Whether you’re
currently retired, nearing retirement or have years to go, everyone has a vested interest in retirement
planning. It can also be confusing, which often results in losing hard-earned money to unnecessary taxes.
To get started, you need to establish where you are today and determine what level of income you want once
your employment income ceases. For those who are currently retired, the process is identical, but the focus
is on cash flow. To perform your calculations, you’ll need to make some assumptions, including:
• Investment return rates
• Mortality rates
• Inflation rates
• Taxation rates
• Basic lifestyle expenses
• Variable lifestyle expenses
• Government benefits
Remember the phrase “garbage in — garbage out” when using assumptions. Incorrect or unsuitable ones can
result in an unwelcome future, and this applies to both “do-it-yourself” plans and ones compiled by a
financial advisor. Be prepared to question the assumptions used and how they were derived. Knowledge in this
area cannot be underestimated.
Completing the steps above using reasonable assumptions will give you a projection on whether or not your
retirement plan works. But keep in mind this is only a projection; actual “planning” hasn’t started yet. This
is where your decisions can make a significant difference between achieving your retirement goals and falling
short.
The following questions are crucial, and can have a dramatic effect on your retirement plan’s success:
• What investments do you draw upon to fund lifestyle expenses?
• Do you invest in “tax-preferred” vehicles for money outside of registered plans?
• Do you defer using RRSP/RRIF options until later in retirement or start them earlier?
• Do you take government benefits early? What about company pensions?
• How do you “split” income, and why would you?
• Have you determined the positive and negative effects regarding the “sequence of returns” on your
investment portfolio?
As you can see, there are many areas to consider when formulating an effective retirement plan. Let’s assume
that you have answered the above questions (in actuality, only a partial list) and implemented your plan with
confidence. What about maintaining it? Are you aware of any recent federal or provincial budget changes
affecting retirement income? What about proposed changes that come into effect in 2009? Has your investment
portfolio changed because you withdrew income? Good retirement planning is an ongoing process, which means
reviewing your plan regularly and making the necessary adjustments.
Planning your retirement effectively means using reliable information (facts) and eliminating unrealistic
elements (fiction). The end result lets you establish a plan that will produce the most tax-effective income,
for the longest period of time and with the highest possible estate values (the subject of my next article).
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Peter Murray is a senior financial planner with Assante Capital Management Ltd. in Calgary. Find him
online at: pmurray@assante.com or http://www.assante.com/advisors/pmurray.
