It’s been said that 6 out of 10 Canadians have no plans for retirement. That’s not a very encouraging statistic. Maybe that’s the reason there is a lot of retirement anxiety happening in this country. Planning is the best cure for retirement anxiety.
So what is a retirement plan? What does it look like? Where would you go to get a retirement plan done? Unfortunately for too many Canadians, the financial industry is quick to jump to products as solutions for retirement planning. Too many retirement calculators jump to a number as the conclusion of a retirement plan . . . You need to save $2.8 million dollars to achieve your retirement dreams.
In my retirement workshops, I teach people that retirement plans are not products and it’s not a number. Retirement planning is simply looking into the future to make that future as predictable as possible. It’s about looking at where you are today, where you want to be and finding the most desirable path to get from her to there.
At the root of retirement income planning there are 3 basic steps to determining if you will have enough after-tax income to meet expenses:
Step 1: Plan Your Lifestyle
The starting point of a retirement plan is to think about what will make retirement the best years of your life. It’s about developing a retirement vision. Have you ever had moments where you were looking forward to something so much that you could not sleep? Maybe it was a trip, or a special course, or meeting an old friend. Whatever it was, it was so exciting that you could not wait for it to happen. Or have you ever experienced a day when time just flies by? Often time seems to fly by when you are having so much fun doing what you are doing that the activity just becomes effortless. Some people experience the opposite when the clock seems to be moving too slowly. This can happen when you are not engaged in what you are doing. They can’t wait for it to end because it has little or no meaning to them.
Making retirement the best years of your life should be about replicating great moments. It should be about being so excited each and every day because you are doing the things you love to do. Ideally, these years of your life should be happy, fun and filled with meaningful activities that represent who you are and some of your passions in life. How can you know how much income you need or how much to save if you have no idea about what you are planning to do in retirement?
Step 2: Develop a Retirement Price Tag
Regardless of your age or stage of planning, it is important to understand your spending in such a way that it would help you to recognize how much money you might need on a day-to-day, month-to-month or year-to-year basis. In retirement I see too many people sacrifice their lifestyles to accommodate less income in retirement. Instead of adapting a lifestyle to an income, wouldn’t the goal be to establish or create the income needed for the lifestyle you want?
Spending typically breaks down into one of two categories, basic expenditures and discretionary expenditures. The price tag comes about when you can differentiate those expenditures that are essential to your survival from those that improve the quality of your life.
The closer you are to retirement the more important it will be to scrutinize your spending to determine your retirement price tag.
Step 3: Go Looking for the Income (Paycheques)
One of the key learning steps in our workshops is the hunt for income. The theory is that the more sources of income you have in retirement, the more money you will have in hand! Once you have a sense of the lifestyle you want and the price tag for your retirement based on that desired lifestyle, the next step is simply to begin the hunt for the paycheques of retirement.
Another critical part of the income strategy is prioritizing the income. Once you know how much you will get, it is important to develop an income strategy that prioritizes income based on tax efficiency. You see, you cannot spend your gross income. The only thing you can spend is your net. Therefore, it is critical that part of your plan and your projections reflects that different paycheques or income sources may be taxed differently. Its so important to understand the difference between marginal tax and average tax.
Basically, a retirement plan is really a projection of your income and expenses into the future. If you have enough retirement income (after tax) whether it comes from Canada Pension Plan, Old Age Security, RRIFs, Annuities, Pension plans or other sources, to meet your retirement price tag, then you should be in a good position to retire. If not, then the plan should help you to see ways that you can compromise and get your to review your options.