of a Retirement Income Specialist
Almost 30 years of insights in a 10 minute read
The better your choices, the better your retirement will be
I have spent almost three decades helping people prepare for their retirement years.
Throughout that time, I have witnessed almost every possible scenario. The good and the bad. The joyful and the sad.
A financially secure couple in their late 60’s, struggling to decide when to quit working, even though they both hate their jobs. A widow in her early 70’s, facing the cold reality that her dreams for a comfortable retirement died when her husband passed away. A frugal couple in their 80’s, babysitting a significant sum of retirement savings, while they look back in regret at the life opportunities they let slip by because of their unfounded fear of outliving their money. People in their 50’s who are prepared for retirement and others who are rushing frantically to catch up.
This ‘manifesto’, if you will, is the synthesis of the observations I have made and the lessons I have learned during my journey with hundreds of Canadians into and throughout their retirement.
When it comes to retirement, there is no question MORE money is better than LESS. Over the first half of our lives, the goal of accumulating MORE is all we needed to focus on.
However, by this stage in life, MORE is no longer the primary focus. Now the focus shifts to accumulating ENOUGH to successfully achieve the most important outcomes we seek to accomplish.
Then, as you begin to draw down on your savings, it’s all about ensuring you make the best choices to help your money work harder and last longer. These better choices ultimately allow you to do MORE and worry LESS over the balance of your life
The more good choices you make, the better your life will be
The final 10 years of your saving years before retirement, followed by the first decade of your post-retirement spending years, are commonly referred to as the Retirement Risk Zone. This significant life transition earned this name due to the high concentration of tough choices you will confront during these decades; choices which, if poorly made, could put your ability to fund your desired retirement lifestyle at significant risk.
The tough choices you’ll have to make
Your last 10 year of accumulations (SAVING)
How much longer should I choose to work?
How much more should I choose to save?
Where should I choose to direct the final top-ups of my savings?
How much more should I choose to put in my RRSP?
Should I choose to follow a “work optional” approach?
What role will my home equity play?
Do I choose to downsize? If so, when and where?
Your first 10 years of drawdown (SPENDING)
When should I start to collect my Canada Pension Plan / Old Age Security?
How soon should I choose to convert my RRSP to a RRIF?
Can I afford to support the lifestyle I have chosen, do I risk outliving my money?
Deciding where & how much to draw down from different savings accounts.
Buy an annuity or manage my money?
How much and from where to help out children/grand children?
Deciding the importance of your estate and how it will be managed
People who know what they want are people who get what they want
🞂 They thrive on having the opportunity to explore their possibilities and lifestyle options.
🞂 They’ve considered the what, when and cost of their potential choices.
🞂 They make better financial decisions because they translate their advance knowledge of how much money they’ll need – and when they’ll need it – into superior tax planning and investment decisions.
🞂 They have clarity of vision when it comes to understanding what is possible.
🞂 They have confidence that they know the steps to make their planned retirement lives possible.
🞂 They have security in knowing that they are in control of their own future.
THINGS YOU NEED TO KNOW:
- Better choices lead to more money.
- Better choices on one level lead to better choices on other levels.
- If you don’t enter the second half of your life with a plan, the chances are you’ll make at least one choice which you will regret later.
- It pays dividends to give serious thought to how long you might live.
- The 10 years leading up to retirement are pivotal in setting up the remainder of your life.
- The investment and tax strategies in your retirement years will be very different from the ones you applied in your working years.
- Market volatility poses the greatest risk retirement in the first 10 years after you stop earning.
- Fluctuations in retirement spending will be a bonus or burden to your retirement depending on your approach.
- Goals without a plan are merely wishes.
- The better choices you make today, the better your life will be tomorrow.
BOOM OR BUST
Even though they will live longer than any other preceding generation, it’s been estimated that one-third of all Baby Boomers have nothing – zero dollars – saved for retirement by age 58. At the same time, cash-strapped governments are rapidly changing the rules to retirement benefits. Corporations are relinquishing their obligation to provide guaranteed pension plans. And lower interest rates and increased market volatility have significantly increased the challenge for individuals who now have to create their own reliable, sustainable retirement income stream.
- 70% of working Canadians DO NOT have a company sponsored pension plan.
- 80% of working Canadians DO NOT have the lifelong income guarantee of a Defined Benefit Pension Plan.
- 90% of working Canadians DO NOT have a financial plan that explores their capacity to fund their desired retirement lifestyle.
- 99% of working Canadians DO NOT have a retirement income plan that optimizes their income and minimizes taxes.
