Banner Ad

Home / News / The Big Picture Video / About Us / Advertise / Contact Us

WHEN IT COMES TO RETIREMENT, PLANNING IS EVERYTHING!

By: Patrick Longhurst & William Jack
October 2008

U.S. President Dwight D Eisenhower once said, “Plans are nothing; planning is everything.” This is particularly true of retirement plans based on an uncertain future for an unknown period of time. However, we sincerely believe that the process of planning for retirement is immensely valuable, as we will demonstrate in the balance of this article.

Retirement Planning

OVERALL PICTURE

The justification for planning for this major period of our lives is clear. As the Cheshire Cat said to Alice, “If you don’t care where you’re going, it doesn’t much matter which way you go.” By planning you obtain an overall picture of your retirement. Considerations include:

  • Are the lifestyle and financial elements of the plan aligned?
  • Are there particular minefields you need to avoid?
  • Are there major decisions which need to be made now or at some point in the future?

Retirement PlanningAt lower income levels, the key factor for any retirement plan must be the ability of the sources of income available to provide for the necessities of life. Lifestyle issues generally come second to these fundamental financial concerns. However, for readers of this magazine, the opposite is likely to be true. Assuming that your sources of retirement income are sufficient to provide for both core expenses and anticipated special events, the key questions have to be:

  • What will I do with my time?
  • How will I protect myself against unforeseen circumstances?
  • What will I do with the excess?
  • How will I achieve all of this in the most effective way?

PLANNING YOUR LIFESTYLE

When we are working full-time, it is sometimes hard to believe that we have more than 100 waking hours a week to fill. After we have factored in work, non-negotiable social events, and time with family there is normally precious little time left to relax and enjoy hobbies, participate in volunteer activities, or simply hang out with friends. When we retire, the opposite is true. We have the ability to create our own lifestyles in a way we have never known in our lives before. This can be a blessing or a curse and planning is the great differentiator.

Research has shown that the more demanding your job, the more difficult the transition to retirement is likely to be. Leaving a job on Friday, where you were working 60 hours a week, to go to a life on Monday where you have zero commitments is almost certain to harm you both physically and mentally. Most of us need a structure in our lives and it is up to each of us to create one. The key to this process is to build something that you retire to, rather than focus on what you have retired from.

Retirement Planning

A typical thought process would involve the following steps:

  • What are my needs and motivators/my strengths and transferable skills?
  • What do I want to do, and what am I good at?
  • What of my existing hobbies and passions which I would like to spend more time on?

Oh, and don’t forget; if you have a spouse or partner, do involve them in the discussion. Never assume they will blithely go along with your plans!

If approached properly, the early years of your retirement can be a wonderful phase of your life. You can:

  • Do what you want
  • When you want
  • With people that you want to be with

The later years of your retirement will be harder to predict as they are highly dependent on your health and the health of your loved ones. So ask yourself now questions such as:

  • How long do I want to remain in my current home?
  • What are acceptable options if I am no longer able to look after myself?
  • What would I do if I can no longer drive?

You can both then make your wishes known and also be mentally prepared for when they do occur.

DEALING WITH THE UNEXPECTED

The process of preparing financial projections involves projecting future sources of income from:

  • Existing registered and non-registered investments
  • Any private or government sponsored pension plans
  • Additional remuneration from part-time work, directorships, etc.

Then, compare them with expected sources of expenses based on the lifestyle plans you have developed. You need to include:

  • The costs of daily living – home, entertainment, clothes, vacations, etc.
  • Major life events such as weddings, home renovations, and special trips
  • Federal and provincial taxes

Naturally, these projections also include a large number of assumptions about the future ranging from rates of return and rates of infl ation to life expectancies and automobile costs. The only thing we can be sure of with these assumptions is that most of them will ultimately prove to be incorrect. However, they represent the best attempt that we can make at the time. Despite these shortcomings, these projections are valuable because:

  • They require the discipline of bringing together all your financial information in one place at one time.
  • Over time, they create a comprehensive picture of where your finances are heading.
  • By creating various scenarios, they can be used to illustrate the financial impact of any set of circumstances that may be of interest to you.

By using a scenario approach, we can investigate certain situations which might throw your planning into serious disarray:

  • What if my unfunded executive pension suddenly stops being paid at age 65?
  • What if I should die at an early age?
  • What if I need to be in residential long term care from the age of 70?

By analyzing these situations, you can evaluate the options of obtaining insurance to protect yourself or of self-insuring the risk through the assets you have accumulated. This is not pure ‘recreational’ planning. If you need to purchase insurance, it should complement any post-retirement group benefits you may be entitled to as a result of your past employment. As time goes by, you may find you are uninsurable for personal life insurance or that the costs of critical illness insurance or long-term care insurance have increased significantly.

