How to Build Flexibility Into Your Retirement Plan
Soon-to-be retirees want a simple formula for making their retirement plan. There are hundreds of calculators that will crank out numbers showing how many years until you can retire, how much you need to save, and how long your money will last.
It’s a good place to start, but don’t stake your entire future on the results.
You spend decades preparing for a comfortable retirement, planning to spend time playing golf or travelling the world. But if a financial disaster strikes, like the current Covid-19 pandemic, those dreams may not translate into reality.
Unexpected financial crises that disrupt savings are far more common than you anticipate.
If your retirement plan only works as long as nothing goes seriously wrong, you are not properly prepared for retirement. It’s important to plan ahead. Knowing how you will handle certain crises can go a long way toward minimizing the financial fallout.
What kind of disruptions can detail a retirement plan?
Unexpected financial surprises can include:
- Lost income.
- Providing financial support to an adult family member.
- Paying significant health care costs for yourself or a family member.
- Divorce or loss of spouse.
- Investment underperformance, or investment fraud.
- Unanticipated major home repairs, especially after a natural disaster.
- Changes in tax rates and legislation.
Let’s look at three situations that can disrupt your financial plan.
1. Unpredicted early retirement
How would your retirement plan be impacted if you lost your job due to company downsizing? Do you have the marketability to find comparable employment elsewhere in a reasonable amount of time? Would you receive the same salary, or be forced to accept a lesser amount?
Lost income might be due to forced retirement for health reasons.
Not only would there be loss of income, you might have to dip into your savings earlier than expected. There could be expensive medical costs not covered by your provincial health plan.
2) Providing financial support to family members
People over the age of 50 have the opportunity to beef up their retirement accounts with additional contributions. But what if your child is forced to return home and/or requires financial support due to a job loss, divorce, or health crisis? There may not be room in the budget to make those catch-up contributions.
As life expectancies increase, aging parents may require some expensive medical support or long-term care.
A lot of people currently care for two generations of family members.
3) Investing challenges
Key investment objectives for retirees are income and preservation of capital. Liquidity is important. Growth as well.
Investment challenges facing retirees include:
- Uncertainty about longevity and future health issues.
- Low interest rates.
- Volatile equity markets.
- An abundance (too much?) of investor information that requires careful examining.
- Lack of confidence in ourselves and lack of trust in our advisors.
Bad financial decisions can reduce your retirement savings – making large withdrawals too early, suffering losses with bad investment choices and poor portfolio management.
Be mindful of get-rich-quick-schemes. Retirees and near-retirees are often targeted by scammers who prey on fears of not having enough saved.
Have a back-up plan
Most individuals should be able to have the retirement they envision. What could possibly go wrong?
First of all, when you’re doing your calculations, run some “what if” scenarios to see the impact on your cash flow, net worth and expenses. What’s the result of reducing, or eliminating, further contributions?
You may have to rethink your retirement strategy – your wants, wishes and goals – to come up with some acceptable alternatives.
What are some things you can do to build flexibility into your retirement plan?
- Revise your budget to stretch your dollars. You may have to cut out some lifestyle choices. What can you drop if you had to reduce your discretionary spending?
- Consider your insurance needs. Ensure you have adequate disability insurance.
- To reduce your housing expenses would you consider downsizing to a smaller home or rental, or move to a less expensive location?
- Could you work longer, or go back to work if necessary for the first few years – even part-time? Do you have the skills to start a business that could bring in some extra money – hobby, consulting, publishing?
- Identify other possible sources of income.
- Hold a stash of money in a liquid account that is specifically set aside for unexpected events that carry a financial impact. This can be anything from a job loss to your roof developing a major leak. The amount you save is largely dependent on your circumstances.
People tend to have a fixed idea of the way they want their lifestyle to be and are reluctant to make any changes in their lives to get there. But when financial disasters strike you need to be flexible enough to change the plan.
The bottom line
Our objective is to accumulate wealth during our working years that’s sufficient enough to generate an income stream in retirement that replaces our employment income.
We’re advised to have a goal, a detailed plan to achieve it and a willingness to commit to that plan.
But, life isn’t always a straight highway. There may be potholes and detours along the way and your retirement plan has to build some flexibility into it so you can make any necessary adjustments along the way.
You can’t just point yourself in the right direction and hope for the best.
“The knowledge that you have emerged wiser and stronger from setbacks means that you are, ever after, secure in your ability to survive.” J.K Rowling