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The Canadian Institute of Actuaries (CIA) recently released an Insight Statement on Helping Canadians Prepare for the Risks of Retirement.  Their paper aims to help you understand the financial risks of retirement and provide you with strategies to manage them effectively. Retirement is a big step in anyone’s life that requires careful financial planning to ensure you have a secure and fulfilling future

A recent CIA survey indicated that over half of Canadians do not have a retirement plan, and only 44% of those without a plan expect to live comfortably in retirement. Among those with a financial plan, 80% anticipate living comfortably. Do you have a plan?

Understanding Retirement Risks

It’s important to start with a basic understanding of the key retirement risks, which can be divided into two phases: saving for retirement (accumulation) and spending your savings during retirement (decumulation). These risks can be external (outside your control) and personal (specific to you).

External Risks

Inflation and Loss of Purchasing Power: Inflation increases the cost of living, reducing your purchasing power. To mitigate the impact of inflation, it is essential not only for your salary to increase but also for your investments to appreciate both before and after retirement, thereby preserving purchasing power throughout your retirement.

Taxes: Not using tax incentives for retirement savings and not considering tax impacts when withdrawing funds can hurt your financial stability. In particular, the source and timing of withdrawing retirement income can impact the amount of government benefits you will receive.  Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) can help manage these risks.

Market Volatility and Investment Loss: The value of your investments may go up and down, but generally speaking the lower the volatility the lower the expected returns of a particular investment.  Diversifying investments and choosing the right risk level based on your comfort level and goals can help reduce this risk and maximize your expected long-term returns.

Changes in Interest Rates: Higher interest rates can affect borrowing capacity and investment values, especially bonds and annuities.  For example, higher interest rates result in higher mortgage or loan payments and therefore less capacity to save for retirement; however, higher interest rates also mean a lower premium for an annuity and higher income in retirement.

Personal Risks

Unexpected Expenses: Sudden expenses can disrupt financial stability, especially during retirement. Having an emergency fund is essential.

Premature Death: The loss of a spouse can lead to financial challenges like funeral expenses and managing debt, not to mention the loss of income. Planning for such events is crucial.

Loss of Good Health: Health issues can prevent working and saving, and also lead to additional medical costs.

Longevity and Life Expectancy: Outliving your retirement savings is a big risk. Canadians often underestimate their life expectancy, so planning for a longer retirement is essential.

Aging and Cost of Care: Many Canadians underestimate the financial impact of long-term care needs. Planning for these costs, which are not necessarily fully covered by government programs, is very important.

Personal Debt: Accumulated debt can be challenging during retirement. Managing and reducing debt before retirement is crucial.

Strategies for Managing Retirement Risks

Here are some key strategies to manage retirement risks effectively:

Personal Savings

Having enough personal savings gives you financial independence and flexibility. Establishing an emergency fund and using a range of savings vehicles such as TFSAs and RRSPs can help navigate risks.

Insurance and Personal Risk Management Products

Life, health, disability, and long-term care insurance, along with annuities, can be very important elements in retirement planning. These products offer protection against unexpected events and contribute to financial resilience.

The Role of Financial Advisors

Insurance products provide significant protection and peace of mind in retirement but can be expensive and complicated. Balancing their pros and cons requires careful consideration of personal needs, which is where financial advisors can help to manage retirement risks. They can help with budgeting, debt management, insurance, investment strategies, and tax efficiency. Most importantly, financial planners and advisors can create comprehensive financial plans tailored to your needs.

Getting Help with Financial Planning

Seeking help from a financial advisor is wise for anyone preparing for retirement. Here’s how to get started:

Finding the Right Advisor

Choose an advisor who meets your needs and makes you feel comfortable. Ask about their process, client types, and compensation model. Ensure they explain their services clearly.

Developing Your Plan

A plan is a cornerstone of success since as noted above, 80 percent that have a plan are ‘on target’. An advisor will help you build and document your financial goals, both short and long-term. The plan should balance current obligations with future savings and include strategies for managing unexpected expenses and accumulating retirement funds.

What to Plan For

Your financial plan should consider personal savings, life insurance, health insurance, and long-term care needs. Establishing an emergency fund and setting long-term savings goals are crucial steps.

How Much to Save

Start saving early, even if it’s a small amount. Your advisor will help determine how much you need to save based on your retirement goals, expected income sources, and spending habits.

Compensation Models

Advisors may work on a fee-for-service basis or be compensated by the products they are selling. Understand their compensation model and ensure it aligns with your financial situation.

Next Steps

Planning for retirement involves more than just numbers; it’s about achieving peace of mind. No matter your stage of life, a financial advisor can help you navigate risks and stay on track. Research your options, ask questions, and choose an advisor you trust. It’s never too early or too late to take charge of your financial future.

The CIA paper’s advice, which I fully support, is to follow these strategies and seek professional advice, so that you can prepare for a secure and fulfilling retirement. Remember, the key to successful retirement planning is to start early, have a plan, and make informed decisions. Your financial future depends on it.