Until recently, many retirees have been able to draw upon three sources of income: a designated benefit pension plan that affirms a lifetime income, their own savings, and the Canada Pension Plan. Within the last couple of decades, the guaranteed pension plan has all but disappeared as many defined benefit plans have been replaced with defined contribution plans such as an RRSP. This has shifted the responsibility for creating a retirement income source to the individual. With longer lifespans and rising retirement costs, one will have to sit down and draw up a well thought out retirement plan to ensure there is enough money to last until the final end. The following are four key components of a solid retirement plan:
Set Clearly Defined Goals
With an increased life expectancy, retiring at age 65 is no longer considered a solid or realistic goal. In order to create a concrete plan and manageable and attainable steps to get there, one needs to gain clarity about what your retirement will look like.
Do you plan on actually retiring; or would working a reduced work week be more realistic?
What will your retirement look like?
Where will you live?
What are your dreams for retirement?
As you get closer to your retirement goal, your vision will become clearer and more focused. Along the way, your retirement goal becomes your investment benchmark, guiding your investment decisions based on where you are in relation to your goal.
What is the Price Tag on Retirement?
Consensus suggest that retirees will require an estimated 70% to 80% of their income to maintain the status quo of their living means. The major weakness with this ideal or guide is it doesn’t account for the true cost of aging. This equation does not take into consideration the reality of rising health costs, longer life spans, and assisted living expenses. The cost of your retirement needs to factor realistic spending assumptions based on your goals and desired lifestyle with contingencies for healthcare costs and unexpected expenses.
Once you know the cost of your retirement you can more accurately calculate how much you will need at retirement, which can become your accumulation goal.
Long-Term Investment Strategy
Saving enough money to provide for retirement can be a discouraging task in today’s climate of low return on savings and a fluctuating volatile stock market. It requires a serious long-term investment strategy with the confidence and discipline to follow the plan. It starts with a specific investment objective- which can be stated as the return on investment that must be achieved to meet your capital need.
The next step is to develop a risk profile that will enable you to match your tolerance for risk with a portfolio of investments that can reasonably expect to achieve your objective. This is done by developing an asset allocation plan that mixes different types of investments with varying correlation to one another. Then, through broad diversification within the asset classes, you can reduce portfolio volatility and achieve more stable long-term returns.
For decades we have been told that the best way to accumulate capital for retirement is through tax deferred savings plans, such as an RRSP. Although it still makes sense for accumulating capital, it doesn’t take into account the tax consequences of income withdrawals and its impact on the total spendable income available in retirement. Retirement planning used to be almost entirely about capital accumulation; however, with the possibility of living 30 years or more in retirement, the emphasis is now on managing your income during retirement. If your only income source is an RRSP, your income will be taxed as ordinary income. With diversified income sources you may be able to minimize your taxes in retirement which will help make your income last longer.
Lynn Cain is a Holistic Certified Financial Planner and has been helping families plan and save for their golden years for over 2 decades. For more information on how you can get started on your financial goals, please contact Lynn Cain at 613-491-0348.
Lifecycle Planning for Lifestyle Protection.