3 basic steps to a retirement plan
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.
Hi Jim Yih,
Thanks for such a interactive post,I totally agree with you, retirement anxiety is a very common problem nowadays and it’s very alerming for any development country where has mass population, such as India.
I certainly appreciate the benefits of a retiree developing his (or her) “retirement vision.” We should keep in mind however, that none of us can fully anticipate our retirement. I think it’s quite normal therefore that we might expect a bit of “floundering around,” while we discover “our true retires self.” Bill
Thanks Bill! I agree and believe that Self discover is important at all stages of life. It’s part of the journey. Just because you do it pre-retirement does not mean you should stop once you retire. However, I think people that don;t do any of it or enough of it prior to retirement in hopes that they will have more time in retirement, may be doing themselves a disservice. Self discovery is so important that it needs to be a priority no matter how busy you are.
Thanks for sharing!
Yes, I certainly agree that people should begin thinking about, and planning for, retirement beforehand. Bill
Are you familiar with the book, “You Could Live A Long Time, Are You Ready”? I haven’t read it myself yet but I’m waiting it’s arrival. It’s written by Canadian Lindsay Green and is about retirement lifestyle with a focus beyond just the money. ie, creating a fulfilling retirement through volunteering and other choices. I would be interested to hear feedback on this book from anyone who has read it.
Jim, can you direct me to any entries you may have already made discussing the virtues of using a TFSA vs. an RSP as a vehicle for saving for retirement? I am mulling over dividing my future retirement savings between the two types of accounts. My thinking being, I expect to have a low-ish retirement income (currently in the process of a divorce which includes selling the home & plan to rent as I simply don’t have sufficient cash flow to pay off a mortgage by 65 & maintain a home ongoing) and at some point I can see I may well end up in a senior’s complex where my rent would be based on my income. And since TFSA withdrawals will not form part of an income calculation that would help to keep my potential rent low but I could still have the cash inflow from a TFSA. My current marginal tax rate is 30%. I am aware that rent to income calc’s can be up to 70% (or more!) That is a significant spread…. your thoughts please (& thank you in advance!)
Well, I see there are lots of articles about TFSA’s vs. RRSP’s if I’d only done the logical thing and looked in the archives before I asked the question!
However, I would still be interested to know if there is somewhere that compiles or discusses the types of things to be aware of that may be subject to income testing. ie provincial medical plan premium assistance, rent-to-income, or…?
As a 61 year old with no retirement income other than a tiny CPP benefit I wish I had been less anxious and a whole lot wiser as I look forward to years of poverty before I die. It is in many ways my own fault, and I always counsel young folk I know to not do what I have done…too late now
Start 401K as soon as possible and start contributing. 401K is one of the easiest way to save for retirement. Plus, your company will match certain percentage which is a bonus.
unfortunately my situation is not that simple..but I appreciate the reply…
I think a major issue is like what Jim had mentioned in that people don’t have a retirement vision. If a person can picture what they want their life to be like, they will be more inclined to make sure that they achieve that. I also love the idea of splitting up your discretionary and your basic expenditures. I tell people all the time to track their spending and separate it between their needs and wants. Very quickly they’ll be able to see how much money they waste on things they don’t need and hopefully this will lead them to stop spending and save more. Thanks!
By coincidence, I just attended a presentation at the local Charles Schwab office. The presenter spoke on the importance of retirees separating necessary expenses from discretionary expenses. Bill
Well….having read Stephen’s post, I’m thinking I might need to look into my plan. It’s been awhile.
really like the post re discretionary and basic expenditures, I have to say I have had my head in the sand for so long the bright light is killing me…
I am looking at ways of creating a small income to live on, it is going to be tough, but I am still alive and life demands that I act..
Most people do not look into their future. They are too busy living day to day and there is not much motive to plan for the future. Until people start thinking about their future years, it’s going to be difficult for them to save now for their future. The easiest way to save for your retirement is via 401K. I highly recommend starting 401K as soon as possible if you don’t have one.
Yes, I agree with you. Nowadays everyone is busy with their own lives. They don’t have time to think about their future as they want to live in the present more. But saving for future is very important part of our life.We have to make plans for our future from today only. Because if time goes It will not come back. With work, we need to save money for our future too. So, we can spend our future happily.
I recently found this site and have enjoyed reading many of the articles. It would be helpful if a date was included as there is nothing to indicate how old the articles are (or the comments). Regarding “You see, you cannot spend your gross income.”, all I can say is: yes you can! The whole fun of my retirement planning has centered on tax free locations and we are off to Portugal. This may not apply to US citizens though, as the US is one of just 2 countries that tax based on citizenship, as opposed to residency. An extra 30%+ disposable income makes for a very nice travel budget every year!
Every time i read your post . It makes sense and it is easy to follow.
Thank you .