How to make your retirement savings go farther and last longer

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If you are like most Canadians, the investment choices you make during your working years may have a significant impact on your retirement. But the importance of smart investing doesn’t end when you retire. In fact, post-retirement investing can have an even larger impact on your retirement well-being. There are two reasons why.

First, retirements are much longer now. Many Canadians are living well into their late 80s and 90s. At the same time, many are retiring, semi-retiring or switching to less remunerative pursuits earlier. So, those leaving full time work at age 60 or 65 must consider the potential for a retirement of 30 years or more. As a result, many will be investing for a longer time period after their retirement date than during their working years. 

Second, there is more money at stake. Hopefully your nest egg will grow as you approach retirement (assuming decent market conditions). Also, at some point you may receive a large cash infusion from an inheritance, from downsizing your residence, or selling a business. Or perhaps you have an employer RRSP or other plan that may be switched at retirement to a personal RRSP, LIRA or other registered account that you manage. 

Given increased longevity and relatively large portfolios, a modest increase in your investment rate of return during retirement can have a meaningful impact on financial well-being. If you are among the millions of Canadians who invest through mutual funds, your greatest opportunity to increase returns may be to reduce your costs. Consider the following simple example. 

When they retire at age 60, Nicole and Michael will have accumulated a combined $1 million in their RRSPs, which are invested in balanced mutual funds. They plan to withdraw $67,000 from their RRSPs annually. Let’s assume the mutual funds will produce an average return of 6% before charges of 2.25%, thereby providing a net annual return of 3.75%. At this rate, the RRSP will last until Nicole and Michael are age 83. 

If they were to switch to lower cost index ETFs, whether through the same advisor or a new one, and generate the same average 6% return before total charges of 1.25%, their net annual return would be 4.75%. This 1% extra net return would enable the couple to continue drawing $67,000 for an additional four years to age 87. 

Alternatively, if Nicole and Michael were to switch to DIY investing and buy balanced ETFs which produce the same average 6% return before charges of 0.25%, their net annual return would be 5.75% giving them a total of 12 additional years of $67,000 withdrawals to age 95. In total, a 2% reduction in costs would produce about $800,000 in added lifetime income assuming the same pre-fee return.

How long will your nest egg last?

Assume a $1 million nest egg invested at age 60, earning 6% before fees with annual withdrawals of $67,000

How can you determine whether you should reduce your investment costs in order to make your nest egg last longer? First, take some time to improve your knowledge of investment basics. The industry portrays investing as mysterious and complex, but it can be quite simple. Don’t be intimidated. You might even enjoy the learning experience and the increased confidence that comes with it! There are some great online sources like OSC’s Get Smarter About Money, BCSC’s InvestRight and this publication, as well as some excellent books focused on lower cost investing (one of my favourites is John Bogle’s Little Book of Common Sense Investing). 

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