For most Canadians, the days of guaranteed income for life are behind us. For better or worse, defined benefit plans seem to be a thing of the past.
If you’re lucky, your employer will offer you a matching contribution into an RRSP. For example, if you contribute 3% of your salary into the plan, your employer will match that 3% contribution.
This means that for most people, much of their retirement income will come from their investment portfolio.
There are benefits to this new reality in that you have more control over your retirement assets and how much you withdraw. It can also mean a larger estate for your beneficiaries.
However, one of the drawbacks is that many people will have to watch their portfolios drop in value as they start taking an income to fund their lifestyle. After spending most of their adult lives saving and seeing the value of their portfolio increase, this is a very difficult mental hurdle to overcome.
As far as I’m aware there is no magic pill to overcome this feeling, but there are steps you can take to mitigate it.
A retirement plan that projects the withdrawals into the future can provide much needed peace of mind and ease the transition.
With this plan in place, make sure your portfolio reflects your reality and if not, adjust accordingly. For some, that might mean reducing the volatility you will experience in your portfolio to protect that retirement income. For others it might mean reducing your expenses to make sure you have enough to last your lifetime.
At the very least, everyone should take the time to build a basic forecast with estimates that include a conservative rate of return and a realistic expense projection (in my experience, most people underestimate their expenses).
There are many other factors to consider in retirement including taxes, sequence of return risk, estate planning and more. If you start with the basic forecast you’re already on the right track.