6 Things Every Retirement Plan MUST Include
Retirement planning can be daunting. Giving up the security of a stable job often feels like a big risk. But you've had a long career and now you're ready to reduce your stress. You just need to make sure you’re prepared first.
The good news is that having a financial plan has been shown to increase both financial readiness and confidence. Whether you're making a plan on your own or with a professional, make sure that your retirement plan includes these six vital pieces:
1. A Vision of Retirement
Increasing work stress is a common reason why people begin taking retirement planning seriously. But do you know how you'll spend your days once you retire? With life being so busy, it's common to not have a clear idea of what retirement would look like.
Without a vision of retirement, you could miss opportunities that you hadn’t considered. Potentially worse, you might stay in your stressful job because you haven't yet found anything worth retiring for. Knowing what you want from retirement can motivate you to take action and make it a reality.
To start creating your retirement vision, find a block of time to disconnect and explore the possibilities:
Where would you like to live?
Who will you spend time with?
What interests would you like to explore?
Where would you like to visit?
How could you maintain or improve your health?
Start by casting a wide net and write down all ideas as they come to you.
Once you've created your initial list, take a short break and then try to double it. Putting in this extra creative effort can help uncover new and meaningful ways to spend your time in retirement.
2. A Review of Your Financial Resources
Our financial lives are getting increasingly complex. With so many pieces, it is easy to feel out of control. Taking stock of your current situation will bring you the clarity you need to make better retirement decisions.
Here are the basic financial items to take stock of when making your plan:
Current taxable income and net pay
Your assets (home, RRSP, TFSA, etc..)
Your debts (mortgage, car loans, etc..)
Expected retirement income sources (work pension, CPP, OAS)
How much you currently spend each month
The sooner you understand where you are financially, the sooner you can start making positive changes.
To help you get started, I created a FREE email course to help you organize and understand your financial documents.
3. A Tailored Spending Plan
How do you like to spend money? Do you need a consistent amount of money each year, or do your expenses change from year to year? Answering this question will help you to create retirement income that fits your lifestyle.
If you have a lot of expenses that can't be easily eliminated, delayed or reduced, you'll want to make sure your cash flow is stable and dependable.
Common examples of fixed expenses include:
Mortgages and other loans
Property expenses such as rent, taxes, utilities, and maintenance expenses
Family obligations like support for aging parents
If your budget has more variable expenses, such as travel and dining out, you have more flexibility to cut back if required.
Canadians often underestimate how much control they have over their retirement income. Decisions such as when to start receiving Canada Pension Plan benefits make a big difference in how predictable your cash flow will be. Try to match your income sources to your spending preferences.
Start creating your retirement spending plan by reviewing your spending:
How much do you spend on fixed expenses?
How much do you spend on variable expenses?
Will the balance between fixed and variable expenses change in retirement?
Next, think about how the following choices will influence your retirement income:
When you stop working
Which pension option you choose
When to start your CPP/OAS benefits
How you invest
These are complex decisions and how they influence the stability of your retirement income isn't always obvious. Getting help from a professional can help you better align your income and spending needs.
4. Sound Assumptions
You'll need to make a few important assumptions to estimate your income in retirement. Getting these numbers right can make the difference between a secure retirement or having to make big spending cuts later in life.
The three key assumptions that all retirement plans make are:
How long do I expect to live?
What will inflation be?
How much will my investments earn?
While no one knows for sure what the future will be, financial professionals have taken great care to come up with reasonable expectations. Every year, FP Canada updates their financial assumption guidelines which Certified Financial Planners® to use to create financial projections.
These assumptions are our current best estimates, but they will change over time. Updating your assumptions regularly will allow you to make small adjustments to your plan as needed. Regular small corrections are easier to make than big corrections after many years have passed.
5. An Asset Drawdown Strategy
Nobody likes paying taxes. Yet many Canadians fail to create a strategy to minimize their lifetime income taxes. Knowing which investment accounts to use first in retirement can save you thousands of dollars in reduced tax.
One common mistake I see is retirees not claiming any income from RRSPs in the initial years of retirement. While this saves tax now, it can cause higher tax rates in the future. There may even be OAS clawback that could have otherwise been avoided.
Factors which make a drawdown strategy especially important:
Retiring early
Delaying the start of CPP
Large RRSP balances
Owning multiple properties
Income that is close to the OAS clawback threshold
Tax planning is a complex topic, so getting help from a professional can be well worth the cost. If you're creating a plan on your own, start by learning about marginal tax brackets.
6. A Plan for the Unexpected
Even the best retirement plans are subject to surprises. Many will be positive, but there will likely be an unpleasant shock or two. Knowing this in advance and making a plan for how to react will put you far ahead of the average retiree.
Common retirement shocks:
Stock market declines
Home repairs
Major dental expenses
Early death of a spouse
While it's impractical to try and prepare for every possible retirement shock, a few proactive steps can make you more prepared for whatever life throws your way.
Actions you can take now:
Make a list of big upcoming expenses in the next five years
Set aside an emergency fund
Know where you could make short-term spending cuts
Estimate the impact that the early death of your spouse would have on your budget
Identifying the common problems and how you'll respond will help you avoid rash decisions in the heat of the moment.
Make Your Retirement Plan Today
With these six elements of your retirement plan prepared, you can be confident that you'll be ready to make the most of retirement.
If you’re feeling overwhelmed by all the work needed to create a plan, you can book a free introductory meeting with me.
