Wondering how to get yourself on the road to financial health? Consulting a financial advisor about your retirement plan is probably the best route you could take. Choose an advisor you are comfortable with and who is a member of Advocis. Ask to see samples of financial plans prepared for other clients. Be prepared to think long term.
The planning process
Most advisors start by asking for the details of your current financial situation, including your savings, investment patterns, liabilities (such as loans, credit card debt or a mortgage) and future obligations such as education costs for your children. Many advisors use a software package that helps analyse this information to give a picture of your financial health. The next step is to examine what kind of retirement you see for yourself. The analysis will uncover inefficiencies in your investments and help build a better portfolio that will carry you through your retirement years.
How much will you need?
Retirement planners used to assume that you would need about 75 per cent of your current income after retirement. The thinking was that you could eliminate your work-related expenses (such as commuting and work clothes) once you retired. But fewer Canadians are opting for a quiet retirement at home. Many purchase a second home in a warmer climate or choose this time to travel. Your initial needs can be as high as, or even higher than, your current income. Later in life, in your 70s and 80s, you may prefer to stay home. You may then be able to live on a more modest income if you do not need the money for health care.
How long will you live? How long will you work?
Our increasing lifespan is another big variable in retirement planning. The average Canadian man can expect to live to age 76. Canadian women live an average of 81 years. And many people live even longer. Most advisors will insist you plan until at least age 90.
Another crucial question is how long you will continue to work. Will you have a choice of retirement age or will your employer offer you a pension while you are still in your early 60s? Many people hope to retire early or spend the last few working years consulting and easing into retirement. Can you save enough money to support yourself for 30 years after retirement?
Saving is only part of the equation – you also have to let your money grow in investments that beat inflation. Inflation can erode the spending power of your retirement income, both while you are saving and once you have retired. Your advisor will factor in the effects of inflation on both your retirement income and your investment portfolio.
Where will the money come from?
Most Canadians have several sources of income after retirement. You will likely draw Canada Pension Plan or Quebec Pension Plan benefits. Lower-income Canadians will receive Old Age Security payments (and perhaps other supplements). You may have a pension or a deferred profit sharing plan from an employer. And you should have savings, both inside registered retirement savings plans (RRSPs) and in non-registered investments. by the end of the calendar year in which you reach age 71. You can transfer the RRSP money to a Registered Retirement Income Fund (you must withdraw money from a RRIF annually) or use it to purchase a retirement income annuity.
Consider where your partner will be in the years after your retirement. Will he or she still have some years to go on earning and saving? Have you considered balancing your incomes after retirement? The more equal your incomes are, the less tax you may have to pay. See Taxing Canadian Twosomes.
Spending and saving
The most difficult part of retirement planning is to look at how you save and spend your money now. Consider your current cash flow. "Fixed" expenses can include costs such as mortgage, utility, rent and loan payments, food, child care and regular contributions to charity or to RRSPs. Anything left of your earned income is what you are spending. A thorough retirement planner will analyse these spending patterns and try to find ways to use your money more effectively.
Perhaps you have credit card debt that would be better handled through a line of credit. Perhaps your loans or liabilities can be handled in a way that makes them tax-deductible. Any money you can free up gives you extra opportunities for saving. Your advisor can help you set up a regular savings plan that puts the money into a retirement portfolio before you can spend it.
Your retirement portfolio
Your financial advisor will make recommendations about the structure of your portfolio. These suggestions will consider your tolerance for risk, but be aggressive enough to give you the growth you need. The earlier you begin the process, the longer your money can grow. Getting your RRSPs into shape is essential. Your advisor may recommend saving in non-registered investments as well.
Ask your advisor to show you the long-term performance of plan he or she has structured – this will help you understand your advisor's investment style and choose something appropriate for yourself. Make a date on your calendar to revisit this investment plan in three or six months. Everyone should review their retirement savings profile at least twice a year.