Your Retirement Road Map: How to Make the Transition to Retirement

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INTRODUCTION

Likely you have worked most or all your adult life, often for over 30 years. At some point you will be looking to make the transition to retirement, or perhaps have the ability to make work optional.

Typically, when you first started to work, your largest financial asset was your ability to earn an income. Over time, perhaps you married and had children as your career was progressing. 

Over the years you and your partner built up equity in your home by paying off/down your mortgage, investing in RRSPs, TFSAs, company savings plans (and a pension if you are lucky), non-registered investments, and contributed to Canada Pension Plan.

As you reach your mid to late 50s and early 60s (and as you look in the mirror), you begin to realize you are closer to the end of your career than the beginning. You start to take a closer look at your finances and wonder if you will be able to retire at some point in the future? 

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HOW MUCH IS ENOUGH?

At this point in time, you ask yourself if you have saved enough to make the big transition to your non-working or work optional years?

Once you stop working, you will no longer have a pay cheque coming in monthly, and you must be able to generate income from the financial assets you have accumulated. As well, the income must last for the balance of your lifetime…. and for many this can be a stressful time and they are often unsure how to decide if they can retire.

Consider the challenges and questions you may need to answer as you attempt to determine when and if you can retire:

1. Do we have enough?
2. How much can we spend each year?
3. How do we create a monthly pay cheque to our bank account?
4. How do we make sure we don’t run out of money?
5. How do we invest and deploy our financial assets?
6. From which account do we take the income?
7. How do we reduce our taxes?
8. How do we plan for health care as we age?
9. What is the most effective way to transfer wealth to the next generation? 

 

FROM CHESS TO CHECKERS

It turns out that the financial services industry has primarily focused on wealth accumulation, with very little attention and training on how to help people create a retirement income and cash-flow plan from the financial assets they have accumulated over their lifetimes.  This is often called the “decumulation stage,” as you are no longer saving and are starting to draw down on your financial assets.

Some financial institutions just want their share of the “client wallet” without providing any type of holistic advice or preparing people for the big transition to retirement.

Saving for retirement can be compared to playing checkers, in that you only have a certain number of financial moves.  Most options include:

• paying down debt, 
• allocating your surplus cash flow among RRSPs, TFSAs, and company savings plans,
• saving for your children’s educations, 
• making sure your estate documents are in place, and
• having adequate insurance to cover risks.

Retirement income planning is more like playing chess, where each piece has different options on how to move, and you have to co-ordinate all of the potential moves together to create a cohesive strategy.

In our conversations with people making the transition from their working years to retirement, many have done a great job of saving over time and end up with several potential retirement income sources but are unsure of how to put it all together. 

This is often called the “retirement puzzle” as there are many types of retirement income that may have to be coordinated including:   

• Canada Pension Plan (CPP) and Old Age Security (OAS), 
• Pension Plans,
• RRSPs, S-RRSPs, 
• LIRAs, 
• RRIFs, LIFs
• TFSAs, 
• company savings plans and stock options,
• non-registered investments,
• rental properties, and 
• HOLDCOs if you owned your own business.

As an added complication these may all be at different financial institutions, and each may have different rules, regulations, and potential start dates.

UNIQUE RISKS TO RETIREMENT INCOME PLANNING

As part of the retirement income planning puzzle, there are several unique risks or challenges that you must account for in your planning that are different from the risks when simply saving for retirement.

Unknown Time Frame – Longevity Risk:

• No one knows how long they will need their income to last, but they are certain they don’t want it to run out. In general people are living longer today, so most will have to plan for their income to last a greater time period than previous generations.
• For couples aged 65 today, the FP Canada guidelines suggest that CERTIFIED FINANCIAL PLANNER^® or CFP^® professionals plan to age 98 for them (25% chance one of them will be alive then).

Inflation 

• Inflation risk is the risk of not being able to maintain your purchasing power during retirement. Over time everything can become more expensive and can have spikes like in 2022.
• To maintain your purchasing power, you need to be able to increase your income in retirement, much like an annual pay raise while you were working. 

Taxes

• Taxation Risk is the risk of your tax rates increasing over time and paying more in taxes than you otherwise might have if you had organized your investments in the most tax effective manner. 
• One of the best ways to increase your income (and to make your money last longer) is to reduce the amount of taxes you must pay by structuring your income sources tax effectively.
• This is needed because retirees can have numerous sources of income that need to be coordinated to reduce current and potential future taxation.

