Dreaming of a great retirement? Like actor Jack Nicholson's character, start with your bucket list and work backward.
While the fundamental goal is to invest in a secure financial future, portfolio manager Adrian Mastracci at KCM Wealth Management Inc. also encourages clients to "dream a little." What will they want to do, while they still have the time and health, to make themselves happy? Travel, indulge in the kids and grandkids, buy a vacation property?
With RRSP season coming to a close, Canadians have been bombarded daily with warnings that they are in for a meagre retirement if they do not sock away more to supplement their government pensions.
"It's nice to be realistic, but you can also say: 'What if I want more, what do I have to do to get more?' My clients and I go through that a lot."
The non-profit Investor Education Fund, in its modestly titled The Best 30-Second Retirement Video Ever!, offers five basic steps to retirement readiness: Think about your life in retirement, determine how much that lifestyle will cost, explore government benefits, know how much you need to save, start saving now.
The IEF website, getsmarteraboutmoney.ca, offers a suite of tools and calculators to simplify and demystify the process. It is also about to launch a retirement cash-flow calculator that will predict when your retirement savings will run out – good to know if longevity runs in the family.
New retirees receiving the maximum Canada Pension Plan benefit now are entitled to $1,012.50 a month at age 65, plus Old Age Security payments of up to $546.07 – not enough to support the retirement lifestyle to which most Canadians aspire, but a solid base on which to build, say Mr. Mastracci and Perry Quinton, vice-president of marketing at the Investor Education Fund, which was founded by the Ontario Securities Commission to provide unbiased financial information to Canadians.
Old Age Security benefits are roughly the same for all Canadian residents who qualify – although they are clawed back for those at the highest retirement-income levels.
But CPP entitlements vary, depending on contributions made during the recipients' working lives. Those who worked less or earned less receive lower benefits that those whose paycheques were consistently docked at the top contribution rates year after year.
Those who opt to take their CPP benefits between 60 and 64 also receive lower benefits, while those who do not claim their CPP entitlements until after 65 can be entitled to more. (For example, if you had taken your pension at age 60 in 2011, 60 months before age 65, the reduction would have been 0.5 per cent per month, for a maximum reduction of 30 per cent. From 2012 to 2016, this early pension reduction will gradually increase from 0.52 per cent to 0.6 per cent a month.)
The federal government's Service Canada website has online calculators that will crunch the numbers depending on each contributor's circumstances, and agents who will take you through the "what if" scenarios, Mr. Mastracci says.
"If you just phone them and get a printout from them, that's probably the easiest way to do it. The big question of when to take it really comes down to a very simple question: Is the money worth more to you now or later? If the answer is 'I need it now,' you will probably take it now."
Once you have established your government pension entitlements – and the projected benefits from any employer-sponsored pension plans you might have – "you make up the difference with other stuff – RRSPs, RRIFs, TFSAs, you name it," Mr. Mastracci says.
"In terms of rule of thumb, some experts say you are going to need 70 per cent of your [pre-retirement] income in retirement, some say 60 per cent," says Ms. Quinton. "It really depends on what you think you are going to do. If you have a goal of travelling around the world, doing lots of things that cost money, it [the government pension payout] is not going to support that lifestyle."
Getting a handle on pre-retirement expenses is a pretty good indicator of what someone might spend post-retirement, although there is usually room to cut back, the experts say. Then you have to cost out what more you want, and how much you need to pay for it – whether it's travel or helping your kids with the mortgage. Clearly, the sooner you start investing and accumulating wealth, the better off you will be in retirement.
Mr. Mastracci said it is often suggested that Canadians should have gathered $1-million by age 65. "That sum, however, may be a scary thought for some. So how about meeting halfway at $500,000? Say you start saving at age 30, 40 or 50 with no other retirement assets?" says Mr. Mastracci, who has prepared the following chart based on age and rates of return to meet a savings target of $500,000 at age 65. If your aim is to accumulate $250,000, divide the savings targets by two, if your goal is $1-million, multiply the savings targets by two.
Annual saving targets starting at:
8 per cent
7 per cent
6 per cent
5 per cent
4 per cent
If you want to know how much your RRSP savings will provide in annual income in retirement, check out the Investor Education Fund's online RRSP savings calculator. Plug in how much you have in RRSP accounts now, the average annual return, how much you plan to pay in each year, your current age, the age you expect to retire, and how long you expect to live – and the tool will kick out an annual income estimate. The major financial institutions all offer similar online calculators and retirement planning advice.
At any age, the appetite for risk depends on personal circumstances, but generally speaking younger investors can take greater investment risks because they have more working years ahead of them to make up any potential losses. This is generally reflected in the asset mixes, with investors becoming more conservative as they age, sinking less into stocks and skewing their portfolios more heavily toward bonds and cash.
By mid-career, investors should be "ramping up the accumulation for retirement," Mr. Mastracci says, while older investors will become more concerned with preserving their investment gains.
Ms. Quinton points to a blog entry (by The Globe and Mail's Rob Carrick) on the Investor Education Fund website about how the mix of assets in RRSP savings plans might change to reduce stock market exposure over time. For instance, a 25-year-old might have 85 per cent of his or her assets in stocks and 15 per cent in bonds and cash. That mix might shift to 65 per cent in stocks and 35 per cent in bonds and cash by age 45, and to 30 per cent stocks and 70 per cent bonds and cash by age 65.
"The goal with investing is balance, and that balance is going to shift the closer you get to retirement because you are less able to absorb loss," Ms. Quinton says. "It can be very tempting to lock everything up in guaranteed low risk [investments]," she adds. But low risk typically means lower returns.
"You have to take some risk to increase your earnings."
Mr. Mastracci goes through his clients' wish lists and takes them through the various scenarios of how much they need to invest – and earn on those investments – to finance those desires. Risk tolerance is always a consideration.
"People often come in and ask 'what is the best investment?' Well, you know, it's not what the best investment is, it's what you can stand. Some people can stand the best investment, some people can't. It's what makes sense for you."