Over this past year, I have noticed a larger than usual number of people deciding to retire from their jobs and exit their businesses. This may be expected given Canada’s aging population and more people reaching retirement age. However, what I am seeing is more people retiring early. Some cannot keep up with the rapid evolvement of technology and workplace changes, while others realize that life is just too short. Unfortunately, not all these retirees will have a comfortable retirement. Without a corporate pension plan, they will rely on their personal savings to provide a retirement income stream.
Bob decided to take early retirement. He had a lot of spare time and invested in the stock market to supplement his retirement income. Initially, Bob did okay and made some money. Finally, however, Bob realized that his inexperience was costing him money that he could not afford to lose without a disciplined investment plan. This expensive lesson caused Bob to rejoin the workforce, not because he wanted to, but because he had no choice.
Mary was forced to retire early due to health issues. She sold her business and invested the proceeds with several financial advisors. She told each financial advisor that she did not want to have a master financial plan or share her total net worth details. Without a complete picture of Mary’s income needs and net worth, each financial advisor was limited to investing their money more conservatively than they normally would. As a result, Mary earned less on her investments and paid more taxes than she would have with a custom-designed diversified investment portfolio. Mary sold her house earlier than she wanted to because the investment portfolio that provided her with retirement income was now depleted.
Avoiding situations like that of Bob and Mary takes planning. Your retirement should be planned out so that you can make the most out of what awaits you without having to worry about running out of money. This means saving and investing continuously from a young age. Pay yourself first by contributing the maximum allowed to a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Your financial advisor can help you set up these plans as well as anything else needed to achieve your family’s financial goals.
When investors are building their investment portfolios, they tend to focus more on growth and taking on more risk. However, as they approach and enter retirement, this focus shifts to protecting their nest egg. But many retirees need their investment portfolios to protect them from inflation by growing and providing tax-efficient income.
Susan decided to retire early and needed to use her personal savings to provide income until she was eligible for the Canada Pension Plan and Old Age Security income. Even after starting these Government pension plans, she still needed to use her personal savings to make up for her expected income shortfall.
When Susan told her financial advisor of retiring early, the building blocks for her retirement income portfolio were already in place. She had an RRSP, TFSA, and a taxable investment account to withdraw income from. Each of these accounts was invested in a combination of investments designed to generate both growth and income.
Since Susan’s retirement is expected to last a long time, she needed to generate a rate of return higher than that provided by today’s low interest rates. So her plan allocated global growth investments meant to be left alone in the short term and generate long-term growth. And to protect her assets from stock market declines, a combination of low-risk investments and portfolio management tools were used that are designed to reduce risk.
A retirement income portfolio should be built to balance income, downside risk protection, and growth. Having access to financial professionals who can deliver the right solutions designed explicitly for retirement portfolios and tax planning can help ensure that you have a comfortable retirement like Susan, rather than a stressful one like Bob and Mary.
This article outlines several strategies, not all of which will apply to your financial circumstances. You should obtain professional advice from a licensed financial planner or financial advisor before acting on any information in this article to help navigate your options. Then you can enjoy life & have fun.
John Niekraszewicz (Nick-ra-shev-itch) BMath, FCSI, CFP, FMA is the Certified Financial Planner specializing in Wealth & Estate Planning that is responsible for the AHIP Association Health & Dental Plan provided by JVK Life & Wealth Insurance Group that receives a sales commission. John is also the Principal of JVK Life & Wealth Advisory Group - provider of mutual funds and investments. John welcomes your questions and can be reached at 1-800-767-5933 or email@example.com