Finance 3. Not figuring out the right withdrawal rate For anyone depending on their investment portfolio for a portion of their basic living expenses (as most retirees do), calculating an appropriate portfolio withdrawal rate is a critically important task. Failure to do so may not lead to immediate financial disaster but, over time, spending beyond your portfolio’s means could lead to considerable hardship. Over the years, many experts have given their opinions regarding how much retirees can reasonably withdraw from their portfolios without ever running out of capital; today, most of those experts agree that it’s somewhere in the neighbourhood of 4% of total portfolio value per year. But such advice is a general rule of thumb – determining the right withdrawal rate depends largely on your individual lifestyle needs, your longer-term goals and, of course, your personal risk tolerance. To make sure that you avoid this deadly sin, make sure to estimate your annual living expenses, then compare these to your expected sources of income in retirement. Figure out a reasonable rate of return for your portfolio and compare expenses to income. Then perform a number of “Monte Carlo” simulations to model out the impact of your anticipated withdrawal rate on your portfolio, given a number of market conditions. If the above advice leaves you scratching your head, it’s a good idea to talk to an experienced professional who can help you crunch the numbers and review your options. Sure, it’s a bit of work but, without that kind of detailed review, you could be taking a big gamble with your financial future. 4. Forgetting that ‘stuff’ happens At the start of this article, we spoke a little about mistakes – how every one of us will make at least a couple over the course of our lives. The same can be said for unfortunate circumstances. Whether it’s a leaky roof, a bum transmission, a broken leg, a family member who needs some help or a stock portfolio that takes a hit early in your retirement years, sooner or later, ‘stuff’ happens to everyone. When it does, you’ll need a safety net. If you don’t have one, you risk transforming difficulty into catastrophe. Some of us are fortunate enough (or frugal enough) that if a financial mishap or unexpected expense occurs, it won’t make a serious dent in our ability to fund our ongoing retirement. If that describes you, then please go ahead to the next point on this list. For everyone else, building a ‘just in case’ fund of easily accessible cash that can cover your basic living expenses for six months or longer if you’re faced with an emergency should be a top financial priority. Hopefully, you’ll never have to use your emergency fund. But even if you don’t, keeping that cash in a short-term GIC or high-interest savings account is a pretty attractive idea these days. With interest rates having risen from their decades-long lows, your emergency fund can earn a bit of a return while it’s sitting there as your safety net. 5. Believing the hype Let’s face it: the financial world can often seem like a big hype machine with hot tips, trendy investment strategies and ‘get in now before it’s too late’ types of ideas all over the place. It might be entertaining, but getting caught up in this hype machine can be a recipe for financial destruction. Unfortunately, our current media landscape of quick social media videos, Mad Moneytype talk shows and expert-of-the-month podcasts can all make it seem as if successful investing is a game or a gamble, rather than the rational, reasoned process that it really is. The most recent example of this phenomenon is with meme stocks – companies whose stock price has been driven up due to social media attention, online discussion and influencer speculation rather than their business fundamentals. If you’re quick enough, or lucky enough, some of these hyped-up ideas and industries can make you a lot of money. But the tables can turn incredibly quickly, and a phenomenal gain can rapidly turn into a catastrophic loss. Don’t let excitement lead your investment process. Sure, gambling on a hot tip, a market rumour, a no-revenue idea stock or ’the next big thing’ can be fun and, potentially, even profitable. But it is a fundamentally different enterprise than making an investment based on the careful study of an opportunity. Following the hype too often – or with too much of your money – leads to addiction. And like any addiction, it can make an absolute mess of your finances… and your life. 24 | www.snowbirds.org
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