Preparation for the ‘golden decades’

Retirement planning is probably the number one reason people are interested in personal financial planning. Given the huge amount of widely available information on this topic (endless lists of books, articles, websites, advertisements, etc.), it’s close to impossible to say anything about it that is both novel and meaningful.

A very important aspect of retirement planning is that it cannot be done meaningfully with a cookie-cutter approach. Every situation, every person is different, and the content and scope of retirement planning is changing as we age. Therefore, treating it as a cyclical process is vital. Using a spiral is perhaps a better metaphor for this process, since it’s not just that same issues had to be revisited from time to time; instead, the issues and tasks to tackle also change as people progress from one stage of life to the next. Besides a mistaken one-shot approach, another trap is treating retirement planning as purely an investment planning exercise. Investing has to be done for a purpose; clarification and perhaps adjusting of goals (because, as our life unfolds, new circumstances emerge, new values, attachments, or emotions may develop, or simply because the financial conditions alter from what seemed likely before) is an iterative process between the financial and non-financial realms. According to age, personal characteristics, and circumstances, the range of applicable investment tools varies too. In general, annuities are not for the 30 years old, while sector funds are not for the septuagenarian (people in their seventies), e.g.

A fundamental first step in any retirement planning is considering the various aspects of available / expected government pension plans (OAS, CPP, GIS) and government and/or company sponsored tax-advantageous retirement programs (RRSPs, RPPs, DPSPs, RRIFs, etc.). Based on these, as well as on own non-registered assets, and other factors, the major decision about retirement age can be made. If all the factors don’t constitute an acceptable and realistic plan, then the variables to manipulate (with reason and awareness!) are the retirement age (or type, from full to gradual, e.g.), the accumulation (savings before retirement and/or risk/return adjustments and compromises), the intended lifestyle (needs and wishes), or some estate planning belt-tightening. With spouses, the retirement plans of both parties should be dovetailed to achieve better joint results.

Retirement planning cannot be considered circumspect and comprehensive without insurance planning, since illness, injury, or death in the family may render an entire nice retirement plan obsolete in no time. Not much less obvious is the interconnection between retirement planning and other sub-components of personal financial planning, like tax planning, investment planning, or estate planning.

Demographics plays important roles in so many things, from fashion to politics, but perhaps nowhere is it more obvious than in thinking about retirement. Like in other highly developed economies, in Canada as well the age-composition of society is dramatically unprecedented. The so-called baby boomers are just about starting a huge retirement boom, and the decrease of the proportion of people in the workforce to those already retired will keep increasing for many years to come. Many believe, and serious scholarly studies support it, that changing demographics will bring about many insurmountable challenges for governments in the coming decades. There is much talk about these issues; however, if one looks at how historically low savings rates have gone, it seems that the consequences have not sunk in for most people.

In addition to all the qualitative and macro aspects to consider (goals, relationships, connections, preferences, complex financial rules, social and economic trends), retirement planning, of course, encompasses numeric aspects at the micro/individual level as well. Objectives and assumptions must be quantified, otherwise progress cannot be monitored. There are many on-line calculators and inexpensive software tools to help this number-crunching. They are usually very useful as a first approach, and playing with them can be quite informative for anyone, if not for other reasons than at least because they can clearly demonstrate the huge long term effects of compounding returns, costs, and inflation. For serious planning though, even some of the tools widely used by financial service providers are quite rudimentary. A fine job usually takes fine tools, and those are not inexpensive and not so simple to use.

One of the problems with most planners/calculators is that they are not very detailed. A next one is that they often do not handle taxation properly, if at all. Perhaps the most important though is that often people do calculations based on assumed averages (of returns or inflation). You can read more about these issues on other pages; here I just wanted to make sure that you become aware of them. In this regard the best source I can direct you to is Jim Otar’s website: http://retirementoptimizer.com

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