FP Answers: I don’t have a pension, so how do I determine when I can retire?

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By Julie Cazzin with Allan Norman

Q: I have friends retiring and I’m also thinking about retiring, but I don’t have a pension. How do you know when you can retire? — Cynthia

FP Answers: Hi Cynthia. It is certainly a lot easier to pick a retirement date if you have a pension.

Think about it. At the start of your career, you have an estimate of your pension benefits, a retirement date and constant reminders of both throughout your career. Plus, it is so much more comfortable to spend pension money than to spend money from a pool of capital, because pension money regularly shows up in your bank account. There is no worrying about market swings, how to invest, where to draw money and running out of money or having enough.

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How much is enough? Answering that question is one of the most important things you, or you and your financial adviser, need to do — and the sooner the better. Just like a pension, knowing your number gives you a path to run on.

Imagine saving and accumulating money and reaching the age you want to retire, but you can’t — you don’t have enough money. If you had known your number earlier, it would have given you a sense of purpose and the motivation to find a way to hit it. What if you were working with an adviser and were never told you would be short? How would you feel? Let down?

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What if the opposite happened? You have enough money to retire and don’t know it? You continue working in a job you hate, you work five years longer than needed and then, boom, you have a health issue. How would you feel if you found out after the fact that you had enough money to retire five years ago and you could have been playing rather than working? What if your adviser didn’t tell you five years ago that you could have retired? What would you do?

Do you see why it is so important to know your number? How much is enough — your number — isn’t a difficult concept. It is simply figuring out how much money it will take to fund your lifestyle. Big lifestyle, big number; small lifestyle, small number.

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Cynthia, knowing when you can retire is all based on lifestyle — the lifestyle you have now and the lifestyle you want to have in retirement. Nobody wants an income that is 70 per cent of their career income, but everybody wants a lifestyle. What is your lifestyle? What does it cost and how much wealth do you need to support it?

For most people, figuring out how much is enough is best done with the help of a financial planner using sophisticated planning software. A planner will help you identify your current income and spending, effectively defining your lifestyle.

Do this by itemizing your expenses, which takes a little work on your part, but is worth it. Your planner will learn more about you. It makes the work you do together more accurate, but, most importantly, you become involved, making the whole process much more meaningful and engaging. If it isn’t a cash-flow plan, it isn’t a plan.

Your planner will also help you identify all the wealth you have now and in the future. This will include your liquid assets, which can include registered retirement savings plans, tax-free savings accounts, cash and other assets that can be used for financial planning, as well as your fixed assets, which include your home, business and rental properties.

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Then, using sophisticated software, your planner will show you what your future will look like, and it will be one of three things. You will either not have enough, have more than enough or have just enough. Each scenario comes with its own issues.

If you are a “not enough,” you need to know so you can do something about it, and the sooner the better. Knowing you have “more than enough” means you can do more or gift more to children or charity, create a legacy or take less risk with your investments.

Guess what happens if you have “just enough” and don’t know you have just enough? You might take more investment risk than you need, work longer than needed, feel guilty spending money or cut back on things. You won’t live life to the fullest.

Cynthia, retiring without a pension can be intimidating, but retiring is all about lifestyle. Do you have enough money to maintain your lifestyle throughout your lifetime without the fear of ever running out of money? This will be the telltale sign that you are ready for retirement.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan can be reached at alnorman@atlantisfinancial.ca.

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