Part 1
THIS RETIREMENT THING
Golf clubs? Or hockey sticks? The transition to retirement is a whole new game. What will it look like? I’ve never played it before. The planning strategies you used to prepare for retirement during your working years mostly aren’t applicable now. You need new skills to map everything out and prepare for the contingencies of retirement.
Chapter 1 We Don’t Know the Score
Retirement income planning is not an exact science; there are too many variables and details in each retiree’s situation to suggest that you can employ a cookie-cutter solution. We don’t know how long we will stay healthy or how long we will live. Or what family situations will arise. Will we still need a certain level of income in thirty five years? Or will everything have changed thirty five days from now?
Chapter 2 It Depends
“It depends” is the universal answer to many questions about retirement Income planning. Anybody can make a case for their bias on retirement income topics but that ‘answer’ may not reflect your own circumstances. Should I take my CPP early? Or should I defer it as long as I can? It depends. Are you spending your personal savings in the meantime to replace that income? Do you expect to live a very long time? Would you be depending on a survivor benefit to top up your own CPP benefit? Every individual situation is unique.
Chapter 3 It Seems to Me That Every Year……I Am Getting Older
I can’t tell you how often I have heard clients tell me why they have chosen to retire. Once they have experienced the loss of a friend or family member or learned that someone close to them has developed serious health issues, they feel their own mortality more keenly. They understand, emotionally, as well as logically, that it could just as easily have been them, and so they decide to leave work and retire while they still have their good health and are “on this side of the grass.”
Chapter 4 This Ain’t Your Mom and Dad’s Retirement
Having discretion with your time is usually a key incentive for retiring. And among my clients, I have also witnessed that the ones who are really enjoying retirement are not simply making it a ‘life of leisure.’ Far from it. They are finding fulfillment in having structure and purpose; in the retirement space, they are the ones taking charge and setting the agenda. They are first planning how to use their time, which in turn helps them plan how to use their money.
Part 2
FROM ACCUMULATION TO INCOME
Chapter 5 The 30,00-foot View
The first question that needs to be answered as you are coming close to a retirement date is, “Can I afford to retire?” As you already know, the answer is, “It depends.” Do you have sufficient assets and benefits to create the sustainable income you need so that you can have the lifestyle you want? An initial assessment is the 30,000 foot view.
Chapter 6 Flippin’ From the A-Side to the B-Side
Saving for your retirement is only half of your financial adventure. If you are about to retire, your days of saving for retirement are pretty much done. It’s all downhill and easy from here, right? Well…not really. As dangerous as it is to climb to the top of Mount Everest, coming back down is even more deadly. (Research from the British Medical Journal, stated that 56 percent of the fatalities on Everest involved climbers who were descending the peak.) Co-ordinating various income streams and drawing down your assets in retirement can be quite complex. You might need an experienced sherpa.
Chapter 7 The Concept of Outcome
Improvements large and small, applied to how your retirement income is delivered and your income-producing assets are managed, can greatly enhance your outcome. The factors are integrated and each can have a huge impact over the long term. Planning retirement income is iterative and ongoing; circumstances and variables are always changing. The single most important requirement for you and/or your advisor is to pay attention to details, especially in the early years. In the end, the goal is the best outcome.
Chapter 8 The Value of Advice
What is the potential impact of a qualified advisor on your overall financial outcome? In the big picture, there is a connection between what you pay your advisor or institution for the services they provide to you and the potential to enhance your outcome. As a consumer, you need to receive value in exchange for the fees you are paying, otherwise fees serve only to reduce your investment returns. What is your most definition of ‘value’? Is it guidance and a better net outcome? Or is it strictly an implied difference in fees?
Chapter 9 It’s Time to Get a New Plan, Stan
The decisions you make at the outset of your retirement — the direction you determine and the actions you take — all have a substantial impact on your long-term financial outcome. Questions and uncertainties are natural. The right advisor can create a comprehensive sustainable retirement income plan to help guide you to the solutions that are right for you. You’ll feel better when your well-designed monthly retirement paycheque hits the bank.
