Retirement Planning 101

As a financial planner, my job is never boring. Except for tax time, which is a necessary evil, I love my job. My clients are varied and so are their needs. I have clients who have been transferred abroad who need advice; I have clients who need help with their estate planning, insurance planning, divorce issues, cash flow planning, etc. After 28 years of experience, one would think that I have seen pretty much everything, but there is always a client who shows up with a new wrinkle—that’s why my job is never boring.

The one thing that always comes up is retirement planning, and the questions: Will I have enough savings for my retirement years? Am I saving enough for my retirement? These questions come up more and more often, so we spend a lot of time doing retirement projections for new and existing clients.

I believe that many people are becoming concerned about their retirement savings because the media keeps sounding the alarm bells that Canadians are not saving enough for their retirements and that X% of Canadians will not be able to retire at age 65, hence, they have to delay their retirement.

I’m not entirely in agreement with these dire warnings. Yes, I see a lot of clients who should save more, but in most cases, these people can retire with just a bit of tweaking of their budget and some tax planning advice.

Planning for Longevity

My retirement plans start in the current year and run to the client’s age 90, because that is the industry norm and I don’t want to start using mortality tables as these are averages. If there is a large age difference between husband and wife, I will use the younger spouse’s age of 90.

It is also important that clients realize that 30 years or so of cash flow and asset projections are road maps; they show the big picture. It is always good to take them out and dust them off and check every few years to see if the client is still in line with their road map. But they should not be concerned if income or expenses are off by a few hundred dollars.

Avoiding Common Pitfalls

Some planners will do Monte Carlo projections to see the probability of their clients’ funds outlasting them. In 28 years, I have never done a Monte Carlo projection, even though my software has the ability to do them. I do not find them useful and it is a tool to scare people, in my opinion. The idea of retirement planning is to help clients achieve their goals, not to scare them.

Of course, savings come into play, but if you make clients save so much that they can’t enjoy their current lifestyle, they will give up and not save at all. I am not recommending doing a budget and trying to maintain it. Usually, if you’ve never budgeted, it’s not going to happen. Most people live paycheque to paycheque; if the money is there, they will spend it. It’s human nature, but with a little discipline, the idea of paying yourself first works very well.

Key Steps to Retirement Planning

1. Be Debt-Free

First, be debt-free or as close to debt-free as possible by retirement age. So the first goal, while still earning income, is to get rid of debts, especially the expensive ones like credit cards. Once these are paid off, attack the next expensive debt and so on, until all debts are paid off by retirement date, or nearly paid off. Be aware that debt repayment is a form of saving as well.

2. Focus on Expenses, Not Income

Second, do not look to replace income; what should be replaced are expenses. What do you anticipate your expenses to be at retirement? Usually, if debts are paid off, and children’s schooling is done, you will need 100% of current expenses, at least for the first 15 years into retirement. You have established a lifestyle that will not change overnight. Some expenses that were related to working life will be replaced by other expenses, such as hobbies, travel, etc.

3. Understand Your Income Sources

Third, look at what your sources of income will be in retirement, such as QPP/CPP, OAS, and RRSP. If you have a defined benefit pension plan, that is worth its weight in gold. If your employer allows you to withdraw the present value of these funds, do not do it unless there is a risk that the employer will not be around in the future, or the pension plan is underfunded.

4. Do Some Tax Planning

Fourth, do some tax planning. If you retire early or your income is low, consider withdrawing from your RRSP prior to age 71. This will depend on your income and your spouse’s income. If you each withdraw an equal amount from RRSPs, you will likely pay less tax. If only one spouse has an RRSP, consider converting it to a RRIF at age 65, in order to do some pension income splitting.

5. Be Cautious with Investments

Fifth, look at your investment allocation. In retirement, you will be in a withdrawal mode. I normally recommend that clients be far less aggressive with their investments at this stage, even if they have to give up some returns. Being too aggressive while in withdrawal mode is not recommended, unless you have other sources of income.

Conclusion

In a nutshell, this is Retirement Planning 101. Every case is different and I don’t want to put everyone in the same boat, but the above five points are what we repeat more often than not in our retirement plans.

If you have any questions or need assistance with your retirement planning, feel free to contact me at [email protected].