Investment Risk

• Market crashes (known as “bear markets”) occur on average about every 6 years, so with a 30-year retirement time frame a retiree could live through 5 such “bear markets” or market crashes. 
• Retirees must develop an asset allocation (investments) that provides them with the ability to meet their income requirements over their lifetime and fits their risk profile with the ability to navigate the inevitable market turmoil.

Sequence of Return Risk 

• The years just prior to retirement and after retirement are the key times for planning to create retirement income. If you have poor market performance just prior to and in early retirement, it can dramatically reducelong term income. 
• Your income strategy should take into consideration that you will not receive consistent investment returns each year.

Health 

• Health care can be a significant cost for retirees, and yet many retirees have not factored extra health care costs as part of an aging in place strategy, or even considered long term care costs in their plans. 

What is the Answer? Create a Retirement Road Map 

To help with the transition, a Retirement Road Map will help you make smart financial decisions as it will align your financial assets and sources of income with what is important to you. 

With a strategy in place, no matter what happens in the markets, the world, the economy, or your life, you will have a basis to be able to adjust and adapt.

To align your sources of capital with what is important to you and what your family wishes to accomplish over time, your Retirement Road Map should outline your strategy in the following key areas:

• Financial Management – focuses on your current and future net worth over time.
• Retirement Income Planning – creating a lifelong retirement income and cash-flow strategy.
• Investment Management – developing smart investment and asset deployment strategies.
• Tax strategies – strategies to reduce the tax you pay today and in the future.   
• Estate Planning – efficient transfer of assets to the next generation.
• Risk Management – ongoing review of all risks to your strategy.

 

FIND AN ADVISOR THAT SPECIALIZES IN RETIREMENT INCOME PLANNING

If you are unwilling to create and manage your own Retirement Road Map, you will want to find an advisor that specializes in working with people who, like you, are planning for the transition to retirement or who may already be retired.

A report from July 2014 called, “Sound Advice Insights into Canada’s Financial Advice Industry,” prepared by PWC for Advocis, the Financial Advisors Association of Canada, explains that financial advisors generally work in four broad advisor segments:

• Full-service brokerage

These advisors generally work for a bank brokerage, although there are some non-bank owned companies.

• Branch advice

These are advisors who work for deposit taking institutions, such as a bank or credit union.

• Insurance-based

Insurance based advisors are contracted with a life insurance company directly or with a larger group called an MGA, which means Managing General Agent.

• Financial advisor dealer

These are advisors that work outside of a deposit taking institution.

The specific channel is not the most important, however you will want to ensure that you deal with a firm that is financially strong. You will also want to find an advisor that provides holistic plan-driven advice that puts your interests first.

You should also look for an advisor has obtained the CFP^®or CERTIFIED FINANCIAL PLANNER^® professional designation, as they are trained in of the following key areas:

1. financial management,
2. retirement and cash-flow strategies,
3. investment management,
4. tax planning,
5. insurance and risk management, and
6. estate planning.

 

Finding the right financial advisor for you who specializes in retirement income planning may be difficult, as most financial institutions are not set up to help in the decumulation stage.  You will want to find someone who resonates with your values and communicates in a way that you understand.

They should be focused on the entire plan, not only on the “hot” stock or fund of the day, and one who has a detailed ongoing process to follow.

HOW TO CREATE A RETIREMENT ROAD MAP

Once you have found a financial advisor that specializes in retirement income planning, they should be able to guide you through the process using a series of meetings that will:

• Identify your values and what is important to you.
• Determine what your retirement goals and income requirements are.
• Discuss your other goals that require planning and money to achieve.
• Benchmark your current reality.
• Establish a plan to close the gap to meet those goals.
• Act as a guide to help you stay on track by being able to adjust and adapt your plan and strategies as required.

 

The Retirement Road Map Process 

1. Preliminary Meeting
2. Strategy Review Meeting 
3. Implementation Meeting 
4. Get Organized Meeting 
5. Regular Progress Meetings

 

Preliminary Meeting 

The purpose of this meeting should be to ensure the advisor is in total alignment with your family’s dreams, hopes and desires, and what you wish to accomplish and achieve over time. 

In this meeting the advisor should find out: 

• What are your values and what is important about money to you?
• Benchmark your current financial situation.
• Review your projected retirement dates and spending requirements. 
• Discover your other goals that require money and planning to achieve.

At the end of this meeting, you can decide if you wish to take the next step of having a preliminary strategy developed for you. 

