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A better way to manage your retirement

Nearly 66% of Canadian citizens who are nearing retirement are scared of running through their savings too soon. Unfortunately, not many of them seem to be doing much about it according to a recent survey conducted by the Canadian Institute of Actuaries. According to the survey, most of these people don’t even have a plan to fix this problem. To make matters worse, many financial advisors aren’t giving them a useful plan, according to a recent Russell Investments research paper.

The main reason for this is that most financial advisors are trained only to compute the total amount of assets their clients have, then keep those clients happy. Rather than truly spend time developing a good retirement strategy, most financial planners will instead steer their clients to financial products that generate the highest sales commissions for them.

In addition, many financial advisors don’t have a lot of real-world experience guiding older individuals and couples to meet their retirement income needs. Most of them will design a portfolio that will generate personal income for themselves and keep their clients happy in the short-term so that they continue to renew their contracts.

However, an increasing number of baby boomers are starting to enter the “de-accumulation” phase of their financial lives. This means that they will start withdrawing from the savings they’ve accumulated over their working years. Unlike the generations that came before them, however, baby boomers will have an entirely different set of challenges. One of the biggest challenges facing this group is the increased amount of time that they will spend in retirement. While a person who retired at age 65 half a century ago could expect to live for another 12 years, today it is common for a person retiring at that same age to live thirty years or more.
In order to plan for this, it’s necessary for advisors to change from an asset-only portfolio management outlook to a broad approach that predicts spending needs and retirement readiness. In order to do this, it is necessary to get away from the traditional model of investing money into stocks and bonds then using occasional withdrawals to create retirement income.

Instead, it makes sense to focus on three areas of concern. These include a low risk of outliving their assets, known as sustainability, a consistent income known as predictability, and some financial flexibility or liquidity. This means that advisors should focus less on the type of investments they are putting their clients into and more on how to manage the profits from these investments.

One way to do this is to compute the ratio of assets to liabilities, also called the funded ratio. This ratio helps retirees make an informed decision concerning how much they should spend. With this information, they can determine if they are really ready to leave work.

A ratio of 100 percent or more means that a client is in good shape to not outlive their retirement portfolio. A ratio under 100 percent, however, is a sign that the money a client has put aside is likely to run out to soon if they continue to withdraw at that rate.

This process can help advisors and clients manage their longevity risk. At the same time, it can provide retirees with a way to predict their income without having to lock up their capital in an annuity. By doing this calculation with a financial advisor, a potential retiree can plan his or her retirement. If the calculation indicates that he or she cannot withdraw as much as he or she needs, then the client can make a decision to either cut expenses or continue to work and save.

Michael Gritchie loves to be in charge of his money and always reads, studies, and improves his learning about all things concerning investing and money including foreign exchange trading, growing money, and personal finance from places like OANDA, Investopedia, and the abundance of personal finance sites available.

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