Retire without FORO (fear of running out)

KEY TAKEAWAYS

• FORO stands for the fear of running out of money – it affects 59% of Canadians.

• Retirees who take a defensive position gain access to tax-free benefits to cover unexpected costs.

• A resilient financial plan can eliminate FORO and provide a lifetime of reliable income.

• FORO is overcome through a combination of investment and insurance strategies.

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A recent survey from CPP Investments found that nearly six in 10 Canadians (59%) worry about outliving their savings. The fear of running out is not uncommon. We hear and read about it a lot these days. But we believe that if you are 10 years from retirement, there are strategies you can put in place today to create a resilient, predictable retirement income, provide a financial backstop, and guarantee your loved ones a tax-free legacy.

Shifting from offence to defence

For most of your life, you’ve been an income earner and a saver. You’ve had a healthy relationship with market volatility because it worked in your favour. Before retirement, you could go on the offensive and hope for higher returns because time has always been on your side. That has been offered as a reasonable approach because markets do tend to go up over time. But not always. 

When you retire, you are no longer in the wealth accumulation phase of your life. You’ve moved to income distribution and wealth preservation. You become the steward of your family’s financial legacy. That means drawing an income, giving the kids a leg up here and there, paying for renovations, and covering unexpected medical expenses.

Predictability becomes very important because most of life’s major expenses don’t stop when you stop working. Sure, you’ll slowly spend less as you age, but you can’t escape the basic cost of living, and you probably want to live well.

So in advance of retirement, you should consider shifting to a defensive position, where you see volatility as something to be avoided, but don’t give up the potential for investment growth. Here’s how:

Step 1: Rethink your tolerance for risk in retirement

Retiring with the same mix of investments that helped you grow your wealth during the accumulation phase exposes you to the market's unpredictability—its ups, downs, and fluctuations. You’re playing offence, but you have no control over the battlefield.

Before you retire, you can start to rearrange your investments into groups that generate income at a lower risk level and with greater consistency. Your retirement asset mix can include a combination of fixed-income and equity investments so that you benefit from growth, but with less risk, and greater financial resilience. This can be achieved by including more pension-style assets, like the ones favoured by pension funds, institutions, and sovereign wealth funds, such as:

• Real estate – to generate returns not tied to the markets.

• Private lending – to create steady, reliable interest income.

• Infrastructure investments – to create consistent revenue streams.

These pension-style investments are not tied to stock market headlines or short-term volatility, so they do a better job of creating the consistency you’re striving for in retirement. Because you can rely on your investments to produce a reliable retirement income, you can draw down a consistent amount for as long as it’s needed.

Step 2: Put a backstop in place

You can spend your retirement income however you choose because the second part of a resilient retirement plan is a paid-up permanent life insurance policy.

If you’d like to learn more about why we call permanent life insurance the foundation of every resilient financial plan, check out this quick read or book 20 minutes for a quick chat.

The kind of permanent life insurance we recommend is called ‘participating whole life insurance’. It gets its name from the fact that it lets you participate in the insurance provider’s financial success. Here’s how permanent life insurance creates an invaluable financial backstop.

1. Guaranteed tax-free benefits

When you buy a permanent life insurance policy, your beneficiaries are guaranteed to receive a tax-free death benefit when you die. Knowing they are protected, you can spend your retirement more freely and worry less about how you’ll set up the next generation for success.

2. Access to the cash portion of your policy

The cash portion of a whole life insurance policy can be accessed through a policy loan, sometimes non-taxable and can be used for anything you want, such as:

• Tuition

• Renovations

• Medical expenses not covered by government plans

• Investments

• A down payment to give your kids a leg up

3. Policy dividends

Dividends from a participating whole life insurance are as good as cash. You can spend them, reinvest them, or use them to buy more coverage.

Putting it all together – the cure for FORO

Once you have a mixture of investments that produce consistent retirement income, you can stop worrying about the typical forces that erode wealth over time, such as inflation, taxes, market volatility, interest rates and illness.

Even if your income comes up short from time to time, you have access to tax-free cash through your whole life insurance policy, and you’ve guaranteed an inheritance for your loved ones.

Find out how to halt wealth erosion and keep more of what you earn

What you can do now before it’s too late

In our first meeting, we’ll show you how easy it is to move from offence to defence and start building a truly resilient financial plan as you edge closer to retirement. Book an appointment online or give us a shout at 905-361-2026.  

David Cooke is a Chartered Life Underwriter^® (CLU) and a Certified Financial Planner^® (CFP).