Thanks to my good friend and accountability partner, Conrad Toner, for this great guest post. If you are considering starting over and you are within the age group that realizes how serious retirement planning is, you really want to get your finances straight! Conrad is THE person to help you!
With the recently announced changes to the Old Age Security (OAS) program, there is renewed concern by many Canadians about their “financial ability” to retire when they want. This worry could be eliminated for most people if they had a “retirement income plan” prepared by a professional advisor who specializes in this area of financial planning. But what exactly is a “retirement income plan”?
Many people have been misled about the definition of a retirement income plan. Let’s start by talking about what it’s not. It isn’t a retirement investment portfolio. It isn’t a GIC, a CD, a Stock, a Bond, a RRIF, or a 401K. These are products, not plans. Products will be part of the plan, but they are not a plan by themselves.
Nor is a plan an investment projection. An investment projection is a printout from a bank or broker that shows how your investment portfolio (stock, bond, mutual fund, GIC or CD etc) will grow or decline over time, assuming a certain rate of interest or growth and accounting for any income that you may withdraw. For Canadians reading this book, a RRIF projection also doesn’t count as a retirement plan. All that shows is how long your RRIF account will last, assuming a certain rate of return, relative to the prescribed amount of income you must take out of the RRIF account each year. Such projections will be used when creating a complete retirement income plan, but they only make up a small part of the overall plan.
Retirement Income Plan – Defined
A retirement income plan in its most basic form is a simple listing of all the possible sources of income that you can expect to receive in retirement. This would include things like: government pensions (CPP, OAS and Social Security in the USA), company pension(s), private annuities, rental income, royalties, and business income that may continue into retirement. The list should also include projected income from investment accounts – both taxable (non-registered) and retirement accounts (RRSP, RRIF, TFSA, 401k etc).
At this point, investment projections may become confused with retirement plans. In fact, your list should include any and all sources of income. For some people, simply knowing how much income they can expect to receive becomes their plan. They will just spend what they get.
A more Advanced Plan
A more advanced and useful retirement income plan also addresses the other side of the picture – your expenses. It’s useful to know how much income you can expect when you retire. It’s even more useful to know if your pensions and savings will generate enough income to cover your expenses for the rest of your life. You can determine this only by addressing the expense side of the equation. For people approaching retirement, not knowing if their income will cover their expenses presentsa major cause of anxiety.
Unlike an investment projection, a retirement income plan is a written document that shows in black and white how your income will cover all your expenses during retirement. Expenses include the obvious ones like food and utility bills. They also include taxes and inflation. If your income doesn’t cover all your expenses, your plan will quantify the shortfall so that you can take steps to address it. Your plan will also show you how to position your investments and savings to produce the income you’ll need to cover your expenses. A retirement income plan can be as simple as a Word document that summarizes your income and expenses or as complex as a report prepared by a financial advisor using advanced financial planning software. The point is, you need a plan! This is especially true now that the government has changed the rules when it comes to our Canada Pension Plan (CPP) and Old Age Security (OAS) entitlements.
This article includes an excerpt from Conrad’s recently published book – Fearless Retirement: How to Retire Without Financial Worry. For information on 5 Key Risks to avoid in order to make a successful transition to retirement, enter your name and email address in the form on this page to receive 6 FREE Video interviews with Conrad and Peter Drake, VP of Retirement & Economic Research at Fidelity Investments Canada.
Also, to find out more about Conrad, his book, his programs, and his events, be sure to visit his website FEARLESS RETIREMENT