Back in the fall of 2008, I called one of my older clients and asked how he was feeling about things – given that the stock market had dropped 30 per cent.
His answer was very profound. He first asked two questions: Are all of my bonds, preferred shares and stocks still paying out their income? Is there a high risk that any will likely be cutting dividends?
Given that the answer was 'yes' to the first question and 'no' to the second, he then said "I think I am fine then."
As it turned out, he was right. The key point was that his income needs were sorted out based on his investment portfolio and other sources of income, and as long as the income was there, and would continue, then he didn't need to worry about the ups and downs of the market.
With that in mind, here are four steps to ensuring your retirement income plan is in good shape:
1) Understand all of your pension and government pension income.
For example, what are you going to get? When can you get it? What are your options? How do you co-ordinate it with any income your spouse gets?
2) Understand your expenses.
This requires a little time doing a budget. Here's a free budget worksheet that can help.
It is important to think about if there are meaningful changes to your expenses once retirement hits, and whether these changes are long term or more short term.
3) Understand the tax implications of each dollar.
This is where it gets complicated. Do you draw from your RRSP, TFSA, or non-registered account? How much income do you need to withdraw from your investment portfolio? What kind of income should you try to earn – dividends, interest, capital gains?
For a great website on Canadian taxes, visit the Ernst and Young tax calculator.
4) Plan for each year.
Especially if there is any variable income for either you or your spouse, you want to review how much you want to pull from your registered accounts, if any, each year. (Of course if you are over 71 you will be required to withdraw a minimum amount.)
This will be affected as each pension source comes on stream. For a couple, sometimes there are four separate pensions that get added in over time. (Canada Pension Plan and Old Age Security for a husband and wife of different ages.)
While these four steps form the foundation, setting up a retirement income plan takes some effort and knowledge. One free source is the Canadian Guide to Retirement Income.
As with any planning, the goal is to take the disorder, and put some order around it. Like my older client, even as the markets zig and zag, if you are lucky, you can have a plan that still lets you sleep soundly at night.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.