Over the last few months, we’ve introduced you to three of the six components that contribute to a successful investment plan. Last month, we talked about investment planning. Today, we’ll discuss component number four, retirement planning.
Retirement planning involves gaining an understanding of your overall financial position and ongoing well-being once you’ve stopped working. Planning involves looking at your lifestyle and the expenses that make up that lifestyle. As an example, when you’re retirement planning, you’ll ask yourself things like:
- How many of my current expenses will continue into and through retirement (ex. cable, utilities)?
- How much and how rapidly will these expenses grow each year because prices always goes up (inflation)?
- How many of these current expenses will disappear before or at retirement (ex. costs of child rearing and education, mortgages, work related expenses)?
- What kind of new expenses may arise during my retirement (ex. extended travel costs, healthcare increases)?
Retirement Planning then takes all of these current and future expenses and matches them up against your future sources of retirement income. Sources of retirement income are likely to include government pension plans like CPP and OAS, employer based defined benefit pension plans (if you’re employer provides one), group RRSPs (also employer based), regular RRSPs, TFSAs, other investments, savings, and potential inheritances.
Integral in all of this analysis is:
- how much more can you save and invest between now and when you stop work, and
- what will be the length of time between when you stop work, and when you are likely to pass away? In other words, how long does the money have to last?
Note: As people are living longer and the likelihood of living well into your nineties continues to grow, people will need to ensure that their money lasts for this extended retirement period. Alternatively, they may need to consider retiring later.
But proper retirement planning cannot truly be done on a stand-alone basis. To ensure that you’ve addressed future opportunities, challenges and risks, you’re going to want to include the other components of the investment planning model as well. Consider the following:
- How will you manage your current and future household spending so that you don’t run out of money in retirement? (Financial Management/Budgeting) Can you reduce spending? Do you need to? Can you save more?
- Should you add money to your TFSA or your RRSP? What’s the most effective way to access accounts such as your RRSP while paying the least amount of tax? (tax planning)
- What would happen to yours or your spouse’s retirement plan if you were to become disabled, ill, or incapacitated? (risk management and insurance)
- Would you like to have any money left over after you pass away to bequeath to children, grandchildren or charity? (estate planning)
- How will you invest your assets considering that that decision could have a significant impact on the nest egg you will ultimately accumulate? (investment planning)
Here at LGK Wealth Management, we consider all of these factors when building your retirement plan. A retirement plan isn’t just about throwing a couple of numbers into a spreadsheet or some software and hitting the “calculate” button. It’s about talking with you very frankly about who you are, what you want from retirement, where and when you want to retire, and how you’ll make your wealth last.
Our job then becomes helping you implement your plan so that you achieve your goals. That may involve looking at improving how you manage your investments, helping you decide the amounts and timing of withdrawals from your RRSP, looking at the practicality of delaying CPP payments, or determining whether there are risks to your retirement plans that aren’t covered should something happen to you.
Ultimately, our goal is to help you achieve your retirement objectives, and most importantly, not outlive your money. Next month, our article will focus on the fifth investment planning component, tax planning. Stay tuned.
Gary M. Koss
Senior Mutual Fund Advisor
Manulife Securities Investment Services Inc.