Many of us look forward to retirement, but what retirement looks like can differ from person to person. An important first step in retirement planning is what we call a “visualization exercise” and it’s this tool that allows us to guide clients and prospects to the position they’d like to be in when they officially become a retiree.
The Visualization Exercise
Using a series of statements, individuals rank how strongly they agree with different scenarios allowing us to obtain a good understanding of what the ideal retirement would look like for their specific situation. Some examples include:
- The longevity of my retirement savings is a major concern to me.
- I plan to spend all my retirement savings over the course of my retirement.
- It is important that I leave something for my children.
Maybe you found yourself agreeing or disagreeing with the above statements – for many, this exercise tends to elicit some excellent conversation and emotion. We’ve heard various responses over the years, some of which you may relate to:
“My greatest fear is running out of money while still alive.”
“If I get sick, who will take care of me? I need to have a buffer to ensure that I can take care of escalating health care costs.”
“If I could plan it perfectly, I’d like to die having spent my last dollar.”
“I worked hard my entire life so that I can enjoy retirement. I don’t want to sacrifice enjoying retirement now just so that my kids can benefit.”
“It is important that we leave money for our children in a world that is more challenging than the one we have had the privilege of living in.”
“We have given our children an education and have helped them along the way; they know not to expect an inheritance.”
And what’s interesting is that we often have conflicting answers from couples where one would rather leave more money for children while the other would prefer to spend and enjoy retirement. This results in them having different asset levels that they choose to focus on. We call these focused asset levels “water-marks”.
Leaving More Behind: High-Water Mark
For some retirees, they’d prefer to leave something behind for their children and ensure their family is financially cared for once they are gone. Retirement for them is about spending as little as possible, preserving and even growing the portfolio. These individuals are more likely to be focused on the highest historical value that the portfolio has reached through market appreciation and trying to maintain that high-water mark. Often when we help these individuals plan for retirement, our focus shifts to estate planning, and we guide our clients on how they can transfer wealth to the next generation in a tax efficient manner.
Spending More in Retirement: Low-Water Mark
Other retirees choose to spend more in retirement – they’ve worked hard and want to enjoy the fruits of their labour. Their focus is on maximum income, rather than how much money is left behind for others. However, that individual should ensure that they understand the risk of taking too much income from their retirement portfolio and the potential of running out of money prematurely. Through our Retirement VIEW approach, we guide these individuals with a suggested maximum income and a minimum asset number to stay above as a means to ensure a higher probability of retirement success. This minimum asset number becomes their low-water mark – an asset level they shouldn’t fall below.
High-Water Mark vs. Low-Water Mark Example
Mr. Gupta (71 years old) and Mrs. Bouchard (72 years old) are a retired married couple who have $2.3 million in investments. They are both collecting Canada Pension Plan and Old Age Security Pensions which pay them each $21,963 per year. They have three adult children and four grandchildren.
Mr. Gupta wants to leave the full $2.3 million for the children and would prefer to live off the growth and income of the portfolio only. He is willing to live a more frugal retirement life and forego some bigger trips. He would be happy taking out $24,000 per year from the portfolio bringing them to $68,000 per year of pre-tax income. Mr. Gupta is a high-water mark individual. His focus in retirement is on ensuring the protection and growth of the $2.3 million portfolio. He will likely be more focused on ensuring a tax-efficient transfer of a sizeable estate to his children.
Mrs. Bouchard, on the other hand, would prefer to enjoy retirement rather than sacrifice today in order to leave a larger estate for the children. Among other things, she would like to travel and update their home. For her, spending around $80,000 after-tax per year seems more realistic. To fund this, they would need to withdraw closer to $45,000 before tax annually from the portfolio. Given their assets, this income would be possible. In fact, according to our calculations, as long as their assets remain above $1.636 million, they can continue to take those funds out of the portfolio and still have a high probability of not running out of money before age 95. Mrs. Bouchard is a low-water mark retiree. She will want to ensure that they maintain assets above the minimum required to have a high probability of not running out of money.
Ultimately, It’s Your Choice
Every individual has their unique preferences. What makes them happy or keeps them up at night will likely change over the course of their retirement. We have seen individuals who were high-water mark retirees, in their later ages, realize that their estate has continued to grow and, as a result, decide to take the entire family on larger trips or to start gifting money early to their children so that they could witness first-hand the enjoyment that their gifts provide.
The key to managing retirement plans is to understand motivation and concerns. It is also important to remain adaptable and to allow for both low-water mark and high-water mark retirees to enjoy their retirement while reducing their financial stress.
At Tall Oak Private Wealth, we help many clients plan for and enjoy retirement. Using our proprietary Retirement VIEW, we work side-by-side with our clients throughout their unique retirement lives to help build a retirement plan that’s custom-fit. Our ultimate goal is to relieve retirees of financial stress and answer the most important question they will face throughout that chapter: “Am I ok?”
If you would like to hear more about our Retirement VIEW, we would be more than happy to connect. Please click here to schedule a complimentary discovery call.
This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact Tall Oak Private Wealth of Raymond James Ltd., for individual financial advice based on your personal circumstances. Raymond James Ltd. – Member – Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
