ARTICLES  &  REVIEWS

Retirement Planning: “An Art & A Science”

London Free Press

The question that often arises is how much savings will I need to retire. The answer of course is “it depends”. It depends really on how much you need to support your lifestyle. There are four steps to get there.

1. Create a Retirement Budget.
   One of the first things that we ask clients to do is to complete a budget statement outlining how his/her income is being spent and then review the budget to see what expenses would diminish during retirement and what expenditures (such as vacations) may increase. We can’t just simplify it and say that 75 per cent income is needed in retirement because everyone’s retirement is going to be different depending on what the client wants to do when they retire. Some could require more income; others lower than their pre-retirement income. Many clients will lose the benefit of health coverage when they retire while others will continue to have health coverage continue from their employer. On the other hand, many clients are ready to have their mortgages paid off and do no longer need to contribute to RSP’s and other retirement vehicles and many of the deductions that come off of their pay cheque. In the budget we would need to factor in potential impact of inflation in addition to expenses for medical care and prescription that may grow at a higher rate than inflation particularly if government programs reduce funding for these types of programs. Usually, your financial advisor can provide you with a detailed form to provide a retirement budget.
   
2. Determine the available retirement income.
   Once we have determined the desired lifestyle during retirement we would need to determine the RSP’s, pension plans, non-registered assets, savings and any interests in the home that may be sold in the future, interest in a business that could be sold to create additional retirement income, Canada Pension Plan, and Old Age Security.
   
3. Problem Solving
   Once we complete the analysis of the retirement income needs and the sources of retirement income you may find that there is a gap. In this situation there is four options. One way may be to free up more investment dollars now. This may mean extending the purchase of a new car. Another option may be considering expenses on retirement; perhaps moving to a less expensive home or reducing travel. The third strategy would be to try and increase the rate of return on current investments and this would likely require investing in more risky investments which could backfire if the market goes south like it has in the last two years on growth stocks. The final least acceptable option is for you to consider postponing your plans for retirement to a later age.
   
4. Create Retirement Income
   It is generally wise to leave your registered assets tax shelters as long as possible and use your open account in unsheltered first. This often is reversed before age 65 depending on income and the onset of Old Age Security, which can be clawed back over $54,000. You could also look at drawing against the Canada Pension Plan before age 65 and the penalty of that is ½ of one per cent and you can do that at beginning age 60 and then once your spouse is 60 you can assign half of your Canada Pension Plan to your spouse. This is a good income splitting tool. Generally a stream of income after the open money is used can come from turning your RSP into a RIF although it’s not required before 69. You can make lump sum deposits from your RSP until age sixty-nine rather than begin a RIF and force minimum payments on yourself. Your non-registered investments could include sale of your home, cottage, rental property, term deposits, mutual funds, and seg funds and stocks. In Canada, many new tax efficient vehicles are being designed for your non-registered income by taking advantage of the capital gains treatment and the low capital gains rates that can be included. Another vehicle that can create good income with your non-registered is prescribed annuities which pay out income as a blend of principal and interest but the tax advantages are very significant compared to a taxable GIC.

So in conclusion there is a lot of considerations and options you have to increase income and reduce taxes. You need to recognize that every decision has a reactive decision on the rest of your overall planning.