If you're wondering whether your savings will provide enough income to retire on, you should consider two factors: your future financial needs and the return on your investments over the years.
This last aspect is related to your investor profile, in that you have to decide how much risk you're willing to tolerate in exchange for potentially high returns.
A Realistic Picture
For a closer look, go to the I'd Like to Assess My Needs section of the Desjardins Financial Security Web site, which features, among other things, a simulator specially designed to help you plan your retirement.
This calculator differs from other similar tools in that it gives investors a realistic picture of potential returns on various RRSP portfolios and their attendant risks.
Often, calculations are based on average returns for different investor profiles. However, the prospect of obtaining a 12% rate of return (ROR) with an aggressive portfolio may cause investors to overlook the risks involved.
The DFS calculator, on the other hand, shows you the probabilities of obtaining your desired retirement income while considering of possible market behaviour. This puts you in a better position to determine your own degree of risk aversion.
Consider this Scenario
William would like to retire at 55 with a comfortable annual income. To do this, he needs to accumulate a certain amount of capital.
How much will he need at the end of his working life to generate the required annual pension income? Based on the parameters William enters (number of years until retirement, capital currently available, anticipated savings by retirement, assumed inflation rate, desired rate of return, etc.) all calculators will answer this question.
Standard Calculator
William expects a 9% ROR and is hoping for a retirement income of $40,000 per year. While a standard calculator would tell him he'd have to accumulate $840,652 to reach these goals, it would not explain the risks he'd have to incur.
To obtain a 9% ROR, William would have to invest in securities that may be extremely volatile, as demonstrated by the market ups and downs that have characterized the past few years. The greater the anticipated rate of return, the greater the risk!
The Desjardins Financial Security Simulator-A More Accurate Tool
The DFS Calculator, on the other hand, not only indicates the capital needed upon retirement, but considers positive and negative market fluctuations and the range of income to expect.
Based on the data given above, William's annual retirement income would indeed be $40,000 if the average ROR were 9%, but it might be anywhere from $20,000 to $100,000, depending on how his investments actually perform.
Thanks to this information, William will be able to make an enlightened decision: he can lower his risks and accept a lower ROR (which he can offset by investing more money or increasing the frequency of his contributions); maintain his investment strategy; or even take on a greater amount of risk in hopes of obtaining a higher rate of return. Because the DFS Calculator explains how risk affects investments, William won't be in for any unpleasant surprises.
If William wants to be more conservative and aim at an average ROR of 7%, most retirement calculators will estimate an annual retirement income of $32,000. The DFS Calculator will estimate, with 95% accuracy, that the figure will fall somewhere between $21,000 and $47,000.
Taking ROR Fluctuations Into Account
The greater the difference between the best- and worst-case scenarios, the more risk investors assume. Most calculators do not show that there can be fluctuations in the rate of return.
Here are the lowest RORs William can expect from his portfolio, according to the DFS Calculator:
An Essential Tool
This kind of information is critical in helping people like William fully understand the risk and return potential of their investments.
By looking at both short-term and long-term consequences of various options, the DFS Calculator helps users determine which portfolio "feels" right.
The Calculator also provides suggestions for effective asset allocation, along with a list of products to help them meet their goals and reduce risk.
Thanks to its revolutionary Retirement Calculator, DFS shows users how to determine their risk tolerance, offers information on what expected returns should be, provides a choice of investment strategies, and gives a comprehensive review of all relevant sources of retirement income.