The Top 3 Benefits of Retirement Planning
In this article, I’ll review the three main benefits of retirement planning, which I’ve identified from having created hundreds of retirement plans for Canadians. We'll start by looking at some of the biggest money decisions you’ll need to make. These choices can drastically shape your cash flow and your ability to enjoy your retirement. It's not just about saving more or earning a higher return, but about making your money work smarter for you.
We’ll also take a look at the options available for transitioning into retirement, and how having a written plan increases retirement confidence.
By the time you finish reading this article, you'll have a clearer picture of why retirement planning is critical. I’ve also included a handy pre-retirement checklist at the end to make sure you're on the right track. Let’s get started.
Help With Big Financial Decisions
Getting help with specific financial decisions is one of the most common reasons why clients seek help from me. Many different choices will impact your finances and overall well-being throughout retirement.
Here are five of the biggest financial levers that most Canadians will have control over:
Pension Decisions
Tradition defined-benefit pensions are a great income source to have in retirement. They are a base of income which gives much-needed cash flow stability.
Typical pension decisions include:
whether or not to buy back past pension service,
which survivor option to choose, and
taking the lifetime pension option or the lump sum.
Special note: The decision to take the lump sum option should not be taken lightly, especially if you have many years of service. This single choice can drastically change the nature of your income and spending in retirement.
Those without a traditional workplace pension may seek to replicate the benefits of one by purchasing an annuity.
Canada Pension Plan and Old Age Security
The Canada Pension Plan (CPP) and Old Age Security (OAS) form the foundation of most Canadian’s retirements. Both have a traditional start date of age 65, but CPP can be started as early as age 60, albeit with a reduction in monthly payments. Both programs also have the option of deferring the start date to as late as age 70 in exchange for an increase in monthly payments.
While it can be tempting to start receiving payments as soon as possible, doing so could lead to you missing out on over $100,000 in lifetime payments.
Portfolio Reboot
Many Canadians are paying too much for investment management. The investment industry has done a good job of convincing Canadians that they need to pay a high price for investment managers who try and beat the market, but the results show that they rarely do. While fees have been trending downward over the last few years, I still regularly see new clients with annual investment fees of 2.5% or greater, which is far too high.
By simplifying your portfolio using a passive investing strategy, you may be able to save thousands of dollars each year.
Efficient Tax Planning
Opportunities for tax planning vary based on your unique situation, but a thoughtful tax planning strategy in the remaining years of work could save you a considerable amount of money.
Common tax planning tools include:
Strategic RRSP contributions/withdrawals, including spousal plan contributions
OAS clawback planning
Working with a financial planner can also make you aware of commonly missed tax credits. The Disability Tax Credit and the Primary Caregiver Tax Credit are prime examples.
Managing Risk in Retirement
When you retire, you give up your stable career income and begin relying on new sources of cash flow, such as pensions and investment withdrawals. This change brings new sources of risk.
The two main risks that retirees have to contend with are longevity risk and stock market risk. In short, we don’t know how long we’ll live, or what our investment returns will be. This uncertainty directly affects our ability to safely spend the nest egg we’ve accumulated over our careers.
The financial decisions above, as well as other smaller decisions, influence our exposure to these risks. While it is impossible to eliminate all risks, being aware of where the risks are and knowing how to react if we end up facing them is vital. This awareness can save us from panicking and making costly financial mistakes in the heat of the moment.
Planning the Transition Into Retirement
When will you be able to retire? Will you be able to do so on your own terms? Our time is truly our most precious resource, and serious consideration should be given to when to stop working. This is even more important if the stress of our jobs is taking a toll on our mental and physical health.
A retirement plan can help you answer:
How much will working an extra couple of years change my financial outlook?
Do I need to continue to save during my final working years, or can I stop saving and “coast” into retirement?
Can I simply slow down by switching to part-time work and still be ok?
It’s not uncommon for clients to realize that they have over-saved and could have retired a couple of years earlier. Or, by being so focused on retiring at a specific age or years of service, we miss other opportunities, such as starting a small business, that may have been much better for our overall happiness and well-being.
Increased Peace of Mind
The decision to retire is one of the biggest single choices you’ll make in your lifetime. Most people will only retire once, so it can be hard to have true confidence in a DIY plan. Our friends and family may try to give advice, but financial circumstances and personal priorities vary so much that the tips you receive may not be relevant to your own situation.
The good news is that having a retirement plan has been shown to increase confidence levels. Getting expert advice can help you retire confidently and is possibly the biggest benefit of creating a financial plan.
The Non-financial Aspects of Retirement
As much as I enjoy helping people with their finances, I recognize that money is far from the most important aspect of retirement. With your financial plan created, you’ll be able to devote your valuable time to other important aspects of retirement, such as planning for health, quality relationships, and fun!
Even if they know the benefits, many Canadians have trouble getting started. There are common obstacles to retirement planning that trip a lot of people up. The best way to start building momentum is by taking small steps.
An excellent starting goal is to simply collect all of your relevant financial documents. To help with this process, see my list of what you need to get started with your plan. You can also download my pre-retirement checklist to continue your journey to retirement.
