Monday, 24 June 2013

Effective Retirement Planning is About Spending, Not Saving (And Sit Up Straight)

The point: planning for your retirement isn't just about your investments, although you can be forgiven for thinking it is. It involves exactly the same activities as planning for tomorrow, next week, and next month: active budgeting, debt elimination, robust savings, and - above all - flexibility.

You've figured out what you want out of life. You've got a handle on how much you spend, and what you need to cover your minimum expenses. You're reasonably certain of your retirement income from public and private pensions, and you've worked out how much you should save toward your long term goal of quitting your job and traveling the world. Or staying at your job until you die because you love it that much. Or whatever.


Now what?

Now, my friend, it's time to put all of this information to work for you.

I'm going to take a moment to make the argument that we in the financial planning industry have made the mistake of conflating "investment advice" with "financial planning", and I'll bet that you've had the same experience that I've had: you've gone to see an advisor, thinking you'll come out of the meeting with a clearer idea of what your future might look like, and some immediate actions you can take to get closer to it.

Instead, you've left the meeting with some net worth printouts, a market forecast report that regurgitates what the resident market experts think is going to happen in the next six months, and a new mutual fund, and - when pressed to explain how that forecast or those funds in particular will help you achieve your goals - you're a little fuzzy on the details.

How you invest will impact how fast and how reliably your money will grow. But - and here's the kicker - no one can guarantee either the speed or the volatility of your returns, and those future returns - plus inflation, and your health - are the pieces of your retirement puzzle that you have the least control over.

Since you don't have a crystal ball that will tell you how efficiently your money will grow or if you'll experience some financial catastrophe or when exactly you'll die, the only sensible course of action is to make the best choices in the areas you do control. 

What you have control over is how much money you make, how much of it you spend, how much of it you save, and how much debt you're in. Any one of those things can impact your bottom line at retirement more powerfully than those things you can't control.

Think back to the fun you had with retirement calculators yesterday. Now, because I have no idea what your ultimate goals are, what follows isn't going to be specific to you, except by sheer coincidence, but the thought process will be the same.

Bare Bones
Imagine the bare-bones scenario: work until you're eligible for your private pension, draw your OAS and CPP entitlements, and cover the rest of your necessary expenses with your savings. The calculators will all have given you slightly (sometimes wildly) different numbers to save to make up the difference: can you save that much? That's the benchmark.

Best Case Scenario
If you're already saving that much, or can pretty easily find that money in your budget, then you can set your sights higher - actually, lower - what if you take early retirement at 60, collect your reduced CPP and wait until 67 for OAS? How much more would you have to save then?

Even Better Than Best
If that's easy to accomplish, go lower. How much money would you need to save to be financially independent at 55? 50? Years before you're eligible to collect a dime from anyone else? That calculation is a bit trickier, because it's got more moving parts: you need a sum that will generate enough income on its own, and that will last long enough to adequately supplement your pension when you do take it.

Uh-Oh. Belt-Tightening Time
What if the amount you need to save even to retire at age 67, or 70, or even 75 is out of reach? Remember what you can control: how much money you make, how much of it you spend, how much of it you save, and how much debt you're in.
 
Change any one of these moving targets, and it affects the other three, so if you want to be able to save more money, revisit step 3½ of your budget work in this post and start cutting your spending, ruthlessly if you have to.

I am utterly convinced that if you find yourself unable to save enough for a bare-bones, necessities-only retirement then any amount of tampering with your investments won't make a difference. Your only course of action is to address the reasons you can't save, and your only way to figure out why you can't save is to examine your spending.

I know. Here we are, back where we started, talking about the most unsexy part of personal finance: budgets. Even the word is ugly, which is why we financial planners (the ones who actually talk about spending, that is) like to tart it up by calling it a "spending plan".

But here's the truth: if you have the kind of income most regular Canadians do, and the kind of mortgage payments and debt loads, then unless you can ruthlessly control your spending you will only save for a comfortable retirement by going into debt. It won't look like you're putting your RRSP or TFSA contributions on your credit card or line of credit, but that's what the net effect will be.

---

Finally. The end of the retirement planning series. If you're new to the series, you can find the preceding posts here:
Related Posts Plugin for WordPress, Blogger...
Fees | Privacy | What to Expect
© Spring Personal Finance 410 Bay Street, Gravenhurst, Ontario, P1P 1G9. All Rights Reserved.
Sandi Martin is a fee only financial planner who specializes in business and personal budgeting, investment advice, and debt management strategies.
Telephone, internet, evening, and weekend appointments are available to clients across Canada.