Chapter 10 The Advisor You Have Been Using
While the relationship is important, the level of your advisor’s proficiency and competence with retirement income planning is paramount. Managing retirement income is much more complex than, and dramatically different from, the financial advice that applies in the accumulation years. When you are moving into the income phase of your life, you want to be completely confident in the advice you are receiving. If not, you may want to investigate other options. This is definitely one time when you should be using a specialist. The early years of your retirement are particularly vulnerable to mistakes with long term consequences.
Chapter 11 Be Wary of This Standard and Outdated Advice
This common advice in retirement planning is the best example of one size definitely not fitting all, and yet retirees continue to be advised to ‘”wear it.” Many people are counseled, and still believe, that deferring withdrawals from their registered sources of income (RRSPs, RRIFs, LIFs etc.) for as long as possible is the best strategy. That often leads to excessive taxation and claw backs in later life, just when you need more security. While there may be certain situations where this advice makes sense, the reality is that for many retirees, it can often sabotage the potential for a beneficial financial outcome. It depends.
Part 3
YOU MAY HAVE STOPPED WORKING, BUT THE TAX COLLECTOR HASN’T
Let me tell you how it will be — There’s one for you, nineteen for me
‘Cause I’m the taxman — Yeah, I’m the taxman
Should five per cent appear too small? Be thankful I don’t take it all
‘Cause I’m the taxman — Yeah, I’m the taxman
- The Beatles – Taxman
Chapter 12 Taxes are So “Un-Rock and Roll”
How much is a taxpayer’s ‘fair share’? As bad as a 50-percent marginal tax rate may be to Canadians, it is nothing compared to what happened in Britain during the time we Boomers know as music’s “British Invasion.”
Chapter 13 Taxation of your Retirement Income
Taxation is so much more “in your face” in retirement. Where your payroll department used to look after tax withholding and remitting on your earned income, retirees now have to figure out how to pay the tax owing on several different sources of income which are taxed at different rates, and to make tax installments which are sufficient but not excessive. It’s a new and daunting exercise for many.
Chapter 14 Getting the Next Dollar, After Tax
How much “strain” are you putting on your income-producing assets in order to get a dollar to spend? Just as the exchange on US dollars can ratchet up the cost of travel across the line, so can high levels of taxation increase the cost of getting a dollar to spend from your savings. Be vigilant about marginal tax thresholds and the tax treatment of different types of income so you can ‘layer’ your income efficiently.
Chapter 15 Line 23600 – Your Net Income
“Your Net Income is used to calculate federal and provincial or territorial non-refundable tax credits. The CRA also uses your net income (and your spouse’s or common-law partner’s net income if you are married or living common-law) to calculate amounts such as the Canada child benefit, GST/HST credit, social benefits repayment and certain other credits.” — Canada Revenue Agency (CRA)
You need to understand the critical importance of this line on your tax return in order to better preserve government benefits and credits.
Chapter 16 How the Tax System Discriminates Against Single Retirees
Couples in retirement enjoy some special tax advantages and strategies that are unavailable to single retirees and are affected by the type of income you create, which sources you use and which you defer. We need a revolt.
Part 4
KEY FINANCIAL PLANNING POINTS FOR RETIREES
Over the thirty-plus years I have been putting together retirement income plans, there are some areas of discussion about the process which are brought up frequently by the clients, and some that I feel they need to be aware of and address in their personal strategy.
Chapter 17 The Most Common Question in Retirement Income Planning
Should I start my CPP early? Or should I wait and get a higher payout? This, in my experience, is the most common question asked in retirement income planning. Maybe that’s because there is no one correct answer.
Chapter 18 Old Age Security
Get it while you can. Give serious consideration to first using those income streams that disappear when you do.
Chapter 19 Creating a “Bridge” to Government Pensions
Not all of your income sources may be available at the time you retire. You may need to create an interim bridge from your personal savings to serve until your government benefits are collectable.
Chapter 20 Dealing with Inflation
You need to plan for inflation, and you need to have an investment strategy to address it, but there are unique considerations as your spending needs change in retirement. You might not need a fully-indexed income all the way through retirement. But you need to ensure that you have the flexibility to make adjustments when necessary.
Chapter 21 TFSA’s “Rock”
Continuing to fund your Tax-Free Savings Account throughout retirement may be one of the most beneficial things you can do. It’s a small improvement over an extended period of time with a long-term positive impact on total outcome.
