Personal Finance

The Canadian Press - ONLINE EDITION

Keep your nest egg from running out

By: Talbot Boggs

8/02/2010 12:54 PM | Comments: 0

(Special) - What with the recent economic recession, crashing financial markets, job layoffs and lower real estate prices, the retirement plans of many Canadians today may seem to be in ruins, at worst, or at least severely damaged.

One of the biggest fears many Canadians have today is that they might not have enough money to see them through their retirement years.

It's true that Canada's population is aging and Canadians are living longer.

Currently, 11.5 per cent of the population is above the age of 65. By 2031, approximately nine million Canadians, or 21 per cent of the population, will be 65 or older. In 2005, the life expectancy of both men and women was 80.4 years. By 2031, however, the average male will live to 82 and the average woman to 86.

A recent survey by National Bank Financial Group found that running out of money was the main retirement-related issue for 48 per cent of Canadians, second to concerns about health problems.

When it came to depletion of capital, inflation and expenses were the two most important sources of worry for Canadians. Sixty-one per cent of adult Canadians believe that inflation may eventually threaten their financial capital, followed by spending more than expected, a longer life expectancy, health care costs and underperforming investments.

One of the keys to a successful retirement is to implement strategies to ensure that the nest egg you've built up over your lifetime is not unduly depleted so it will last as long as you do.

"What we want to see is retirees living their retirement, not just surviving it," says Gaetan Ruest, director of strategy and investment planning at Investors Group. "That's where people's nest egg comes in and how it is allocated and drawn down through their retirement."

Many Canadians might not realize the true value of their assets because they forget to factor in the Canada Pension Plan (CPP) and its equivalent in Quebec) and the Old Age Security (OAS).

If you've worked in Canada as an adult you're entitled to the CPP or QPP, and you're entitled to the OAS by virtue of having lived in Canada for a specified period. If you've worked your entire life in Canada and retire at 65, you can receive as much as $17,000 a year in CPP and OAS payments.

Financial planners such as William Bengen in the U.S. have concluded after studying stock market history that drawing down four per cent of your portfolio a year is safe, assuming you retire at 65, live for 30 years, and adjust withdrawals each year to keep up with inflation.

Guaranteed income products such as annuities are one way pensioners can create a steady income stream in retirement. You buy an annuity from an insurance company and then receive regular payments until you die.

Annuities are complicated instruments with fees attached to them, so it's a good idea to get some professional advice before purchasing them. "In general, you do give up some returns for those guarantees, so you may want to put only a portion of your portfolio in them," says Ruest.

Ruest suggests people need to determine what they want to do in retirement and where they think they'll be spending their money. It's important to understand how much money you have and how much you need to cover the essential expenses you need to live. What's left over is discretionary.

Most financial experts suggest having a balanced portfolio of blue chip dividend paying stocks and investment grade bonds.

Between June 2008 when the market was at its peak and the trough in March 2009, an equities-only portfolio would have declined by just over 50 per cent compared to a balanced portfolio, which would have depreciated only 22 per cent over the same period, says Patricia Lovett-Reid, senior vice president of TD Waterhouse.

Even accounting for the sharp recovery in equities since March, 2009, an equities-only portfolio would still have been down 23 per cent between June 2008 and the end of October, 2009, compared to only eight per cent for a balanced portfolio.

"A good retirement plan can help you understand what you have and what you need and can make the difference between a good retirement and a great retirement," says Ruest.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. (boggsyourmoneyrogers.com)

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