A sound retirement planning guide must include realistic goals, and practical decisions

If you’re heading into retirement and are short of money, you should still aim for safer investments, rather than taking one last gamble.

But above all, we recommend that you base your investing for retirement on a sound financial plan. If you’re looking for a retirement planning guide, continue reading our recommendations below.

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Retirement planning guide: Four key factors to consider when investing for retirement

A successful retirement begins with a successful retirement income strategy. One of the things that investors of all ages fear is that they won’t have a good financial plan in place so that they have enough retirement income to live on once they’ve stopped working.

Your retirement plan should address the following factors to ensure that your retirement investing generates enough income in retirement:

1. How much you expect to save prior to retirement;
2. The return you expect on your savings;
3. How much of that return you’ll have left after taxes;
4. How much retirement income you’ll need once you’ve left the workforce.

Retirement investing strategies to avoid

Stock Options: Stock options are not a smart idea if you’re headed into retirement. Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. What’s more, every trade costs you money in “slippage,” or the difference between the bid and the ask price. With options, this difference is larger than it is with stocks.

Junior mining stocks: Junior mining stocks are highly speculative, and are apt to cost you money. Another reason why junior mines are risky is that it’s relatively cheap and easy to launch an exploration program and sell stock to the public. So the junior mine’s promotion business attracts more than its share of unscrupulous operators and stock promoters. Putting your savings into the type of business that has a million to one chance of striking it rich is not a retirement investment strategy, it’s gambling.

Penny stocks: Penny stocks are cheap and that’s why many novice investors think they make great investments when they don’t have a lot of money. Most penny stocks are over-hyped. Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests. If you’re headed to retirement, stay away from penny stocks.

Straightforward retirement planning advice: Learn what you can do without

The second solution is something you should begin before you retire. You start by doing a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits.

For instance, a friend decided years ago that he could no longer afford to smoke cigarettes in retirement, but he couldn’t bear the thought of quitting. So he compromised with himself: he quit smoking what he referred to as “tailor-mades”, and switched to “roll-your-owns” (which were less heavily taxed and way cheaper than ready-made cigarettes).

The rigmarole of rolling his own immediately led him to increase the time between cigarettes, and this cut down his total nicotine intake. Eventually he quit smoking altogether, after having tried and failed many times during his working years.

Smoking is less common today, of course. But cutting out fast food can save the average Canadian anywhere from hundreds to thousands of dollars a year. In retirement, you’ll have time for a cooking class or two, and soon you’ll be able to cook better-tasting and healthier food than you can buy at any fast-food chain. The cost difference between home cooking and fast food can be substantial, and it’s like tax-free income.

Stick with conservative estimates as part of your retirement planning guide

As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning—5% a year, say — to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

Has our retirement planning guide been helpful to you? Are you already using some of the strategies listed? Share your thoughts with us in the comments.