Your Retirement Road Map

Introduction

Likely you have worked most or all of 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 the 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? 

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 paycheque coming in monthly, and you must be able to generate income from the financial assets you have accumulated. As well, the income has to 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 paycheck 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
• 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
• RSPs, S-RRSPs 
• LIRAs 
• RRIFs, LIFs
• TFSAs 
• company savings plans and stock options
• non-registered investments
• rental properties
• 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 have to 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 reduce long 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 Specialized 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 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
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.