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  Retirement is about more than money, insists author Mike Drak. You need to get a handle on how you want to live

  Author of the article: Mike Drak, Special to Financial Post Publishing date: Jul 02, 2021 ? 9?hours ago ? 8 minute read ?

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  <img alt="Retirement is a major life event that needs to be planned for properly." class="featured-image__image" height="750" src="http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc3d4ed.jpg" srcset="http://111.com:33699/wp-content/uploads/2021/06/http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc3d4ed.jpg,

  https://smartcdn.prod.postmedia.digital/financialpost/wp-content/uploads/2021/07/vw0629retire.jpg?quality=90&strip=all&w=576 2x” width=”1000″/> Retirement is a major life event that needs to be planned for properly. Photo by Chloe Cushman/National Post illustration files

  Excerpted with permission from Retirement Heaven or Hell by Mike Drak.

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  Financial independence is a prerequisite for anyone contemplating a transition to retirement. It’s the point at which your basic (non-discretionary) living expenses are covered by your passive (non-work) income.

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  In other words, the amount of annual cash flow you require to keep a roof over your head, put food on the table, and pay for the basic necessities (heating, electricity, property taxes and other essential expenses) can be covered without you having to work to earn an income. The day you achieve financial independence is the day you no longer need to work in order to survive.

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  If you choose to continue working at this point — be it to give yourself a financial buffer, to finance specific retirement goals, or simply to stay challenged and engaged — then you are working because you want to, not because you have to. If you are unfamiliar with the idea, we refer you to our first book, Victory Lap Retirement, to gain a deeper understanding of this important concept.

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  As for financial planning for retirement, there are lots of excellent books out there to help you with the details, so we won’t go into too much depth here. This book focuses on the lifestyle planning piece, but there are some key financial planning points to consider.

  <img alt="" class="embedded-image__image lazyload" data-src="https://smartcdn.prod.postmedia.digital/financialpost/wp-content/uploads/2021/06/drakCover.jpeg?quality=90&strip=all&w=288" data-srcset="https://smartcdn.prod.postmedia.digital/financialpost/wp-content/uploads/2021/06/drakCover.jpeg?quality=90&strip=all&w=288,

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  To figure out how much money you will need to have saved to consider yourself financially independent and/or to be able to retire, you should have a detailed financial plan created by an accredited financial advisor or financial planner; but by itself that’s not enough, because financial planning fails without adequate lifestyle planning.

  You need to have a good handle on exactly what kind of life you want to live — what you want to do in retirement and how much it will cost you. Until you do that, you will never be sure you have enough money, and because of that uncertainty, you will always feel the need for a little more.

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  If you don’t have a good handle on how much money you will need in retirement, don’t feel bad, because you are not alone. Research has shown that 80 per cent of the American public has never taken the time to figure out how much money they’ll need to last through retirement and how much they must save. Until you do that, you are just guessing about how much money you will need, and many people guess wrong.

  People in the FIRE movement take this financial independence stuff seriously and try to achieve it as early in life as possible. (FIRE stands for the goal to have financial independence and retire early. I’m a proud member of this community, except I don’t believe in the RE part.)

  They use a general rule of thumb that’s common to the financial planning industry to determine when they can quit working, based on achieving a level of savings equivalent to twenty-five times your annual spend rate, net of government pensions and work pensions.

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  For example, if you believe that you can live comfortably on $60,000 a year, you would deduct from that amount the income you expect to receive from government pensions, say $15,000 annually. Therefore, you would need income of $45,000 from your own investments every year to finance your retirement lifestyle. And that would require retirement savings of $1,125,000 to maintain your financial independence over a 25-year retirement ($45,000 x 25 years=$1,125,000).

  The rule of thumb is derived from a concept called SWR (sustainable withdrawal rate), which states that a retiree can safely withdraw four per cent of their retirement investments plus inflation for the rest of their lives. If you have been following along, you will have noticed that the $45,000 you will be drawing out of savings for the first year is four per cent of the $1,125,000 you hold in retirement savings.

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  While the FIRE approach works for me, some of you might not be comfortable with it due to the high concentration in equities required to ensure that the four-per-cent rule works. At the end of the day, you need to pick an appropriate investing methodology that delivers what you need and lets you sleep at night.

  Everyone’s situation is different and so are people’s levels of risk tolerance, comfort with investing, and the cost of the lifestyle they envision for themselves in retirement. The point here is, you need to be very clear about your retirement goals and then put a financial plan in place to support them. Whether you choose to go the aggressive FIRE route or to retire closer to the traditional retirement age of 65, you still need to get a handle on how you want to live, what it will cost, and whether you will have enough income to finance your life beyond work.

