The importance of a savvy financial advisor to help prepare you for retirement is paramount. This up-close & personal interview is full of helpful tips to prepare for retirement and how to manage your finances once you get there.
What’s the magic number that will launch you into an easy and worry-free retirement? I am sure we all discovered early in our careers (upon minimal investigation) that public pension funds weren’t going to cut it. Instead, it would require a significant boost and steady stream of savings throughout our earning years to reach our retirement goals. Navigating this world to financial freedom is usually best left with the experts who can make sense of the dollars and cents and advise how best to invest your nest egg for optimum results. In this Up-Close & Personal interview, we speak with seasoned financial advisor, Adam McHenry, who is one of our trusted partners and our go-to financial expert.
In this Q&A, we explore the fiscal landscape of retirement prepping: the savings, the investments, inflation, the all-important budget, etc. In other words, solid financial planning is key to building future financial health for your retirement years. Money isn’t everything but it does offer some peace of mind that will make this major life transition easier. Ultimately, we all seek the freedom that getting your financial ducks in a row offers. It will set the wheels in motion towards the downsizing lifestyle you crave, and when done right, with some extra money in the bank.
Up-Close & Personal with Adam McHenry
Transitions Realty: Whether you started saving early, or later in life, have a company pension or are self-employed, every scenario may play out differently, depending on where you live and how you want to live. Generally, how much money do you need to retire?
Adam McHenry: We need to complete some simple math to determine your magic retirement savings number. The math works like this, you take your employment income while working in pre-retirement and multiply by an age factor based on your current age. Factors for pre-retirees that are in their 50s is 7 and for pre-retirees in their 60s is 9.
For example, Karen is 55 years old and is planning to retire at age 65, she has employment income of $100,000 she will earn until she is 65. Karen’s magic retirement number is $100,000 multiplied by her age factor, which is 7x. As a result, Karen should have current savings of $700,000 ($100,000 x 7 = $700,000) to be on pace to retire while maintaining her pre-retirement lifestyle in retirement.
Transitions Realty: Will I run out of money in retirement? How does inflation affect my retirement savings?
Adam McHenry: If you have a solid financial plan in place that is customized to your own unique situation with the help of a financial professional, then the odds of you running out of money in retirement is significantly reduced. The risk cannot be completely eliminated, because that is determined in the future and the future is uncertain. However, it can be managed and that is where working with a financial professional to guide you along your pre-retirement and retirement years can be very valuable. By putting a financial plan in place for you, your financial professional can help point out significant risks to your retirement and how those risks can be mitigated.
For instance, and to also answer your second question, inflation is likely the largest risk for many retirees over their retirement. To understand the impact that inflation can have on your retirement, look no further than your local grocery store. Reflecting on personal experience and according to Canada’s Food Price Report, Canadians in 2021 will pay about $695 more than in 2020, an increase of 5% year-over-year. The bottom line is that inflation increases the risk of a retiree running out of money in retirement because your lifestyle costs more each year, while your retirement income may not.
Your financial professional can help you mitigate the risk of ongoing inflation and its impact on your retirement savings and lifestyle, by recommending investments or strategies that provide inflation protection. For instance, stocks are a good inflation mitigator as the stock market and its components are a representation of the economy, which inflation is related to as well. As a result, your retirement savings that invests a portion of money in common stocks may track inflation better and protect your lifestyle by helping grow your retirement income alongside annual inflation.
Transitions Realty: How can I boost my retirement income? For instance, is it advisable to take on a small mortgage for a commercial or residential property, and have rent cover your main expenses until you pay down the mortgage in order to have a property rental income stream? Or are there other risk-free suggestions?
Adam McHenry: Although real estate markets have been a tremendous source of wealth for many Canadians over the years and especially recently, believe it or not, real estate returns are not risk-free. In fact, typical real estate transactions use borrowed money (mortgage) to finance the home or condo purchase. As a result, the risk is increased because you are using other people’s money (the banks via a mortgage) to invest in the real estate market that is not guaranteed. (i.e. it can go down!).
- More importantly, even if the expectation is that real estate returns will continue to move higher, becoming a landlord is not for everyone. If your idea of retirement is to relax and not have to answer to any work obligations, then investing in a rental property may not be the best fit with your personality, despite the possibility of a positive financial experience.
- The ability to invest your savings to grow your wealth is a key requirement for Canadians to achieve their retirement goals. Given that today’s bank savings rates are close to nil due to historically low interest rates, Canadians will likely need to explore other options outside of guaranteed investments (risk-free). In so doing, they will need to be comfortable with risk.
- The ability to invest your savings to grow your wealth is a key requirement for Canadians to achieve their retirement goals. Given that today’s bank savings rates are close to nil due to historically low interest rates, Canadians will likely need to explore other options outside of guaranteed investments (risk-free). In so doing, they will need to be comfortable with risk.
Transitions Realty: We keep hearing about diversifying your financial portfolio. Quite simply, how should you invest your retirement savings?
Adam McHenry: Although we like to believe we can predict the future, we must accept that uncertainty is a part of the investing process, so with this realization you should spread out your investment risk to accommodate various scenarios. One way to achieve this is by owning stocks in different asset classes that are thus exposed to different economic influence, also known as “diversifying”.
- Treating your investments like a horse race, where you are trying to pick the winner every time, typically leads to suboptimal outcomes. Instead, investors typically have a mix of investments, called “diversification,” that helps them customize their investments (or “portfolio”) to be more in line with their specific risk tolerance.
- Should the market fall, the diversified investor is more able to stick to their investment strategy. This compared to the investor always trying to pick the winning stock (“horse”) but not able to tolerate the risk involved with that strategy. This typically leads to investors making poor decisions based on their emotions.
- There are two key factors that should dictate how aggressive (or risky) you should be with your savings: your ability to take risk (i.e. factual details about your finances), your willingness to take risk (i.e., your attitude toward risk and potential losses). When combined, these factors provide your “risk tolerance” (i.e. the amount of investment loss you can tolerate and not panic).
Transitions Realty: What’s the one piece of financial advice you would offer to people who are preparing to retire?
Adam McHenry: Health before wealth! Take care of yourself as best as possible, because without your health, you cannot enjoy your wealth.
