A marathon with no plan

I was thinking that next year I might run in the Boston Marathon with a goal to place in the top 3 overall. To reach that goal, and in light of the fact that I don’t normally run, I won’t do any training or stick to any kind of plan. But I’m sure it will all work out? 

Sounds like a pretty unrealistic goal with the lack of planning or preparation, right? Well, the idea of hitting your retirement goals without bothering to do any planning is equally inane. If your goal is to retire at age 60 with a $2 million nest egg, you need to put effort into creating a detailed plan on how you’ll get there. 

Half of Canadians were within $200 of insolvency before COVID-19 hit. And in the U.S., almost half of people aged 55 and over have nothing saved for retirement at all. A recent survey showed that 70 per cent of people had a greater fear of outliving their retirement savings than of dying.

Yet, with all of these very sobering statistics, very few are actually trying to create a plan to do something about it. I know that money is tight for many people right now but that is all the more reason to start working on a customized financial plan today. 

In its simplest form, retirement planning can focus on saving a little more and spending a little less. But a real plan will focus on much more than that. What is surprising for many people though, is how much small changes now can affect their future quality of life.

Let’s look at a couple of examples to illustrate just that. Consider a 40-year-old earning a $100,000 salary who plans to retire at age 60 and wants to make sure that her money lasts until at least age 90. We’ll assume she currently has $250,000 in savings and puts away $10,000 (or 10 per cent) of her income each year. For this example, we will also assume she has a typical balanced portfolio that earns six per cent per year on her equities and 1.5 per cent per year on her bond holdings. 

Based on her current savings, $10,000 per year contributions and indexing of two per cent per year inflation, her retirement income starting at age 60 would be $43,200 per year. But what steps could be done to improve that sustainable income amount?

If she chose to increase her equity allocation by 10 per cent, her retirement income would increase to $49,200 per year. 

If she were to increase her savings rate by $5,000 per year, her retirement income would jump up to $51,600 per year.

And if she were to delay her retirement from age 60 to age 65, her retirement income would substantially grow to $65,200 per year. 

If she opted to do all three of the above changes, her retirement income would be over double at $90,300 per year. This doesn’t necessarily mean that she should make all three of the above changes to her plans, but instead is meant to illustrate how the retirement planning process works and how you can evaluate different changes to your current plans in order to alter your retirement outcome. 

Although retirement plans might presently be challenged and face future stresses as well, there are plenty of steps that you can take now to adjust your strategies with great effect. The question is, are you going to make these changes “one day” or is this “day one” of working towards your new plan? 

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.