Is your Findependence action plan truly game-ready?

Adrian Mastracci

By Adrian Mastracci, KCM Wealth Management Inc.

Special to the Financial Independence Hub

No doubt, investors want to be ready for retirement or what this site calls Financial Independence/Findependence.

The bigger question is whether the Retirement/Findependence plan of action is truly game ready for them.

Investors face a multitude of decisions in mapping their roadway to retirement. Preferably, a roadmap that withstands the tests of time. Especially for those who are at the retirement doorstep. Planning retirement is about setting the long-haul course of action to achieve a specific personal return. The course is more than selecting stocks and funds. Some cases may require a total financial makeover.

Start the process at least 15 to 20 years prior to actual Retirement/Findependence. Longer is desirable. Investors need to find that delicate balance between spending for today and saving enough for tomorrow. At age 60, the plan can easily span 25 to 30 years, possibly more. It’s also likely that few if any savings will be added to the portfolio after retirement begins. The nest egg has to sustain income draws for the lifetimes of two spouses.

At KCM, we have assembled five fundamental steps to improve your game plan readiness prospects:

1.) Think long-term expectations

Achieving a successful retirement is about three vital things. They are about thinking long-term, having a well diversified portfolio and avoiding large losses. Investors ought to focus on what the nest egg is to provide and for how long. Refresh the desired retirement incomes. Confirm that the goals are realistic.

We don’t focus on replacing arbitrary percentages of pre-retirement income. Rather, our attention is on replacing the expenses incurred. That sum is easily translated into a before-tax income ballpark. Our experience indicates the household expenses just before retirement are similar to those after retirement. The individual allocations are a little different.

2.) Size up the nest egg

It’s important to understand the math of retirement. The required capital sum is over and above the employer pension, your residence and government-provided retirement income like CPP/OAS or Social Security in the United States. The key is the investment rate of return required to achieve and sustain the retirement goals. All within the investor’s saving capacity, risk tolerance and time horizon.

The risks of seeking a 4% investment return are different than aiming say at 7%. Expectations may need adjustments if the risk of loss is too great to endure. Examining where the investor is right now and what has to be done is time well spent. It sets the scene for the design and implementation of the right roadmap.

3.) Develop the appropriate plan

Investors approaching or in retirement will need to switch from accumulating the nest egg to drawing income from it, or what the Hub calls Decumulation. This may require investment strategy changes to initiate and sustain the draws. Asset mix has a large impact on portfolios. One vital area is the appropriateness of the mix. Retirement portfolios typically include a mix of equities, bonds, cash instruments and real estate.

A flavor of capital preservation is central to many retirees but typically so is the need to continue growing the nest egg during retirement. Long-haul management of the finances is ever so important. Resist the temptations to make radical changes to the asset mix. Such as becoming too conservative during retirement. Strategies may necessitate adjustments to income if inflation rises or returns drop.

4.) Mull over the risks

Investors should not let risk be the dreaded word. Understand the types of investment risks being incurred. The game plan always considers the ability, willingness and need to incur investment risks. The portfolio may experience periods of low returns or negative returns. We’ve had near 25 bear markets since 1900. Taking on more risk is a strategy full of many dangers for retirees.

Most retirees no longer put much money into their portfolio. Therefore, incurring a large loss is a must avoid. Wise investors have learned to take small losses and move on. The funds withdrawal rate may need adjustment over time if the comfort zone slips to low levels. A “what if” analysis gets a handle on the level of financial safety.

5.) Activities in retirement

Everyone has to consider what activities to pursue during Retirement/Findependence. They are just as important as the financial pursuits. Successful retirement is about pursuing activities that deliver happiness.

They range from travelling, pursuing old and new hobbies, becoming a mentor, doing things with the family, part-time employment, charitable activities, community pursuits, writing and many others. Aim to maintain productive, stimulative and satisfying activities.

The outcome of this exercise is that the plan may require some rethinking of personal strategy. It takes ongoing coordination to keep the retirement roadmap on target.

Personal game plans should be integral pursuits for all investors. Plans that make sure the coveted retirement is truly game ready for them.

Questions and comments are invited.

Adrian Mastracci, MBA,  is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios. 

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