Old Age Security Pension
You should know ahead of time about your rights to your Old Age Security Pension. You can take this as early as age 65. The age eligibility is subject to change, so that’s why it’s important to coordinate and have your retirement funds together. Depending on others to secure your financial future is not a good plan.
These are just a few steps to implement to avoid running out of money during retirement. Of course, the younger you are, the better your chances of successfully preparing yourself for retirement.