It is important to thoroughly plan for retirement; any mistakes can mean you run out of money in what should be a peaceful, carefree time. There are a number of things dentists can take into account when retirement planning: unexpected issues, inflation, expenditure, and many other factors. This article will cover some common things dentists forget when planning for their retirement.
Calculating How Many Years Are Left to Build a Retirement Plan
The earlier you start your retirement planning, the more successful it will be. The problem is that most people don’t see the value in saving for retirement. However, saving early gives people the power to use compound returns to maximize their retirement nest egg.
Let’s use two different types of investors. The first investor starts saving for retirement at 21 and the other person starts saving for retirement at 31. The person at 21 allocates $500 a month for retirement while the person at 31 also allocates $500 for retirement. Both investors place their retirement money in an investment which returns an average of 5% per year. Here is how much each investor has when they turn 65 years of age.
- The investor who started at 21 has $962,054
- The investor who started at 31 has $536,785
As you can see, the investor at 21 has over $400,000 more for retirement while starting to contribute 10 years earlier than the 31-year-old investor. That is the power of starting to save early for retirement.
A successful retirement plan requires enough time to build up your retirement nest egg and investments. The amount of time you have left before retirement will affect how much you need to pay into the retirement fund. These investments will be managed by a professional investment advisor. Your advisor will recommend where to invest the money depending on your risk tolerance and the amount of time you have to build your retirement fund.
Accounting for Inflation
Inflation increases the cost of living by approximately 2-3% every year. Some medical costs can even increase by more than that on a yearly basis. Many people forget to account for inflation when they are calculating how much they will need for their retirement. The higher cost of living will leave them without sufficient retirement savings.
By building a diversified portfolio with the appropriate amount of equities and fixed income, your portfolio can potentially grow at a faster rate than inflation and help build wealth. Historically speaking, equities have delivered higher rates of return than other asset classes over time.
In this era of low interest rates, it is important to incorporate strategies that are designed to help the growth of your investments outpace inflation.
Accounting for Taxes
Your retirement fund will be taxed at some point, whether it is when you withdraw the money or when you make transactions in your investment fund. If you forget to account for the taxes, it can mean the difference between a comfortable retirement and running out of money.
Taking home more income in retirement can make all the difference in the type of lifestyle you get to enjoy. One way to keep more of your income is to minimize the taxes you pay. Here are 5 tax saving strategies to ask a professional about if you are retiring or getting close:
- Contribute to a Spousal Registered Retirement Savings Plan (RRSP)
- Split pension income with your spouse or partner
- Withdraw your assets in the right order
- Use your extra assets wisely
- Keep contributing to your Tax-Free Savings Account (TFSA)
Accounting for Declining Health
Many people require increased medical care once they retire, whether it is additional checkups, or the cost of serious health problems, these costs can add up quickly. No one wants to think about declining health or needing care in retirement, but it’s smart to plan for it just in case.
Retirees do not set aside enough money or consider how other changes brought on by aging might affect their lives. If you suffer a major setback or require home health care, it can be difficult to find the money in retirement. If possible, factor in a little bit extra for medical care.
Also, you may want to consider purchasing long-term care insurance to further future proof yourself against failing health.
Your Budget for Retirement
Calculate how much you will need per month to live comfortably in retirement. How much would you expect to spend on accommodation, transport, medical expenses, and food?
There are a number of free tools available online that can help you with your budgeting.
These costs should be discussed with your partner so you can compare your ideas of what retirement will look like. Once you have a monthly budget, account for the taxes and inflation as per the above two points.
Your Current Income
When calculating how much you can invest into your retirement fund, you need to take a realistic look at your income source. How much can you afford to invest while also accounting for emergencies or economic downturn? Ideally, you will want to apply at least 10% to your retirement. Remember that if you open an RRSP (Registered Retirement Savings Plan), the money that you contribute into the RRSP is tax deferred. That means that you don’t have to pay taxes on that money until you take it out at retirement. Consider your joint income with your partner and what works best for both of you.
Check On Your Retirement Account
Creating a strong retirement investment plan is the first step, maintaining your strong retirement investment plan is the second. Check your online account regularly and keep in touch with your investment advisor to see how your portfolio is performing. Depending on economic circumstances, your investment strategy may need a few adjustments over time.
The most important thing is to maintain your retirement fund contributions to ensure your desired outcome. You should create a strict funding strategy rather than relying on casual contributions. Meet with your investment adviser every year or two to check if you are on track to your desired results.
This has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, investment advice, tax, legal or accounting advice. The views expressed are those of the author and writer only. Please seek appropriate professional advice based on your personal circumstances. Investments are provided through Worldsource Securities Inc. Access to insurance products and services can be facilitated upon request.
About the Author
Jordan Schaffran is a Wealth Advisor at Silver Cedar Wealth Management, helping dentists achieve important financial milestones. He provides independent, forward-thinking advice that aligns with clients’ objectives and offers a holistic approach to their wealth management needs. To contact Jordan and discuss your wealth management goals, email firstname.lastname@example.org.