Of increasing concern to retired individuals is the risk of outliving their investments. This risk can be mitigated through the use of insurance, deferred annuities, or guaranteed minimum withdrawal investments. If you wait until you know you need the protection, it will be too late to do anything about it.

Planning RetirementDEALING WITH THE EXCESS

At a recent meeting, one of our clients indicated that she was well aware that she had more than enough assets to provide for her own retirement. Her interest was in developing a plan for charitable donations and gifts to family members which could be implemented in the short-term without placing her own financial security in jeopardy.

Charitable giving is a popular topic for many of our clients, given the number of approaches that are available and the favourable tax treatment of each one. Once again, this is a topic better dealt with in your planning than as an afterthought at the end of the day, when it is likely you will be giving more of your money to the government in the form of taxes and less to the actual charities you would like to benefit.

Retiring boomers are also wrestling with the challenge of helping their children now, rather than later. Many of us like the idea of keeping our children somewhat ‘lean and hungry’ so that they are driven to make it on their own, rather than knowing that their future is assured whatever they may do. However, some gifts, used creatively to help with the purchase of a first home or the setting up an entrepreneurial business, will be greatly appreciated. It is hard to know how generous to be now, without having an overview of the long-term implications for your own security.

Of course, the other element of planning your estate involves keeping your wills and powers of attorney always current and reflecting your wishes. We are often surprised at how many clients with complex personal situations take a cavalier approach to these documents which are so reasonable to update. By checking out the provisions of your will against your financial model, you can see if your intentions would actually be realized in practice. Wills that, for example, leave the family cottage to one child and a portion of the remaining estate to another may appear fair, until the effect of taxation is taken into account. When you are drafting your powers of attorney, you should also be sensitive to your choice of executors. We have seen many examples of strange and selfish behaviour exhibited by a family when potentially large amounts of money are involved.

Retirement PlanningDOING IT EFFECTIVELY

While we believe that the key elements of retirement planning lie in developing the big picture, there will be strategic decisions which can be made from time to time which will represent your best efforts at fine-tuning the strategy.

Most individuals want their plans to proceed in the most tax-effective way possible. Prior planning may suggest, for example, that starting your Canada/Quebec Pension Plan benefit at age 60 and splitting it with your spouse is a sensible move which is consistent with your overall philosophy. However, you don’t actually have to make these decisions until the day you apply for your benefit. So a part of planning is to be aware of a mental, or documented, list of decisions which will have to be made at some point in the future, and your current views on each one. In addition to the CPP/ QPP splitting, this list will include:

  • When to convert your Registered Retirement Savings Plans (RRSPs) into Registered Retirement Income Funds (RRIFs). Based on the latest Federal Budget, this could now be as late as the end of the year in which you reach the age of 71.
  • How to deal with any Locked-in Retirement Accounts (LIRAs). These provincially regulated programs are constantly changing. There is an ongoing trend towards reducing the restrictions on the paying out of these benefits.
  • Splitting your income from RRSPs, Deferred Profit Sharing Plans (DPSPs), and Registered Pension Plans (RPPs) with your spouse for tax purposes. This can be a very attractive approach for individuals who have a significantly higher retirement income than their spouse.

Other issues will need your immediate input. For example:

  • Developing a strategic approach to managing your money in the light of the need for income demonstrated in your retirement projections
  • Deciding whether to continue to make maximum RRSP contributions and, if so, if it would be more tax effective to make these into a spousal RRSP
  • Investigating other vehicles, such as Individual Pension Plans (IPPs), to see if they could be appropriate for your situation as, if you wait until you retire, the moment will be lost

This article has demonstrated that we are strong advocates for the value of formal retirement planning. We believe this planning should start with a vision of your personal retirement dream, through an assessment of your overall financial situation, and finish with a set of decisions about your personal finances and your estate distribution.

We recognize that not all of us like to plan. Some will argue that they have survived successfully up to now with no formal planning process in their lives. Our response would be that the retirement phase of your life is unique. For once you are in control and you make the rules. To do so without planning seems to be unwise, to say the least.

As a final word, include fun in your plans. Without it, retirement will be a very dull time.

Patrick Longhurst and William Jack are certified financial planners and the principals of Longhurst & Jack Inc., a firm which provides independent advice to individuals approaching retirement.

Sponsored Content header

banner sample

Private Wealth

 

Home / News / The Big Picture Video / About Us / Advertise / Privacy / Contact Us
©2014 Private Wealth Canada. All rights reserved.
Banner Ad