RETIREMENT PLANNING

Retirement planning is all about Retirement Readiness and that is being financially prepared for your retirement years when your income source change from employment income to what your savings and employer and/or government pensions will provide.

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Unfortunately, most Canadians do not plan or think about their retirement until it's too late. And those who do plan tend to stop short at just putting whatever they feel they can afford away. When asked, those who have managed to save for retirement will say they've planned their retirement, but they really haven't. Just saving, no mater how much doesn't qualify as planning. Especially when you have no idea how much you actually need.

 

According to a recent study by the Broadbent Institute, 47% of Canadians between ages 55 and 64 who don't have an employer pension, have less than $3000 saved for retirement. Among these, those who earn between $50,000 and $100,000 have a average of only $21,000 saved and those earning less than $50,000 have a mere $250 on average in savings. The study also found that fewer than one in five people over age 55 who don’t have an employer pension have enough to live in retirement for five years or more. These are very disturbing numbers. Below are some more dire numbers published in the Retirement Readiness Report prepared by the Ontario Security Commission in 2016 for Canadians 50 and older and from the Broadbent Institute website:

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1 in 5 Canadians over age 55 who don't have an employer pension have only enough to last less than 5 years in retirement

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47% do not have a work pension plan

 

40% believe their standard of living will be worse off in retirement​

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56% ​do not have a plan for retirement savings

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31% of those with a retirement savings plan are behind in their plan

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22 % haven't started their retirement savings

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38% have no idea how much money they need to save to fund their retirement

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42% are afraid of running out of money in retirement 

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So where do you stand and what exactly is retirement planning? First and foremost, it's about savings. So unless you are able to put away much more than you think you will need, you will need to determine, as accurately as possible, how much it is that you will need for the lifestyle you wish to have and the length of retirement you want in order to plan effectively. Unfortunately, most if not all retirement calculators/planners out there suggest that you assume a "replacement ratio" of 70% which is the percentage of your working income that you need in your retirement years. This income level approach is over-simplified and err on the conservative side. Which in itself is a good thing, but only if you plan early enough and have the financial means to save what is calculated. Unfortunately this is not what most Canadians can afford and it is why we have so many seniors retire with inadequate funds and must continue to work in some capacity after they've retired.

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The following are some key factors that are very important to consider and are considered in our retirement planner but are typically NOT covered in most Retirement Calculators out there.

 

Savings:

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Most of us know that we need to save but are typically incapable to putting away as much as we think we should. It is therefore necessary to have a flexible savings plan that will allow you to make different contributions at different stages of your life based on your financial situation. You need a planner/calculator that will allow you to delay your savings to a future date if necessary and with the ability to change contribution amounts and rate of returns to reflect real life situations. For example, if you are 35 and starting a family, you may not be in a position to save right away. You will need to be able to delay and/or change the amount to reflect what you can afford to save and when. You may want to start or increase your contributions after the kids have left home or the mortgage has been paid off and to adjust the rate of return accordingly to reflect the risk level as you approach retirement.

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Retirement Income:

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How much you need during your retirement years is not constant like most retirement calculators assume. It will vary throughout your retirement. Depending on your situations, there may be opportunities to spend both less and more as you get older. For example, you may plan on doing a lot of travelling and enjoying life during the early stage which will diminish as you age. The change may also be related to a move from one type of dwelling (house) to another (condo or rental) or due to anticipated health care. To plan most effectively, you need to be able to prepare detail budgets for the different stages of retirement and apply them accordingly.

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Home/Property Assets:

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For most Canadians, owning a home is a major financial burden that may take up most if not all of their available resources and allows very little room for savings for retirement. If you've managed to acquire a home or property, it may be the only significant asset you can bring into retirement and yet, most retirement calculator do not track and/or allow for upgrading before retirement and more importantly, downgrading or selling during retirement, should it become necessary to give you access to needed funds to finance the remainder of your retirement years. 

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Tax:

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Income tax will have a significant impact on your retirement savings as it does right now to your present income. So how much you draw and how you do it will determine how far your savings will go. What you need is to be able to calculate your tax impact as accurately as possible, but unfortunately other than the ones found here, there doesn't appears to be a calculator out there that will do detail tax calculations. You also need to be able to calculate not just for yourself but for both you and your spouse or partner as a couple. This will allow you to minimize your tax exposure by taking advantage of split income on pension revenues and for low income situation it can even reduce or eliminate the Old Age Security pension (OAS) clawback.