These days, many investors who are approaching retirement worry that their retirement planning won’t generate enough income once they’ve stopped working.

(Our Successful Investor Wealth Management clients’ retirement planning goals are always one of our top considerations when we manage their portfolios. Click here to learn more about how you can profit from our portfolio management services.)

4 components of sound retirement planning

We recommend that you base your retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient income in retirement:

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

Most accountants or tax preparers can do the math for you, based on numbers you provide. Coming up with realistic numbers is the hard part. It depends on your personal preferences.

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For instance, a financial planner can give you some idea of what others are saving. But you should base your savings on the way you want to live, rather than on the averages. Your retirement planning also needs to be based on a realistic view of how much income you’ll need once you’ve stopped working. A key mistake is to underestimate how much it costs to fill up your new-found free time.

As for the tax structure, it keeps changing. But it’s safe to assume that you’ll pay a lower rate of tax on dividends and capital gains than on interest, and that you’ll generally pay taxes on capital gains only when you sell.

As for the return you expect, 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 — 6.5% a year, say — to allow for unforeseeable problems and setbacks.

2 practical ways to make sure you have enough money in retirement

Here are two other things you can do before you retire if you’re concerned you may not have sufficient funds. In addition to improving your finances, both can improve your quality of life in retirement:

• Work longer: Put off retiring from your current position, or continue to work part-time. Or, find full- or part-time work in another field. To start, this can solve a common problem that many retirees fail to foresee: how hard it can be, and how much it can cost, to fill up all the free time that comes with retirement.

• Analyze your spending: Start by doing a detailed study of how you spend your money now. Then, you analyze your findings to see what expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits.

  For instance, 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.

In the end, 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.

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.