Strategy Review Meeting 

In this meeting, with an understanding of what you wish to achieve and being in alignment with you, the advisor should have developed and formulated the specifics of your Retirement Road Map. 

This involves reviewing the required strategies and plans that will enable you and your family to accomplish your dreams, hopes, and desires in the time frames you have selected. 

The risks to retirement income planning should be taken into consideration to create a concise step-by-step plan of action for your retirement income and cash-flow strategy. Steps may include, but are not limited to:

1. Documenting your current situation, income requirements, and estate objectives.
2. Creating a detailed income & cash-flow strategy that will:
   • Outline if you can achieve your goals using cash-flow based financial planning software.
   • Utilize ‘what if’ options to maximize your income & cash-flow plan.
   • “Stress Test” your plan to see if it will withstand market fluctuations.
   • Detail how to best sequence the withdrawal of income from your various income sources (CPP/OAS/RRIFs/TFSAs etc.) to reduce taxes and increase asset longevity. 
   • Provide a strategy on how to best deploy your financial assets and investments to achieve your goals.
   • Plan for health care and real estate assets as you age.
   • Estimate taxes and estate costs.
3. Ongoing guidance, review, and annual update of your retirement income & cash-flow plan.
4. Strategies for the surviving spouse and the successful transfer of wealth to the next generation.
5. Co-ordination with your accountant and lawyer.

 

This strategy should address the key actions and strategies to help you manage the unique risks of retirement income planning such as longevity risk, inflation, taxes, investment risk, sequence of return risk, and health risk. 

Part of the strategy review should include a preliminary breakdown of the potential costs to implement, such as:

• Custodial Costs,
• Investment or Product Costs,
• Advisor Cost for advice.

 

If you decide to proceed with your Retirement Road Map, the next step is to schedule a meeting to begin the execution and implementation of your strategy.

Implementation Meeting 

The execution and implementation of your strategy should be in the order of the most important tasks. 

Often for people transitioning to retirement the key implementation items are:

• Retirement Income and Cash-flow 
  • Creating a sustainable cash-flow payment strategy.
  • This should include the sequencing of where and when you should start the cash flow from the various sources of income (CPP, OAS, RRSP’s, TFSAs, pensions, non-registered).
• Investment Deployment and Asset Management
  • Setting up initial investment allocation, asset deployment and products, including tax effective investment options.
  • Asset location strategies on where to place the investments within RRSPs, RRIFs, TFSAs, and non-registered investments.
• Tax Review
  • The initial tax strategies to reduce your taxes today and in the future should be reviewed and implemented.

 

Get Organized Meeting

Your advisor should meet with you about 45 days after the deployment of your strategy to make sure you understand the implementation steps so far, and to determine the next action items. Key items to review would be:

• Review of the paperwork.
• Review of the digital services the financial advisor’s company has, and how they can make things easier for you.
• Review of the investments and the allocations.
• Developing a plan on the next most important steps to take.

 

Regular Progress Meetings 

Regular progress meetings should be scheduled during the year to update and adjust your retirement income plan. Your advisor should behave more like a guide to help you navigate the changes in your life by adjusting your Retirement Road Map to keep it on track.

As part of this effort, regular and on-going review of all aspects of your strategy and plan is necessary to make sure they remain aligned with what your family wishes to accomplish and achieve over time.

Your advisor should follow a detailed checklist-driven, step-by-step process to ensure nothing is missed in the execution of your plan in the following key areas:

• Financial Management

Ongoing review and update of your net worth projections over time. This should also include a review of your debt strategy, cash reserves, and major purchase assistance if necessary.

• Retirement and Cash-flow Strategies 

A complete and thorough annual update of your Retirement Road Map and step-by-step strategy should be done which will focus on your values, goals, and benchmarking of progress. It summarizes: 

1. Your current assets and liabilities.
2. Your needs and expectations.
3. Your emergency provisions,
4. Your family protection provisions.
5. Capital projections to fund specific goals.
6. Adjustments to the plan and strategy.
7. The next most important steps and actions to take.

 

• Investment Planning

Ongoing advice on the optimal strategy and recommendations to deploy your assets should be done.

The portfolios should be regularly monitored and systematically rebalanced to ensure they reflect your personalized plan, and help you accomplish the financial objectives you have set for yourself.

• Tax Planning

There are tax implications to each and every element of your Retirement Road Map, and a full review of the arsenal of tactics aimed at minimizing your tax burden that should be completed.  These strategies will help you pay as little tax as possible while working and have tax efficient income once you stop working. 

