Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing, including retirement planning. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Tip of the week: “Retirement planning calls for realistic calculations.”

Suppose you’re 50 and want to retire at 65. You have $200,000 in your RRSP, and expect to add $15,000 yearly for the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.

• What to expect. Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For retirement planning, let’s assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.
• Income and outgo. If you continue to earn 6% a year, and you withdraw $50,964 a year (6% of the $849,400 in your RRSP), you can avoid dipping into capital until your mid-70s, when RRIF rules require a larger withdrawal.

If you take money out faster, or earn lower returns, you’ll run out of money. If you withdraw $90,000 a year while earning 6%, your money will last just over 13 years. If you earn 5% but withdraw $90,000 a year, you’ll run out of money in just over 12 years.

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• Beware the vicious circle. Some investors deal with retirement planning figures like these by seeking higher returns in riskier investments, such as gold and silver stocks. In years when these volatile investments lose money, these investors will then have less capital for the following year. This may lead to a vicious circle of lower income and shrinking capital.

Investment opinion: Instead of taking on extra risk, take the safe route: enhance your retirement planning by saving more now, working longer, or planning to spend less. Retirement leaves you with lots of free time, and filling it costs money. But postponing retirement, or working part-time as long as you’re able, can pay off in higher current income, more contentment and greater long-term security.

Next Wednesday, December 8, 2010, Investor Toolkit will look at the ins and outs of futures trading.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

*Check your math. There are many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site (www.bankofcanada.ca/en/rates/investment.html).