Steps to Retirement Planning in Canada
Step 1: Understand How Long You Have Until Retirement
To form the basis of your retirement plan, your current age and the age you expect to retire should be your first consideration. Young people who have just started need to really understand the power of time. The more you put away consistently and give it time to work, the better off you will be. Don't let the idea of taking on more risks fool you. Remember the fable of the tortoise and the hair? Slow and steady is what wins the race. Don't get your kicks on Wall Street or Bay Street…buy a skateboard instead. Be serious and focused when it comes to the habit of saving with intention. Your future self will think that the younger version of you was a genius.
Try not to “get married” to an exact date for your retirement. Set a clear target and shoot for it, but recognize that your life and finances will often flow with forces outside of your control. Therefore, find areas in your financial life where you have the most control and consistency, so your success is like an insurance plan. In fact, you may even consider using an Insured Retirement Plan to help provide that stability and peace of mind.
You should also consider how the hidden tax of inflation is eroding your buying power. If you work with a plan that already has a built-in inflation hedge, that can go a long way. For example, some cash value insurance has fixed-level premium deposits that build liquid savings. Once it's set up, you have locked in the strongest dollar, and you are funding the premium deposits with tomorrow's weaker dollars. The earnings, however, are managed by the life company to keep pace with inflation trends.
Step 2: Determine Your Retirement Expenses
You need to know your retirement expenditure. Planning for your expenses ensures you will not outlast your retirement savings. It helps you determine the size of the portfolio or savings, or better than that, what you need in cash flow when you require. Cash Flow is critical. You want consistent income-producing assets, so you do not have to be forced to draw down all of your accumulation. If you draw down too much and then hit a bad market year, you can experience a terrible double whammy event and never maintain the previous standard of living.
Remember to plan based on after-tax income. Tax rates have been rising. Someone has to pay for the government's debt…that falls on the taxpayer. Well, until you are six feet under, that is still you (in fact, they often ding you the hardest on the tax bill in your final tax return). If you have a large taxable account such as a LIRA or RRSP and the tax rates have increased, you may be in for a very rude awakening. This has been happening to many baby boomers today that are finding out the RRSP system has not saved them any taxes after all…they are paying more than the tax break they received when they put in the original deposits.
Most people assume retirement expenditure will be 70-80% of their current spending, which is usually not the case, especially in the first year of freedom. With 40 hours a week to burn, it's easy to find things to spend your hard-earned money on, and those first few years of retirement take a focused adjustment. If you overspend like a drunken sailor, then the party (your retirement) will not last nearly as long as you intended.
The cost of living is continually increasing, and so is inflation. Additionally, retirees have more time to travel, go sightseeing, shop, etc. You should estimate at least 100% of your current expenses minus any fixed debts you have eliminated. More expenses also tend to rise for the grandkids, great-grandchildren and looming health costs are always an issue to contend with.
Track it. What you focus on expands. Be actively involved in your financial life to reach your goals. The more you manage your money, the more money you will have to manage today and in the future.
Step 3: Invest In Yourself
An investment in your education will typically bring more income and opportunity potential to you than just blindly trying an investment at random. Get your habits right, plug leaks in your monthly and annual budget that are sucking away your savings potential and be a constant student. The more you understand a “style” of wealth creation such as long-term buy and hold real estate, the easier it is to spot deals that bring you the best bang for buck along the way.
If you find yourself starting late or perhaps restarting due to an unforeseen set of life circumstances, you need to get very focused. It is impossible to make up the time, but that is no excuse to recover life losses by chasing returns. Far and wide, most people will get eviscerated attempting this, and a professional investor who has patience and knows their niche will swoop in and make all the actual profits.
Get a solid, stable asset class that consistently pays you no matter what. Then as you keep a watchful eye on the opportunities that cross your desk, you can be ready to pounce by being in a strong capital position.
If you're unsure what stable asset classes pay you in, you can learn how to implement the Infinite Banking Concept to grow your savings with uninterrupted compounding and still have access and control to do all of the other deals that will show up in the future.
Step 4: Assess Your Saving Objectives Vs. Risk
Look, let's be crystal clear, savings and investments are two terms that are tossed around like a salad. They seem to be used interchangeably by the financial industry all day long. Even the Canadian government seems confused based on how they have misclassified their own programs. An RRSP is no more a savings vehicle than a blackjack table is. It is actually an investment tool that allows you to put money at various risk levels. Only one of those options is a savings account. If you have an RRSP in Canada, there is a substantial chance you are invested in a big bag of mutual funds from one bank or another.
This is not savings. Savings can only be accomplished inside of a vehicle where your money can never be lost. Do not confuse investments with savings. When money is invested, regardless of the type of investment, it is always subject to the risk of loss. After the massive market correction during covid lockdowns in March and April of 2020, Canadians are rapidly shifting their investments overtime to consistent, stable asset classes such as Par Whole Life that provide very high cash values to build savings with consistency and total control.