- Less than 50% of working Canadians have saved enough money for retirement plan
Despite these alarming numbers, the financial services industry continues to steadfastly ignore the needs of those who are entering – or living through – their drawdown years. Instead, the financial services industry remains fixated on serving the needs of those who are still contributing to their savings.
If this were an epic doomsday movie, a brilliant scientist or a bold adventurer would solve the problem, save the world, the sun would shine again and the screen would fade to black for the credits. But this movie is more of a documentary than fiction and the reality is that there is no way to save everyone.
Thankfully, the movie isn’t over yet. We still have time to rewrite the ending so more Canadians can enjoy a financially sustainable, life-affirming and enjoyable retirement.
Am I going to be OK?
This is probably the most frequently asked question of Retirement Income Specialists. You will never be satisfied with the answer until you define what your OK looks like. This life plan must include associated costs and timelines.
Retirement Income Planning is first and foremost a process of making lifestyle choices. As in all phases of life, choosing more of one thing usually means choosing to accept less of another.
My fundamental belief is that people make better life and money choices when they understand where these decisions are leading – before they need to commit to these choices. In other words, if your retirement is going to be successful you need to determine what you want to do, when you want to do it and how big you want to do it – BEFORE you do anything.
In the process of gaining clarity about the specific life choices you decide to pursue, a Retirement Income Specialist will gain the insight and understanding they need to properly prescribe money choices that will align with the life choices you have chosen.
The creation of a Retirement Income Plan is not a one and done process. It’s critical that a Retirement Income Specialist stays current with what is happening and changing in each of their clients’ lives so they can adapt each client income plan to fit their ever-changing life stories.
Key Observations on Retirement Planning
Planning for retirement is very different from the planning you did earlier in life. By this point in time, you are quickly closing in on the end of your saving years. The questions you now face are: WHAT future life choices can be funded from your earlier choices of how much to save and HOW do you ensure your accumulated nest egg works harder and lasts longer? This requires the alignment of your money choices with the life choices you have chosen to pursue.
- Investment strategies that succeeded during your accumulation (saving) years turn and work against you in your drawdown (retirement) years.
- People spend too much time worrying about when they should retire, when the more important question is how long they might live.
- The majority of financial advisors have received no formal training in providing proper retirement income planning.
- The 10 years leading up to retirement represent the years of highest investment risk and greatest planning opportunity.
- Better plans happen when both spouses are involved.
- Proper income planning can add hundreds of thousands of dollars to lifetime assets and cash flow.
- No one likes paying taxes, yet retirees continue to fall prey to huge retirement tax traps.
- Many people fail to contemplate the possibility of outliving their spouse. It’s important that you understand the financial situation you may inherit..
- Too few people fully understand their company pension plan and/or their government retirement entitlements such as CPP and OAS.
- Few people know how to strategically convert their accumulated savings into a sustainable retirement income stream. Instead, they inefficiently cobble together their required cash flow on an as-needed basis.
- When you integrate the cash flow demands of your life plan with your investment strategy, your money will work harder and last longer.
- Retirement income planning does not have to be a daunting process
Roadblocks to retirement success
- NOT realizing that you may live longer than you think.
- NOT knowing how to convert your accumulated savings into a sustainable cash flow.
- NOT having an actionable, flexible and tested retirement life plan that you really believe in and are totally behind.
- NOT capitalizing on the fact that you will pass through three distinct periods in retirement: Your Go-Go Years, your Slow-Go Years and your No-Go Years. Where and how much money you spend during each of these phases will vary dramatically.
- NOT actively looking for opportunities to reduce income taxes during retirement.
- NOT taking advantage of these annual cash flow fluctuations to set up tax reduction and volatility protection.
- NOT understanding how and when “Dollar Cost Averaging” turns to “Dollar Cost Ravaging”.
- NOT taking advantage of opportunities to create hundreds of thousands of incremental dollars of retirement cash flow because you relied on conventional (outdated) wisdom
I find it very rewarding to help people overcome the obstacles they encounter on the road to retirement. My clients have written, documented retirement plans that have been built with me – but not by me. My clients are the authors of their own destinies. They possess a confidence and clarity about the future that very few of their peers have because they know their retirement plans are both achievable and sustainable. They know, as I do, that you can have a better retirement, if you plan for it.
As a Retirement Income Specialist, I spend most of my time identifying opportunities within people’s life plans that can ultimately add hundreds of thousands to their cash flow and net worth during their drawdown years. When you know what you are looking for, the opportunities are easy to find. The “trick” is not a function of barely legal tax avoidance schemes but more about using your best guess about the future (augmented by my years of experience acquired while vicariously living the retirement life along side my clients) to find ways of generating incremental cash flow.
