Planning for retirement income: Five key retirement factors

Planning for retirement starts with thinking about your retirement goals and how long you have to meet them. Here are five key factors you should consider:

#1. Longevity

Retirees need to plan for possible longer life expectancies: you could spend as much time in retirement as you did at work. You need to plan for this so you don’t outlive your savings.

#2. Asset allocation

With today’s longer retirements, you shouldn’t invest too conservatively too early. You need to ensure your savings continue to grow. The chart below illustrates three phases of asset allocation in your portfolio as you approach retirement: accumulation, transition and income.

#3. Inflation

Inflation reduces the purchasing power of your retirement savings. For example, an item purchased in 1993 for $100 would cost $156.21 in 2018.1

1 Source: Bank of Canada Inflation Calculator

#4. Withdrawal rate

If you withdraw funds too quickly and too early from your retirement savings plan, you could put yourself in danger of running out of money.

• The sustainable withdrawal rate is the estimated percentage of savings you’re able to withdraw each year throughout retirement without running out of money.
• As a rule of thumb, aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, and then adjust that amount every year for inflation.
• Your sustainable withdrawal rate will vary based on things you can’t control (like how long you live, inflation and market returns) and things you can (like your retirement age and investment mix).

One of the biggest factors that affects how much you can withdraw is how many years of retirement you plan to fund from your retirement savings. Say you plan on a retirement of 30 years, you invest in a balanced portfolio, and you want a high level of confidence that you won’t run out of money. Our research shows that historically, a 4.5% withdrawal rate would have been sustainable 90% of the time.
 

Past performance is no guarantee of future results. 812, 752, and 692 overlapping planning horizons were analyzed for 25-year, 30-year and 35-year scenarios, respectively. Monthly returns data were used, starting from January 1926 and ending at July 2018. The chart shows historical maximum sustainable withdrawal rates that produced a 90% success rate over various time periods since 1926. Hypothetical scenarios assume a balanced portfolio of 50% stocks, 40% bonds and 10% cash. Results are hypothetical and do not reflect actual investor experience. For illustrative purposes only.

#5. Health care

It’s important to understand what health care costs are not covered by government programs and, if needed, account for any of these costs in your planning.