Steve McGuinness
Special to Niagara Now/The Lake Report

You’re driving down the highway. A luxury motorhome swerves in front of you. You read the bumper sticker: “We’re spending our kids’ inheritance!” How do you react — by jeering or cheering?

We set earnings aside as retirement savings in our working years, often without any financial plan. So we can suddenly find ourselves, in our mid-50s, taking stock of what we’ve accumulated and wondering if it’s enough to last us the rest of our lives.

Are we able to retire sooner without outliving our savings?

Financial planners have a vested interest in keeping clients invested as long as possible, especially when they’re compensated by commissions tied to account values.

When you begin your withdrawals, your investment values will inevitably drop — unless you limit them to the investment earnings or less.

Conserving principal makes sense only if you intend to pass all your savings down to heirs. When children are financially self-sufficient, skimping on retirement living costs may compromise your enjoyment.

The ideal planning outcome occurs when the last cheque your estate writes is to cover funeral expenses — without leaving a nickel unspent.

Achieving such a perfect balance is unlikely for many reasons. There are uncertainties about how long we will live, what our investments may yield, and how our spending patterns will evolve.

Even when we rigidly follow a retirement budget, many variables will lead to actual account values differing from plans.

Increasingly, retirees are tapping into home equity to fund their later retirement years. Advertising for reverse mortgages abounds. This incites fear, creating resistance to spending after decades focused on saving. A withdrawal plan instills the psychological freedom to live more comfortably.

Those who avoid planning may instead follow shortcut rules of thumb.

It’s tempting to believe we’ll need a fixed amount (say, $1 million) to retire; that we should limit withdrawals to a certain percentage (say, 4 per cent) per year; or that we’ll need to replace a particular portion (say, 60 per cent) of our employment earnings in retirement.

Unfortunately, these shortcuts lead to inflexible “one-size-fits-all” retirement plans, destined to fail.

Begin to plan by considering your expected retirement duration. Actuaries tell us that if we retire at age 65, we have an average life expectancy of 16 more years.

We must adjust this norm based on our gender, health status and family longevity experience.

Retirees don’t need to replace their full working income in retirement because employment costs — like commuting — disappear and savings requirements cease.

Withdrawal plans need to account for inflation, taxes, volatile capital markets, the loss of a spouse, emergency needs and tax requirements.

Withdrawal rates will vary over time. Spending will be higher earlier and decline later due to lifestyle changes.

In our early retirement years, we may travel, pursue long-neglected hobbies and socialize more frequently.

Later, ageing will impose physical limitations, causing our activity levels to fall. So our spending won’t sustain at a flat, inflation-indexed level.

It is never too late to start retirement planning — or, too soon.

In his Bay Street career, Steve McGuinness was a senior advisor to large financial institutions and is now retired in NOTL. Send your personal financial planning questions to him at smcgfinplan@gmail.com.