Whether you are 30 years or 30 days from retirement, you must take the time to determine how much money you will need in retirement. In most cases you will not have the same spending habits in retirement as you have during your working years. How much you need is completely dependent on your spending habits. Retirement as a snowbird with a residence in Canada and a second property in the US is a very different retirement than someone who prefers hobbies like gardening and golfing, coupled with volunteering regularly.
A balancing act
The next step is to determine the best way to create the income you need to support the lifestyle that you want. It is important to be realistic. The entire retirement planning process is all about balance and tradeoffs.
On one extreme, I know people who have saved and saved for retirement living a fairly frugal life during the working years. Often these people become so accustomed to a modest lifestyle that when retirement roles around, they continue their frugal ways. Quite often these people have more money than they need and will wind up dying with healthy bank accounts.
On the other extreme, I know young people who spend and spend, in what I call the now society without putting any money away for the future. These same people have nice cars, nice homes and nice lives but enjoying life today means they may have to make some sacrifices down the road. It might mean retiring later, spending less in retirement or having to ramp up the savings later in life.
Income comes from 5 sources
When it comes to replacing your income from work, you do not have to look further than one of five sources:
- Government Benefits. You have little to no control in this area. The governments make and change the rules regularly so planning in this area is difficult. The best thing to do is to take the time to understand the rules and estimate how much you are going to get from CPP and OAS.
- Company Pension Plans. If you work for a company with a pension plan, this potentially will be one of your greatest sources of income. The key to pensions is tenure. Typically people who work for the same company for a long time, benefit most from company pension plans. Unfortunately, there is less loyalty both from an employee standpoint as well as an employer standpoint.
- RRSPs. With RRSPs, you will have tremendous flexibility in terms of what you can invest in, how much income you can draw and when you plan to draw the income. How much you have in RRSPs is entirely dependent on you. You have all the control. How much you put away and what you invest in will determine your own fate. You will have many RRSP income options to choose from.
- Non-RRSP savings. When you are in retirement, your non-RRSPs will give you the most flexibility. Bonds, GICs, Rental Property, Life insurance, mutual funds, stocks and businesses will give you lots of opportunities to create income after work. The key to drawing income from non-RRSP savings is tax efficiency. The good news is with proper planning, you have the control to create tax efficiency.
- Your Personal Residence. If you have a lifestyle that cannot be supported by the four other sources of retirement income, then you may want to look at the equity in your home to supplement income. Reverse mortgages are becoming more popular as our society ages. They offer viable options to create extra income.
Retirement planning is rarely easy. Trying to balance issues surrounding budgets, income, lifestyle needs, sources of income, taxation, investments, etc can be very complicated and confusing. In the next series of articles I will try to tackle some of the most common issues surrounding retirement planning like:
- Understanding government benefits.
- Dealing with pension income
- When is the best time to draw from your RRSP?
- What are the options for the RRSP?
- How do you create income from non-RRSP?
- Conservative investing in retirement
- Tax efficient income planning
- How do you put it all together?