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Cash-flow forecasting can give clarity needed for successful retirement 17 · Thursday, November 1, 2012 OAKVILLE BEAVER · www.insideHALTON.com T he danger of retirement planning is mistaking what you want with what you need. Our last two articles talked about the lessons individuals can learn from pension fund managers. The conclusion was that having a target rate of return is critical. A target rate of return is what you must earn so your investments grow enough to be able to adequately fund your retirement. In theory that will work -- however, from a behavioral perspective there is a significant pitfall. This comes from doing only half of the required retirement planning. One critical element of planning for retirement is determining your asset allocation. The biggest decision with asset allocation is how much to invest in riskier and volatile equities and how much to invest in bonds, which tend to have much lower volatility than equities, but also a lower expected return. Often investors will complete a questionnaire that tries to uncover how much risk they are willing to accept. That is a good start, but if that is the only method for determining risk, it can be misleading. Unless you do retirement cash flow forecasting, you are at risk of being wrong with your retirement planning and as a result will not be able to support your desired retirement income -- with that mistake goes your hope of a desired retirement lifestyle. Fortunately this is avoidable. Assume you completed a risk questionnaire and the conclusion is that you wanted a portfolio of 40 per cent equity and 60 per cent bonds. That is what would make you feel safe and avoid too much investment risk. The real risk is whether or not that asset mix will grow your portfolio enough to meet your retirement needs. That can only be determined by projecting future retirement needs and cash flows. Perhaps you are not wealthy enough to achieve your desired retirement cash flow and you need to increase your target return. Potentially you should adjust the equities from 40 to 60 per cent to get a larger return on investment. This is the trade-off between your desire for lower volatility investments and need for a higher return than can be expected given this desired portfolio. We will assume in this case you would consider splitting the difference and investing 50 per cent in equities and 50 per cent in bonds. A compromise between what you want and what you need. Does this mean you will miss achieving your desired retirement income? Not necessarily. Having done the retirement cash flow projections, you will know that there will be an expected short-fall and this knowledge will allow you to make other adjustments, which should be used to change the assumptions in the projected cash flow. Cash flow projections are your most valuable tool to allow you to forecast your financial future. Use that information to make intelligent decisions about achieving your retirement objectives. Several things could be changed. Dollars & Sense By Peter Watson You can increase your savings rate or extend your working career so you have more time to save with fewer retirement years to fund. Perhaps you could reduce how much you plan to spend, potentially reduce your income tax with proper tax planning or attempt to reduce your investment fees. For most people who are at least half way through their working years, we recommend projected retirement cash flows be done to help give the clarity needed to plan for a successful retirement. -- Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI. The best way to Cogeco Digital TV. enjoy it Over 6,000 On Demand movies and shows1 Awardwinning customer service2 TV & Internet that don't interfere with each other Up to 150 HD channels 3 Learn more at Cogeco.ca 1-800-780-3525 Shop at our store in Oakville Place Available to Burlington and Oakville customers. 1. Cogeco On Demand service is offered where the technology is available and for customers who meet the Cogeco On Demand access requirements. Cogeco offers the most titles in its territories. Access to some content may require a subscription to the TV package containing the associated digital channel. Channel availability may vary per region. 2. Cogeco call centres have won the "Highest Customer Satisfaction" award in the telecommunications / TV category awarded by the SQM (Service Quality Measurement) in 2007, 2008, 2010 and 2011. 3. Cogeco High Definition service and programming requires the purchase or rental of an HD receiver. The number of available HD channels may vary per region. HD channels are available with the subscription to the equivalent channels in Standard Definition.