Aug 20 2009

Time to Look at the Big Picture

Time to Look at the Big Picture

While markets have rallied off their March 2009 lows, investors face uncertainty when investing solely in equity markets especially when it comes to their retirement portfolios. This article addresses the issue of stress testing your retirement income plan.  I’ve written about this numerous times but it bears repeating especially in this environment.  It’s time to take a serious look at the big picture.

Fewer and fewer Canadians have defined-benefit pension plans at work. Companies have opted to go to defined-contribution pension plans to remove their liability for pensioners in the future. Now it’s your responsibility to look after the money and make the best decision for yourself. Do you have a plan?  If yes, does it answer the following questions?

• Do I have enough money to retire?
• How long will my money last?
• When can I retire?
• How much do I need to save for my retirement?
• Do I need a life annuity?
• What is my optimum asset mix?

As a financial planner, I use the Otar Retirement Calculator to “stress test” a client’s retirement income plan. The basic steps are as follows.

Step 1: Determine your annual withdrawal rate (WR) in retirement.

Step 2: Determine the sustainable withdrawal rate (SWR) for your retirement income plan. This is the maximum amount you can withdraw each year and not run the portfolio out of money.

Step 3: Determine the annuity rate (AR) i.e. how much can an annuity pay you annually for life.

From that a “Zone Analysis” is performed. Quite simply it would be great if everyone were in the green zone meaning their annual withdrawal (WR) was below the sustainable withdrawal rate (SWR). Below is an example of a zone analysis.

The Sustainable Withdrawal Rate - Green, Reg and Gray Zones

The Sustainable Withdrawal Rate – Green, Reg and Gray Zones

If a client isn’t in the green zone then further planning alternatives need to be explored.

More information on the Otar Retirement Calculator and the Zone Strategies can be found at www.retirementoptimizer.com.


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