The Savings Crunch: How to use LifeScape to help in your financial decision-making by Nancy Conroy, Creator of LifeScape.

These are tough times, especially if you are getting close to your desired retirement date and your retirement savings have declined due to the global economic slowdown. Certainly the events of the past several months will require many pre-retirees to reassess their retirement plans.

What is the best way to respond to this challenging situation? Advice abounds but no one can predict the future and this makes it twice as difficult to know what to do. Also, everyone’s situation is different so the right strategy for you may not be the best strategy for the next person. This article explores how to assess your own situation in order to develop a strategy that best responds to your own realities and suggests how you can use LifeScape, the retirement planning web site web, to assist you. The latest version of LifeScape includes information on the new Tax Free Savings Account (TSFA) that may be a tool you can use as part of your strategy.

Taking Stock

It is critical in times of such as these to face the reality, not avoid thinking about it, and only then decide how best to react. Doing so can help you to avoid panicking and then making the wrong choices. It can also be very helpful to seek professional advice from a financial planner.

There are several aspects of your retirement plan that need to be considered such as how much your retirement income will be affected by the current downturn in capital markets, how much money you will need in retirement, how much money you want in retirement, and what flexibility you have in terms of your fixed and variable expenses. LifeScape, with its many financial calculators, has been specifically designed to assist you in doing this.

Retirement Income

If you haven’t already examined these financial issues, now is the time to make sure that you have a very good handle on exactly how much money you expect to have in retirement, given the impact of the current situation on your financial plan. You need to take into account not only retirement income from your pension, but also from Canada Pension, Old Age Security, other sources of retirement income and your savings as they stand now. There is an excellent link in LifeScape to a Retirement Income Calculator on the Canada Pension Plan web site that can help you do this.

If you have a spouse, it is also important to do the same exercise on his or her side of the ledger. This is necessary because you may be able to benefit from pension income splitting in retirement, and realize tax savings as a household. In the latest version of LifeScape there is information on the new Tax Free Savings Account; this is another tool that you might consider using as part of your savings strategy.

Retirement Expenses: Fixed and Variable

Now would also be a good time to try to anticipate what your retirement expenses are going to be, if you haven’t done so already. You can use LifeScape’s Retirement Expenses Calculator to help you to do this.

Some of your retirement expenses will be fixed expenses such as shelter-related costs, food, clothing, transportation and any other basics. They may also include education costs, if you are supporting children through university or expect to in the future. These are expenses for which we NEED income. Once these have been roughly identified, it is worth asking yourself if any of these important costs could be reduced.

Then you will have variable expenses. This is a very different category of expenses. These flow from what we WANT in retirement. For example, a large percentage of pre-retirees say they want to travel in retirement. If you are in this camp, then you need to put some rough numbers to your annual travel wants. Or perhaps you want to buy a second property, buy an RV, take courses, join a sports club, take up new hobbies, etc. What kind of price tag is associated with these WANTS? Your estimation of these expenses doesn’t have to be exact, but arriving at a rough number will help immensely in your assessment of how to adjust your retirement plan in the face of the current financial climate. As noted above, you can use LifeScape’s, Retirement Expenses Calculator to help you with anticipating your expenses, both fixed and variable.

Retirement Scenarios

Once you have a good handle on your expected retirement income and a rough idea of what your retirement needs and wants are, you can use LifeScape’s Disposable Income Calculator to determine whether there will be a deficit or surplus once you retire. You will also be much better equipped to make a rational judgment about your options for action and ultimately the best retirement strategy.

Scenario 1: Perhaps you will find that your anticipated retirement income will allow you to meet your fixed and most or all of your variable expenses. If this is the case, you can probably continue to target your desired retirement date and manage your investment savings accordingly. Your financial advisor can be helpful in advising you on how best to do this.

Scenario 2: If you find that your total retirement income, including savings, meets your fixed expenses in retirement, but not most of your variable expenses, then you have several options to consider. An obvious one is to adjust the timing of your retirement. Adding a few more years to your work life may increase your predictable retirement income from pension sources enough to at least cover some of your variable expenses. If you really want don’t want to change the timing of your retirement, then you could take a hard look at your fixed expenses and variable expenses and consider scaling them back. This could involve a change in housing, i.e. downsizing, moving to one car from two, or finding ways to live more frugally. It could also involve a shift in how you plan to spend your time in retirement, from activities that cost money to those that don’t. You could also consider working part time in retirement to help meet any anticipated shortfalls. This would be a good way to top up retirement income – perhaps to tide you over until the children have completed university, for example. By lowering your fixed and variable expenses in retirement, and possibly working part time in retirement, you may find that it would be possible to retire when you want to.

Scenario 3: If you find that your total retirement income is not going to meet your fixed expenses, let alone your variable expenses, in retirement, then postponing your retirement may be the best option. However, it would still be worthwhile to take a hard look at both your fixed and variable expenses to determine if there is any way to bring them down closer to your anticipated income in retirement. Having a solid savings strategy would also be advisable. It would also be particularly worthwhile to seek professional advice about your best options.

Conclusion

In times such as these, burying one’s head in the sand is really not an option. The current economic situation may make us feel helpless, but in fact we each have the ability to take charge of our own situation. So take a hard-nosed look at your retirement plans, using the tools in LifeScape to help you do this, consider the options, and then develop a strategy that will work for you.