“As for the future, your task is not to foresee it, but to enable it.”
Antoine de Saint-Exupéry, author of The Little Prince.
Saint-Exupery had a point: You may be ready to retire, but are you prepared? It’s one thing to look toward a life of leisure, another to take the steps to make it happen.
“No matter what your age, life does not stop at retirement – nor does the need for financial and retirement planning,” says Sandra Foster, financial author and president of Headspring Consulting Inc. in Toronto.
Yet while solid planning is key both for retirees and for those approaching retirement in a few years, it can be complicated in the turbulent 21st-century global economy.
A survey by the Conference Board of Canada in 2014 found that nearly 60 per cent of those between 55 and 64 said they had not put away enough to retire, while 40 per cent older than 65 also said they hadn’t saved enough. More than a third of Canadians said they did know when they would be able to retire.
How much should you rely on your pension income in retirement and how much should you depend on your investments to grow? It’s a tough dilemma as defined-benefit pension plans become more rare and interest rates that could boost investments remain stuck at historically low levels.
You can start your retirement plan by analyzing what you expect your financial needs will be and comparing this with the income you expect, says George Christison, financial adviser based in Lantzville, B.C., and founder of www.investingforme.com.
“Where you put your emphasis in your planning will depend on the role that investment income plays in your lifestyle,” he says.
Do you plan to travel? Will you work part time? Do you expect your household expenses to remain the same or will you downsize? The answers will influence what you should expect to spend.
Secondly, add up your expected and available pension income.
Ms. Foster adds, “Some people will have a guaranteed retirement income based on Canada Pension Plan, Old Age Security and an indexed monthly income from a defined pension plan. Others will have a guaranteed base of CPP and OAS and need to determine how to build an income stream from elsewhere.”
These other sources will usually be your investment portfolio and/or a registered retirement savings plan.
The relative size of these different income sources will help you determine how much to expect your investments to provide for your basic retirement needs, Mr. Christison says.
“Where you have sufficient pension income from CPP, OAS, private pensions, annuities, etc., to cover your lifestyle income needs, then the income demands placed upon their investments will be smaller. You can be more conservative with your investment choices, focusing on interest and dividend income,” he says.
“If, on the other hand, you need investments to generate the bulk of your retirement income, your portfolio will need to take on a higher level of risk and volatility. It’s an attempt to complement the portfolio’s interest and dividend income stream with capital gains,” he explains.
Capital gains – the profits from the sale of stocks, bonds or other securities – are taxed differently than other forms of income. This raises another point: It’s important to organize what forms of income become available for you to use at which times, because this can affect your tax bill.
“During retirement, more emphasis should be put on asset distribution than asset allocation,” says Andrea Thompson, senior financial planner at Coleman Wealth, Raymond James Ltd. in Toronto.
Retirement planning should pay more heed to when different types of income come out of accounts for you to use than where they are being allocated in different types of investment markets.
“The sequencing of cash flow from various pension sources, investments and other income types all have a different tax treatment when touched. Working out the proper sequence for withdrawal becomes materially more important than choosing the right bond or stock,” she says.
“By reducing the rate of tax you pay on the income you’re receiving during retirement, you can create ‘risk free’ return.”
Include room for emergencies in your planning, Ms. Foster adds. “Like taxes, they don’t stop just because you retire. Determine how much money you should set aside.”
Remember as well that, “no matter how carefully planned, a retirement income plan is only a plan,” Ms. Foster adds.
“To keep on track, review your retirement income plan every three years with up-to-date assumptions, and adjust as necessary. You might not have to go back to work, but you can make the most of what you’ve got.”
Plans can change, she says: “A couple of years into retirement, you will have a much better idea how closely life in retirement matches your original vision. It’s better to make changes sooner than later.”
Retire locally, think globally
Good planning is key to a comfortable retirement and healthy investment portfolio, but in today’s turbulent world economy it’s not always easy to determine what’s good.
“The global economy is in a place where we’ve never seen it before, says Andrea Thompson, senior financial planner at Coleman Wealth, Raymond James Ltd. in Toronto.
For example, while investors have traditionally assumed that money in the bank will grow at a slow and steady pace, “many banks around the world now have negative interest rates, which essentially charges consumers for leaving money in cash or bonds,” Ms. Thompson says.
“We have seen a flight to large-cap companies as a result of this, as investors are looking to stability and predictable dividend payments. This has impacted the value of large-cap stocks, which are trending at above-average long-term valuations.”
This situation might itself change, should interest rates rise or if other surprising or unexpected geopolitical events occur. Here are some other emerging global trends to watch as they could have an impact on retirement plans:
Climate change and the decline of fossil fuels – Scientific evidence is ever more conclusive, the weather is weirder, insurance rates are affected and coal companies are in decline. Is your portfolio ready for the changes?
Deglobalization – The United Kingdom’s Brexit vote to leave the European Union, cracks in Europe itself, hostility to existing trade agreements and the rise of anti-immigrant politicians and policies all could lead to more protectionist policies, affecting the growth of multinational stocks and funds.
Global unrest – Threats ranging from a nuclear-armed North Korea to the tragedy of ongoing war in Syria and elsewhere in the Middle East to international terrorism to a continuous flow of refugees and economic migrants can all take a toll on investment portfolios that aren’t watched closely.
Tax crackdowns – The recent decision by the European Union to hit Apple Inc. with more than €13-billion in back taxes is only one salvo in a worldwide trend toward cracking down on corporate tax avoidance. The movement against excessive transfer pricing or “base erosion and profit shifting” by moving profits offshore is bound to get tougher, affecting the tax bills of companies that might be in your portfolio.
Lingering economic stagnation – Although by many measures there has been a robust recovery since the great crash of 2008, it has been uneven. It’s marked by some of the lowest interest rates ever and deflationary prices, which affect bond yields, and by the vanishing of blue-collar and, now, also white-collar jobs in developed economies, which affects spending power and could also affect you if you haven’t reached retirement age yet.Report Typo/Error
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