Chapter 22 Money and Family Dynamics
The chat that parents need to have with their children can save time, money and, most importantly, family relationships. Estate planning is not an easy or comfortable topic to address, but discussions around issues this important seldom are.
Chapter 23 One of the Biggest Dangers to the Financial Well-Being of Retirees
Generosity is fine and so are children . . . both up to a certain point. When asked to identify the top five threats to their financial health, I’ll bet few retirees would think to put their own family on the list.
Part 5
THE INVESTMENT BASICS YOU NEED TO KNOW
I am constantly surprised that retirees who have been investing for many years are frequently unaware, unsure, or un-informed about some of the more basic investment concepts. Even if working with an advisor, comprehending key fundamentals will help you understand the options and strategies presented to you.
Chapter 24 Your Withdrawal Rate
There is a delicate balance between spending the money you have saved and making sure you don’t outlive your retirement income. Your income years involve a dance between contradictory impulses. You do want to spend and live for today, but you can’t put yourself in a position of overspending and depleting your capital. Your withdrawal rate will be a significant factor.
Chapter 25 What Happens to Bond Values When Interest Rates Rise?
There are times when the ‘safe’ part of your portfolio can actually reduce your returns. People often confuse bonds with GIC’s. GICs are individual deposit certificates which are not traded and are usually held to maturity for the guaranteed value. Bonds have a guaranteed maturity value and interim interest payments, but are bought and sold on the market throughout their term, and therefore have a ‘market’ value which fluctuates. In the trading process, they are subject to gains and losses. A rise in interest rates can actually result in a loss of value on bonds which are sold before maturity. So, theoretically less volatile than a stock portfolio, a bond portfolio may very well be ‘underwater’ at certain times.
Chapter 26 Understanding Variable Investment Returns
They are called ‘variable’ portfolios because you will see peaks and valleys in the value of your investments. Don’t react to the short-term performance of your holdings. Chasing returns invariably results in long-term underperformance of your portfolio. ‘Buy high and sell low’ is a recipe for disappointment.
Chapter 27 The Diversification Table
Predicting the next winner is a difficult task. The historic tables of asset class returns over time illustrate this fact perfectly. In retirement, your investment horizon is decades long and your portfolio should be well-balanced between asset classes so you are positioned to benefit from the emerging outperformers.
Chapter 28 Joy, Fear, Smiles, Tears
A critical role of the advisor is to help coach clients and control their emotions in bad markets and in good markets. Investors need to keep their emotions in check so they don’t make bad decisions that undermine their objectives.
Chapter 29 The Inevitable GIC Comparison
Abandoning your investment strategy and your plan in times of volatile markets may make you feel better, but it likely won’t make you do better. You need to think through – carefully – whether the short-term relief of switching up a variable portfolio for the ‘safety’ of GICs truly benefits you over the long term. As we’ve seen, we can get stuck in an extended low-rate environment. And GIC rates don’t keep you ahead of inflation. You’re likely to be retired for a long time. You’ll need a good measure of growth potential and flexibility.
Chapter 30 (Keep On) Rockin’ In the Fee World
Fees are an important consideration in the performance of an investment portfolio, but by no means are they the only factor in a successful outcome of your retirement income plan. As consumers, we are “hard-wired’ to look for the lowest price on identical items. Comparing fees doesn’t apply the same way here. The acumen of the advisor, the overall strategy, tax efficiency, investment attributes, cash flow execution and ongoing servicing will all come in to play. You’re looking for ‘value’ for price.
Part 6
INVESTING IN RETIREMENT TO GENERATE INCOME
Investing your capital is yet another area that is different in the income years, compared to the accumulation years. In addition to some specific elements of investing for income, I will share with you an income strategy that our clients find very appealing.
Chapter 31 Creating the Income You Must Have
Warren Buffet tells us that the most important rule for investors is to understand what you are buying. I agree, and also hasten to include other considerations of equal importance if you are investing to create income in retirement. What is the purpose for, and strategy behind investing in certain vehicles and products to create the income you need? How do the investments align with your plan so it can be executed year after year? How does the investment strategy deliver reliable, sustainable income even when stock markets are down? Know the investment strategy and understand how your investments help to execute it. It will give you confidence in your plan.
