Retirement is a source of anxiety for many of us. We fear that we will not have enough money to live comfortably for the rest of our lives. To alleviate these concerns, carefully planning for retirement is crucial.
Planning can make all the difference. Although it may seem complicated (and often, not a priority for young adults), it is quite simple.
Planning for retirement should begin as soon as a person enters the employment market. Retirement goals will change at different points in your life, depending on your priorities and significant events, whether they are planned or not. Subsequently, a retirement plan is ideally reviewed annually to ensure that the goals remain realistic.
Here are, in general terms, the steps to take for an adequate retirement planning.
1. Accumulation period (while in the job market)
- It is time to set up a systematic savings plan. Ideally, the amount set aside should be between 10 and 18 percent of your total income. If it is not possible to invest at least 10% of your income, any amount will do to get started. The main goal is to develop good savings habits.
- The preferred investment products are RRSPs, an employer-sponsored pension plan, or even TFSAs, depending on your income.
- The investment horizon is still long term at this stage. The funds can be transferred to types of investments with a higher return potential, such as stocks and mutual funds. Your risk tolerance, as an investor, must be taken into account.
2. Preparation for retirement (about 5 years before retirement)
- It is time to protect the money you’ve earned. The portfolio can be transferred to low-risk investments such as those that offer a guaranteed capital. To adopt the best strategy, your needs should be reassessed, taking into consideration your investment horizon, as well as your risk tolerance.
- Now is also the time to increase systematic savings to fill the gaps, if it has not been done already. Typically, financial obligations and debts are usually lower at this time, allowing you to put more money into savings.
3. Payout to fund retirement
- It’s time to start enjoying your hard-earned income. The goal now should be to withdraw your funds, so that your money is liquidated over the most extended period.
- At this point, depending on your portfolio, the investments should be transferred to retirement income such as RRIFs, LIFs and annuities.
- You have to decide when to withdraw the government benefits such as CPP and Old Age Security.
- The disbursement plan should consider expected income, tax impact, and spousal status.
At all stages, it is essential to determine the amount required to reach your retirement goals. To do so, it is necessary to estimate the expected expenses at retirement.
In order to do this, you must first determine the number of years of retirement that the accumulated savings must finance. Afterwards, you need to forecast your annual budget in today’s dollars, add the estimated inflation, and subtract other potential sources of income, such as government pensions and employer pensions. The difference between the annual amount necessary to fund retirement and the sources of income will be what you need to fully meet your retirement goals.
This exercise can be done at any stage of life, but the earlier it is done, the more time there is to adjust the planning. Of course, it’s never too late to set up a retirement plan. We strongly recommend that you consult a financial advisor to maximize your chances of achieving your goals, and to give you the peace of mind that you need.
Serge Breton, CFP
North East Region