This should also include an analysis of your income tax return, and review of key credits and deductions for retirees.  

• Insurance and Risk Management

Once each year a review of your plan should be done that focuses primarily on increasing the safety of your plan. 

1. Potential risks to your plan should be identified and subject matter experts contemplate best strategies to address them. 
2. Your insurance needs should be updated to determine the right kinds and amounts of coverage you should have. The review should consider your existing policies. 

• Estate Planning

 A full review your Estate Plan should be completed, with the objective of: 

1. Ensuring your financially related wishes are clearly established in your estate planning documents. 
2. Making sure a sensible plan is in place to manage your assets if ever you are unable or unwilling to manage your own affairs.
3. Establishing a plan for your money to make it into the next generation and to survive beyond that.
4. Reducing taxes and estate fees where appropriate.

 

Subject Matter Experts

Your financial advisor should co-ordinate with your other key subject matters experts to help keep your plan on track. This may include your:

• Accountant,
• Lawyer,
• Insurance Agent,
• Mortgage Broker, and
• Real Estate Agent.

If you need an expert in a particular area your advisor should be able to source one for you.

The “What Ifs”

A key part of the ongoing relationship is the ongoing discussion of the “what ifs” as your life evolves over time. 

During a 30-year retirement many questions may occur, and retirees wish to know how these will affect their Retirement Road Map. Common questions may include:

• Can we lend money to our children for a new home?
• Should we downsize our home?
• Can we afford to buy a cottage?
• Can we increase our spending?
• Should we decrease our spending?
• Should we adjust the beneficiaries of our estate plans?
• We need some extra cash, where do we get it? 
• Should we adjust our investments?
• How much can we spend monthly for a retirement home?
• How do we fund extra health care at home? 
• How do we give some money away today?
• We are our parents’ Power of Attorney, what should we do?

Your financial advisor should act as a guide to assist you to navigate the changing landscape of your life over time.

The Ongoing Value

By developing a Retirement Road Map and following an ongoing process with your financial advisor, you’ll be better able to navigate the inevitable changes to your strategy and tactics over time through your life’s journey.

The key to long term success is not only having goals and a strategy in place, but an ongoing process and systems in place to adjust and adapt to changes.  

WHO SHOULD CREATE A RETIREMENT ROAD MAP?

Creating a Retirement Road Map will benefit you most if you are already retired or are within 5 years of retirement and: 

• Wish to find out if you are on track.
• Want to develop a reliable retirement income & cash-flow stream that will last a lifetime.
• Would like to feel in control of your financial future and wish to make sure you will be able to do what you want, when you want.
• Wish to minimize taxes today and in the future.
• Would like to provide for your spouse/family if you are no longer around.
• Desire the efficient transfer of wealth to the next generation. 

A financial advisor who specializes in retirement income planning should be able to help you navigate the big transition to retirement and provide an on-going framework to help you and your family stay on track. 

ABOUT THE AUTHOR

Jack Lumsden, MBA, CFP^®, is a financial advisor with over twenty years of experience. He has enjoyed building a strong career and loyal client base. He focuses on those who are or will be making the transition from their working years to retirement with the need to develop a lifelong income and cash-flow strategy from the financial assets they have accumulated.

A lifelong resident of Burlington, Jack dedicates much of his spare time to staying active and coaching high school football. Spending time with family is another of his core values. He enjoys attending sports events with his son, Connor, and country music concerts with daughter, Paige, while he and his wife, Sandi, like to travel with friends and explore new destinations. 

Jack’s education includes a BBA from Wilfrid Laurier University (where he met Sandi), and an MBA from McMaster University. He is also a CERTIFIED FINANCIAL PLANNER^® or CFP^® professional. 

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Disclosure

Jack Lumsden is a Financial Advisor with CI Assante Financial Management Ltd. (“AFM”).

 The material provided in this article are for general information and is subject to change without notice. The views and opinions expressed in this article are those of the author only do not necessarily reflect the opinions of AFM. Furthermore, they should not be considered as product endorsement or for promotional purposes by AFM. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Insurance products and services are provided through Assante Estate and Insurance Services Inc.

AFM is a member of the Mutual Fund Dealers Association of Canada (“MFDA”) and MFDA Investor Protection Corporation. Mutual funds are provided through AFM and only those services offered through AFM are covered by the MFDA Investor Protection Corporation.