Understanding the financial risks related to retirement

From a financial standpoint, retirement is probably the period during which you are the most vulnerable. The financial risks related to retirement are often unrecognized, misunderstood or underestimated. Yet, they are not exclusive to retirement. However, the solutions available in retirement, to compensate for not having enough income for example, are much more limited.

What are the main financial risks?

Managing risks

Your ability to manage these different risks will depend on 3 elements:

Financial planning of your retirement

Today, the basic income provided under public retirement plans from the Government of Canada and the Gouvernement du Québec is not sufficient to ensure that a worker with average earnings can maintain his or her standard of living once he or she retires. Financial planning is therefore a must in order to determine the savings you need to accumulate while you are still working. It should also be done regularly. Proper financial planning is your best asset to ensure an adequate level of income throughout your retirement and to be able to better manage the financial risks associated with it.

Planning your withdrawals

Financially preparing for retirement is also knowing how to withdraw your money once you have retired. It is called withdrawal. Clear financial goals and good investments are essential, but a good withdrawal strategy is equally important and can have a direct impact on your income throughout retirement. Each savings vehicle has its distinctive features in terms of when to invest and withdraw income. You need to know the features and plan accordingly to avoid having your savings vanish in taxes, for example. The different sources of government income also have their characteristics and each financial situation requires careful thought and good planning.

Balance sheet and annual budget

To evaluate your financial situation, you must carry out regular financial assessments in order to find your cost of living. When you retire, preparing a balance sheet and an annual budget will allow you to fully understand your situation and revise your withdrawal strategy as needed. Ultimately, you will be able to better manage the various financial risks related to retirement.

Good financial planning that includes a withdrawal strategy is your best asset to ensure adequate income throughout retirement and to prevent the financial risks related to it.

The following are other ideas on how to better manage financial risks

  • Postponing payment of the retirement pension under the Québec Pension Plan is one of the most effective ways to ensure a higher income until your death and to therefore have the best tools to face financial risks.
  • Working longer allows you to save enough to have peace of mind.
  • Consulting a financial planning specialist, whether it is to prepare for your retirement or to do your regular assessment so that he or she can help you better manage the financial risks related to retirement.
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