Those Canadians (45%) who say that they have a retirement plan feel less stressed about their future because retirement feels more attainable. However, many of those are unaware of what a real retirement plan looks like. Regularly saving in a company pension plan, an RRSP or a TFSA is not a retirement plan.
A true retirement plan includes many different aspects of your personal and financial life, to help ensure you get to retire when you want to, with the kind of retirement lifestyle you’ve always wanted. Let’s look at what could be missing from your retirement plan.
Deciding on the kind of retirement you want
You can’t start retirement planning until you have a concrete idea of what you want it to look like. These are some of the more common retirement goals:
- Enjoying more leisure time.
- Travelling more often.
- Spending more time with grandkids and other loved ones.
- Adopting a healthier lifestyle.
- Playing more golf/other sports/hobbies.
Relaxing more and looking after the grandkids will require much less money than crossing a dozen new countries off your bucket list. Also, if you’re planning on starting up a business or working part-time in a job that you’re passionate about, you’ll likely need less money.
After you’ve thought long and hard about the kind of retirement lifestyle you want, you can then start retirement planning with more confidence.
Deciding on when you want to retire
Some people are keen to retire as early as possible, while others (like those who love their job) may prefer to wait before retiring. This is a really important decision to make before beginning any serious retirement planning, because it impacts other aspects of your plan.
Early retirement can reduce your government benefits and increase the risks of longevity (when you outlive your retirement savings). Conversely, retiring later can give a significant boost to your government benefits, while also giving you time to increase your retirement savings and reducing the length of your retirement.
Working out how much you’ll need to finance your retirement
The next stage of retirement planning is working out how much money you’ll need to turn it all into a reality. To calculate this, a true retirement plan looks at all your potential sources of retirement income, including:
- Company pension plan.
- Registered Retirement Savings Plans (RRSP).
- Tax-Free Savings Accounts (TFSA).
- Canada Pension Plan/Quebec Pension Plan.
- Old Age Security.
- Non-registered investments.
- Dividend or shareholder payments (for business owners).
A comprehensive retirement plan will accurately estimate how much income you’ll need to fund the retirement lifestyle you’re planning. It will also calculate how much you’ll receive from guaranteed sources (such as the Canada Pension Plan and your company pension plan) and work out the shortfall that will need to be made up.
This comprehensive retirement planning will give you an accurate idea of how much you’ll need to save to reach your retirement goals. It isn’t based on a generic estimate of retirement income (such as $1 million): every investor is different, so comprehensive retirement planning works out how much you’ll need to save for your retirement.
It also includes the investments you’ll need to reach those goals. These will depend on your age, risk tolerance level and retirement date. For example, a high percentage of your portfolio may have to be in equities (company shares), to potentially speed up the growth of your retirement savings, or you might take a more conservative approach, with a larger mix of safer investments, such as government bonds.
Factoring in inflation, life expectancy and the unexpected
Plenty can happen to a retirement plan over the years, with two key threats being inflation and market volatility. A robust retirement plan will take into account possible eventualities, and adjust the amount you’ll need in retirement to account for inflation and volatility.
For example, many retirement plans recommend a cash reserve strategy: this involves holding several years’ worth of retirement income in cash or guaranteed liquid investments (such as redeemable guaranteed investment certificates), as you approach and enter retirement.
That way, you can avoid having to cash in any riskier investments (such as bonds and shares) that may have lost value due to a market crash, giving them time to recover. Cashing in investments that have lost their value leads to sequence of returns risk, which can severely dent the longevity of your retirement savings. A cash reserve will prevent this from happening.
Constant monitoring and refining of your retirement plan
Whenever a key event occurs, your retirement plan should be fine-tuned so that you’ll still get to retire when and how you want. This could mean reducing expenses, increasing how much you save or switching your investments around. Without constant monitoring, the most robustly constructed retirement plan may fail to hit its goals.
Managing debt in retirement
It’s a fallacy that you should never carry debt into retirement. “Good debt” can free up some cash to allow you to make investments that provide a higher return than the interest on your good debt (read more about this and other retirement myths here).
Conversely, “bad debt” (like credit card debt), can have an adverse effect on your retirement income. A comprehensive retirement plan will provide strategies to help you pay off your bad debt by the time you retire.
Turning savings into retirement income
A comprehensive retirement plan will provide strategies to turn your retirement savings into consistent retirement income in the easiest and most tax-efficient way. Certain investment products provide you with a specific percentage of your retirement savings (typically 4% per year), usually paid out monthly.
These investment options and strategies are designed to provide you with a tax-efficient, dependable retirement income, investment growth and protection against market volatility (find out more about turning your investments into retirement income here).
Maximizing tax efficiencies
Including tax efficiencies is a crucial component of a comprehensive retirement plan, both in the investment saving and investment withdrawal phases of retirement planning.
Several registered government savings accounts bring considerable tax advantages. Contributions made to RRSPs deliver an immediate tax break (by reducing your taxable income) and allow your savings to grow tax free, until you make a withdrawal. However, for some people, RRSPs might not make sense from a tax standpoint, with TFSAs being a better option. Any growth within, and withdrawals from, a TFSA are tax free. A robust retirement plan will ensure that your savings grow in the most tax-efficient way possible.
Withdrawing from your investments to provide retirement income also needs to be done in a tax-efficient way. It’s important to keep your retirement income within a consistent tax bracket, throughout your retirement. Different sources of income come with different tax treatments. For example, all of the income from CPP, OAS and RRSPs/RRIFs is taxed at the full taxable rate, whereas any money drawn from your TFSAs will be tax-free.
Drawing money from non-registered accounts (investments that aren’t in an RRSP, RRIF, etc.) is a little more complex. Your investments will be taxed as they receive interest, dividends and capital gains. When you withdraw from them, however, the money you invested will not be taxed, and capital gains and dividends from Canadian companies are taxed at a much lower rate than income tax.
A real retirement plan ensures that your retirement income is drawn from the most tax-efficient sources, leading to consistent taxation. Learn how to plan a tax-efficient retirement withdrawal strategy here.
Ensuring you have all the safeguards in place for retirement
A truly comprehensive retirement plan includes safeguards to protect you, your wealth and your loved ones as you grow older. These include:
Choosing a power of attorney: this will ensure that someone you trust will make financial decisions on your behalf if you become incapable of making them for yourself (for example, because of a head injury, dementia or a stroke). Read more about why you should have a power of attorney here.
Making a living will: also known as an enduring power of attorney, representation agreement or health care directive (among others), this allows you to choose someone to make health care and treatment decisions on your behalf if you’re not able to do so. Find out why you should have a living will here.
How to make sure nothing’s missing from your retirement plan
Creating a true retirement plan that can help ensure you have a long and comfortable retirement is complex. The good news is you don’t have to do it on your own.
An IG Advisor will work closely with you to create your Living Plan, which incorporates every aspect of your financial life, including your retirement plan. The retirement plan component is meticulously designed to ensure that you hit your retirement goals, in the most tax-efficient way possible.
IG Advisors can test out various hypothetical scenarios to help keep your retirement plan on track, no matter what happens in the future. And they’ll constantly monitor and refine your retirement plan to ensure you can retire when and how you want.
Talk to an IG Advisor today to discuss building your comprehensive retirement plan.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
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