Retirement Planning is the process of preparing for retirement and it is never too early to start being aware of what you will need to have that comfortable retirement.
Retirement Planning encompasses more than money, but the bulk of the planning focus falls on "Will I have enough money?"
How Much will I need?
Setting a retirement income goal. When planning for your retirement needs, it is important to have a clear idea of how you spend your money today. One of the most common mistakes in retirement planning results from an unrealistic idea of what will be required. It is important to identify "Lifestyle" expenditures separately from savings and employment expenses.
Once you have a retirement income goal, we need to adjust for inflation. How much is that in Future Dollars. By thinking in terms of today and applying an inflationary factor to the calculations, many programs today can provide the savings requirements to achieve your goal. The calculation will also call for a realistic investment return.
Assumptions for Projecting Needs
The first rule of forecasts is that the actual results will likely be different, so you must forecast frequently. Forecasts are a guide only and should be treated as such
Inflation: From 1915 to 2006 the annualized inflation rate was 3.2%. From 1982 to 2006 the annualized rate was also 3.2%. If we look at the last 10 years, it has been lower. For planning purposes we like to use 3% as a target rate.
Investment returns: Pension legislation in Canada reuires the use of a 7.5% rate of return in the actuarial assumptions. Many Investment Managers will describe their target rates of return as 6-9%, the average of which is 7.5% Another way to descibe this is inflation plus 4.5% or a real rate of return equal to 4.5%. I find it useflu to forecast at 7.5% and also at 5.5% as a low target return.
Sources of Income in Retirement
Pensions
CPP-Canada Pension Plan; was established to provide working individuals with a core pension plan
Company Pensions: There are 2 types of company pension; a Defined Benefit Plan where the investment risks are assumed by the company and a Money Purchase Plan where the investment risk is assumed by the employee.
Personal Pension Plans (RRSPs): We need to think of our RRSP investments the same way we think of our money purchase pension plans when it comes to investment strategies
OAS -Old Age Security Plan: was established to provide every citizen with a minimum pension level in retirment and is actually part of our Social Services Safety Net. It is non-contributary and as such has become subject to "claw-back" at higher income levels.
Personal Savings and Investments
We frequently refer to these as non-registered investments. Tax effectiveness of investment these strategies is extremely important. It is possible to loose purchasing power by on tax exposed savings. An example of this would be a person who puts all the money in a GIC at 4% while they have a persona tax rate of 40%. The after-tax return is 2.4%. in a 3% inflationary environment, the savings will purchase less next year than they would have this year. As this continues year over year, more ground will be lost.
Alternatives to Interest income are Dividend and Capital Gains which both receive tax preferences and may permit some tax deferral of the cpaital gains over a period of time.