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  Many people have a good understanding of the financial side but not so much on the lifestyle cost side. The best way of eliminating uncertainty is to monitor your spending for a year prior to retiring and add in the cost of any extras, such as trips or expensive hobbies, you might want to splurge on in retirement. FIRE or not, when you know exactly how much your annual retirement spend is and you’ve confirmed that you can stay within the four-per-cent withdrawal range, Bob’s your uncle.

  If by chance your financial plan falls short, you have two options: Either cut back on some of your expenses and some of the things you plan to do in retirement, or generate some active income through part-time work.

  My wife was forced to work from home during the COVID-19 pandemic, and I got a chance to see her in action dealing with her clients. One thing I noticed was that, early on when the markets were sharply declining, she wasn’t getting a lot of worried calls from her clients wondering what to do.

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  Rather, she was doing most of the calling, making sure her clients were alright and not overly stressed out about things. She had taught them well over the years, and not one client panicked and ran from the market; in fact, many were actively looking for bargains to pick up because, as smart investors know, there is nothing better than a good sale.

  It was hard to see the market take a sharp drop like it did during the pandemic. Some people felt like throwing up, watching their hard-earned retirement savings disappear right before their eyes. Without an advisor, they could have panicked and sold out, which would have been the worst thing to do. Watching the my wife in action got me thinking about how vulnerable some people really are and why, for some people, having the benefit of a trusted advisor makes sense.

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  Taking risk in the markets can be scary, but erring too far on the other side can be a problem too. Some people make the mistake of being too conservative in their investing, which lowers the returns earned on their portfolio. How your investments perform is what determines your monthly cash flow in retirement, and therefore playing it too safe can cost you large over time.

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  <img alt="If you're planning your own retirement, there are a number of common pitfalls to consider." class="lazyload" data-src="http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc52414.jpg" height="96" loading="lazy" src="http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc52414.jpg" srcset="http://111.com:33699/wp-content/uploads/2021/06/http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc52414.jpg,

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  <img alt="Planners are supposed to help people structure a retirement that could last well into their 90s, but there is a big difference between 90 and 100 when it comes to determining how far a client's savings will go." class="lazyload" data-src="http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc54a83.jpg" height="96" loading="lazy" src="http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc54a83.jpg" srcset="http://111.com:33699/wp-content/uploads/2021/06/http://www.svanusa.com/wp-content/uploads/2021/08/20210805174148-610c22dc54a83.jpg,

  https://smartcdn.prod.postmedia.digital/financialpost/wp-content/uploads/2021/01/vw0127life-expectancy.jpg?h=192&strip=all&quality=80 2x,

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  Retirement is a major life event that needs to be planned for properly. You need to figure out how best to turn your accumulated investments into retirement income, and you need to ensure that income lasts as long as you do. For many people, it makes sense to engage a trusted advisor, be it a financial planner or an investment advisor, when they are close to retiring. It’s comforting knowing that you have a trusted advisor in your corner who knows what they are doing, especially during a market meltdown.

  A trusted advisor will help you answer the big questions:

  Are you financially ready to retire? Do you know your number?How should you invest your retirement assets to ensure that you don’t outlive your money?When should you apply for Social Security/CPP?How can you fund any unanticipated medical costs?What’s the best strategy for withdrawing income from your retirement accounts in order to meet your spending needs and make your money last as long as possible? Story continues below This advertisement has not loaded yet, but your article continues below.

  As retirement goes on, other key lifestyle questions will appear, such as:

  Should you sell your house, rent an apartment, or move into a retirement home?Does a reverse mortgage make sense for you?How will you fund higher care costs later in life?

  Having a trusted sounding board, someone you can call for advice, is a big help when faced with questions like this, and it will help ensure that you come up with the right answers for you.

  One troubling thing I have heard about on more than one occasion from other advisors is that the person responsible for the banking/investing in the family would get sick and the spouse would have no clue where anything was or who to talk to. Passwords were missing along with original documentation, and there would be a mad scramble to put everything in order before it was too late.

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  Trying to get a lawyer/investment advisor/banker to attend a hospital room is not always an easy thing to do, and it causes a lot of stress for the surviving spouse and their kids who end up trying to help. Please do not let this happen to you.

  Bottom line: If you don’t understand investing or retirement planning and have no interest in learning, you should seek the help of a professional who knows this stuff inside and out.

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