Chapter 32 The Bull and Bear Chart
Historically, the stock markets are in positive territory most of the time. . .except, of course, when they’re not. Despite the fact that markets do recover from the inevitable downturns, in the income years, the focus needs to be on having a strategy for those times when markets are negative.
Chapter 33 Spend the Income, Don’t Sell the Investment
In retirement, don’t sell out or sell off – your investments, that is. Choosing investments that also generate income (in the form of interest or dividends, and realized capital gains) will allow you to stay invested through the ups and downs of the markets – helping you preserve your capital for the long term while providing the cash flow you need day to day.
Chapter 34 The Target Distribution Strategy (TDS)
While no one solution is “perfect” in every way, we have found the TDS to be one of the best ideas for meeting the challenge of creating reliable and sustainable income in a low-yield/high-volatility environment. And our clients are telling us that they are no longer focused or stressed over the day-to-day movement of the stock and bond markets.
Chapter 35 What If I Want/Need More Than 5 Percent?
If your retirement goals require a higher level of spending than you can get from the Target Distribution Strategy (which typically provides 5.0 to 5.5 percent of the capital invested as annual retirement income), you may need to consider a combination of investment strategies. i.e. the Cash Wedge/Target Distribution/Growth/Cascading model.
Chapter 36 Incorporating Guaranteed Income Into Your Plan
If you feel that you want or need to have some of your income guaranteed for as long as you live, and you’d rather it be that markets or interest rates don’t matter anymore in terms of their effect on your retirement income, you should explore the options available to you through annuities. Of course, there’s a trade-off, but you can make that choice in your personal best interest.
Part 7
THE EMOTIONAL SIDE OF RETIREMENT
Family, Health and Lifestyle Lessons
It’s not meant to be negative or bad, but this section is all about the emotional side of retirement and about some of the tougher situations we have to face at this stage of life. These are also the realities of retirement, where the financial issues meet the bigger non-financial concerns. I hope that sharing these personal stories from client experiences and reflections with you will make this book an even more complete guide to living your retirement to the fullest and appreciating the people around you.
Chapter 37 Ch-ch-changes
You need to find a way to deal with the changes that come with the journey through Life. During the accumulation years, it’s often all about the money and building up savings to fund your retirement income. After people retire, issues around health quite often take on much greater importance than money. Their enjoyment of life is going to depend largely on how they adjust to the changes that will inevitably occur.
Chapter 38 The Thought Process
Maintaining their autonomy and independence is the number-one priority for many seniors. But some level of cognitive decline is a natural part of aging for most people, as is the ability to analyze and assess more complicated issues. This may be organic, or it may just be a re-focus on other areas of more relevance for them as people move through this stage. It’s a good idea to put measures in place ahead of the curve to help you and your family address the future – come what may.
Chapter 39 Hey! My Freedom’s Been Stolen!
Your life can be hijacked by events outside of your control. As carefully as you may plan, these events can change everything. Your plans for retirement may be thrown off track by caregiving duties, for example. In that all-encompassing task, you also need to “take care of you.”
Chapter 40 The Waiting
At a point in life where time is such a valuable commodity, it is ironic that you may spend more of it waiting. And in retirement, largely because of the changes people go through, they may find that some of the most stressful times in their life involve the arduous task of waiting. Waiting to see a specialist. Waiting for test results. Waiting to feel better. Waiting can be a test of your patience and a weight on your spirit.
Chapter 41 Dealing With Loss
Just because the end of life is inevitable does not make it any easier to accept. There are certain things we just can’t prepare for. Ultimately, everyone will deal with their loss(es) in their own way and in their own time.
Chapter 42 The Story From The Other Perspective
A number of times, I have made that pensive trip to the hospital or hospice to see a client who is likely not coming home again. As emotionally difficult as my short stay can be, I would not miss the opportunity to say a final goodbye because of my friendship and respect for the people I have come to know. One of the most important services an advisor can provide to a client is reassuring them that their spouse will be looked after and that things will be fine. But, in truth, financial issues are not really at the top of the list for them at times like this.
Chapter 43 Facing the Challenges The Will Confront You
You can’t prevent change; it is constant. How you effectively deal with things that are different will determine the impact they have on your life. When you are faced with a change or a challenge, “Don’t Stop (Thinking About Tomorrow)” – Fleetwood Mac