What do I focus on?
Minimizing taxes for the balance of life rather than simply focusing on the current year.
As unfair as it seems, even in retirement, income tax will likely represent your #1 expense. The good news is that because of the many sources of funds you will rely on during your drawdown years, you have far more flexibility and opportunity to take advantage of strategic tax planning. When the decisions of where, when and how you draw your cash flow are being made with the advantage of sophisticated tax planning, it is possible to significantly reduce the taxes you’ll pay over the balance of your life. For those not yet retired, this tax planning will help you identify when to stop contributing to RRSPs and how the addition of other types of investment portfolios can increase the impact of proper tax planning. For those already retired, this tax planning will translate into a carefully constructed customized drawdown strategy that will allow you to profit from the marginal tax rate system and steer you clear of the many tax traps that exist during the drawdown years.
Maximize the value of your government benefits
Nobody in the government will tell you exactly when the best time is to access your Canada Pension Plan and Old Age Security. The conventional wisdom has always been to take them as early as possible. That may have worked in the past, but not today. When the rules changed in 2013, conventional wisdom went out the window. Worse still, making the wrong choice about when to start collecting your Canada Pension Plan could cost you $100,000+ over the balance of your life.
Why leave your choice to chance? Let technology do the work for you with our CPP Optimizer. This tool looks at each of the 121 different start date choices available to identify which one will provide you with the optimal outcome.
Optimizing the timing and value of your withdrawals from savings.
A properly constructed Retirement Income Plan looks at all your sources of recurring income streams and asset pools. It may include RSPs, Tax Free Savings, Open accounts, Canada Pension Plan, Old Age Security, Annuities, Defined Benefit Pension Plans, Personal Pension Plans, and Disability Allowances, among others. Many of these streams and pools have complex rules surrounding them and have a significant financial upside when their access is optimized.
Where, when and how you draw on your various asset pools, optimize options and even when you start using them can make an enormous difference to your lifetime cash flow. With your plan, you will be able to match your retirement life plan with the maximum sustainable retirement income from all sources. When you have been crafting people’s income streams for as long as I have, you know exactly what to look for. Finding opportunities to optimize income streams and minimizing taxation come easily.
Integrating your life plan with your investment plan.
Unfortunately, most people approaching retirement follow the same investment approach that served them well during their saving years. In reality, it’s crucial to recognize that many of these approaches – like buy and hold – turn and work to your disadvantage during the drawdown years. Equity market volatility, that may have helped you build assets when you were younger, now poses an enormous risk.
In these drawdown years, it is essential that you create a direct link between the timing and amount of cash flow required to fund your retirement life plan and your overall investment strategy. This critical connection will enable your money managers to strategically determine when – and how much – of your investment portfolio must be moved closer to the security of a cash position. These portfolio adjustments are made well in advance of the date funds are actually required.
By clearly distinguishing between money that will be withdrawn from the portfolio in the short term from the funds that are invested to provide long term growth, you are protected from the costly damage that can be caused by the ravages of volatility.
What you need to BELIEVE
- Retirement is a one-way street – there are no Re-Do’s. I will RELY on a money management system that follows the disciplines of a pension plan. This can only be accomplished if my money managers clearly understand, well in advance, exactly how much I will be withdrawing and from which portfolios these funds will be sourced.
- The more good choices I make – the BETTER my retirement will be.
- I have carefully contemplated WHAT I want to do, WHEN I want to do it, and HOW BIG I want to do it – and I have a plan that confirms these life choices are achievable.
- The goal in retirement is to align my money choices with my life choices – NOT the other way around.
- I will rely on a set of easy, yet accurate TOOLS that make a proper planning process very do-able.
- I will know exactly what life choices and what money choices I need to make to achieve my desired OK – BEFORE I need to commit to them.
- I will enjoy both the clarity that comes from KNOWING what is possible and the confidence of knowing the steps I need to follow to take my desired life choices a reality.
- I will demand that pension like disciplines are put in place to PROTECT my retirement nest egg from the most damaging risk – volatility.
- I will get the highest SUSTAINABLE retirement income possible.
- I will pay the LEAST taxes allowable
There you have it. That is the short version of the good stuff from almost 30 years as a Retirement Income Specialist.
As Baby Boomers, we are redefining retirement, blurring the line between the end of work and the start of traditional retirement. The experience of previous generations is dangerously irrelevant – we are in uncharted waters here. As such, the probability of making serious, costly mistakes has significantly increased.
If you are uncertain about your future but would like to be or if you would like to know more about how we craft success for our clients, please give me a call.