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Are you aware of the most common retirement planning mistakes? When it
comes to accumulating a retirement nest egg, you're probably guilty of
making the following three mistakes:
- You started saving too late.
- You're saving too little each year.
- You're investing too conservatively.
The result - the compound effect of these three mistakes will have a
significant effect on the outcome of your retirement plan.
So let's assume you decide to make amends and start planning seriously
for retirement. What retirement planning questions should you ask your
financial advisor? The following four key questions are a good starting
point.
1. What assumptions and factors will a financial advisor consider when
developing my retirement plan?
Your financial advisor must make certain assumptions about "controllable"
and "uncontrollable" factors when developing your retirement plan.
Controllable factors: These are factors over which you have
significant control, and include the amount of your annual retirement
savings, your portfolio's asset allocation, your desired retirement
Lifestyle, and your retirement date.
Uncontrollable factors: These are factors over which you have
minimal control and include your life expectancy, portfolio returns,
inflation and income tax rates. Ideally, conservative estimates should
be used for each of these uncontrollable factors, since your retirement
planning period may be quite lengthy (after all, you may be retired
for a longer period than you were working!).
Note that a change in any of these factors, such as lower investment
returns and/or higher income taxes, can have a dramatic effect
on the outcome of your retirement plan.
Your retirement plan is dynamic and you should revisit it annually
with your financial advisor. This review should ensure that the assumptions
remain realistic, and that your plan is on track and you are moving toward
your desired retirement objective.
2. What are the major implications if I retire earlier than planned?
It is essential to understand the implications of retiring earlier than
planned, since a number of factors can compound and dramatically change
the outcome of your plan. For example, retiring five years earlier - at
age 60 compared to a "normal" retirement age of 65 - has three key consequences:
Decreased accumulation period: First, retiring five years early
will result in five fewer years to accumulate your nest egg. Once you're
retired, you will likely not have additional annual retirement savings,
and there will be less growth of your existing investment assets.
Reduced pension income: Second, both government and employer
pension amounts will likely be reduced if you retire prior to the "normal"
retirement age (typically 65). Your pension income will be reduced for
each year prior to age 65, since you will now receive the pension
income for a longer retirement period.
Increased retirement period: Third, you will have to fund a
longer retirement period and accumulate additional capital prior
to retirement, to provide for five extra years of retirement expenses.
The effect of five years on the outcome of your retirement plan can be
significant if the above three factors are combined. Ideally, it is best
to assess at least two scenarios to develop a workable retirement plan.
For example, ask your financial advisor to compare the plan outcomes if
you retire at age 60 compared to age 65 - the difference will likely be
a real eye opener!
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