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Retirement Planning: A Roadmap for Canadians

Key Takeaways

  • Publicly funded pensions, employer-sponsored plans and personal retirement savings are the three pillars of Canada’s retirement income system.
  • Before trying to develop a retirement plan, you should consider your long-term investing goals.
  • Retirees often fail to account for the effects of inflation in retirement. In order to maintain your purchasing power, you may require growth oriented securities in your investment portfolio.

Planning for retirement can be overwhelming since your financial future and legacy is at stake. While there may be different sources of income in retirement, one of the biggest risks and fears a retiree could face is running out of money. This can turn into an unfortunate reality if you don’t plan adequately.

Canadians have three common sources of retirement income—publicly funded plans such as the Canada Pension Plan (CPP), employer-sponsored plans and personal retirement savings. These are often referred to as the “three pillars” of Canada’s retirement income system.

Employer-sponsored plans may include Registered Retirement Savings Plans (RRSPs) or a registered pension plan (RPP). RRSPs and Tax-Free Savings Accounts (TFSAs) can be sources of personal retirement income. Other sources of income can be from stocks, bonds, savings accounts and more.

Depending on your circumstances, your employer sponsored retirement plans may not be enough to enjoy a comfortable retirement. You may need to invest additional savings into a personal retirement account to help you meet your long-term goals. The sooner you recognize this need, the better chances you have of enjoying more financial freedom in your retirement years.

With so many changes occurring around retirement, it can be easy to overlook certain factors. In this article, we will focus on some of the most commonly overlooked factors when it comes to retirement planning.

Long-Term Financial Goals

Establishing a primary objective for your portfolio is an important first step. It can help you create a roadmap for your investing and retirement income strategy.

What does retirement look like to you? Do you have a lifelong passion you have been too busy to commit to in your working years? Maybe you want to travel or pick up a new hobby. Regardless of your vision, it is crucial to understand your goals and be honest about your finances. Here are some potential retirement planning and investing goals to consider:

  • Avoid running out of money. While the notion of retirement may lead to thoughts of conservative investments such as savings accounts and Guaranteed Investment Certificates (GICs), you may require growth-oriented securities—like stocks—to combat the effects of inflation.
  • Maintain or improve lifestyle. Most people want to maintain the same lifestyle they have become accustomed to. However, you may also need to maintain or grow your purchasing power over time, meaning your portfolio and income growth must at least keep pace with inflation.
  • Increase wealth. You may wish to increase your wealth over the long term to pass remaining funds to beneficiaries or charities. If this is the case, your retirement planning may focus more heavily on portfolio growth.
  • Spend it all. Some gear their retirement planning toward spending every penny of their retirement savings. However, this may be risky since you don’t know how long your retirement will last. If not done carefully, you may find yourself running out of money too soon.

Investment Time Horizon

Once you have established your goals, your investment time horizon should be your next consideration. Retirees often underestimate this because many retirees can reasonably expect to live longer than the previous generation.

When planning your investment time horizon, also consider your spouse’s projected life expectancy—which may be longer than your own—plus any dependents you have and any necessary legacy planning. 

The Impact of Withdrawals

Investors often have unrealistic expectations about how much money they can withdraw from their retirement portfolio. Many assume they can withdraw as much as the average annualised rate of return from their account without drawing down their principal. But this plan doesn’t take into account the actual return in any given year can be above or below the average.

Withdrawing more than your account generates, especially when your portfolio is down, may shorten its sustainability and reduce the probability of achieving your long-term goals. This scenario can have consequences, potentially meaning a change in lifestyle or goals.

Inflation and Tax

Inflation is the rate at which the prices of goods and services rise over time. Long-term, this affects your purchasing power—the amount of goods or services your money can buy. To maintain your current lifestyle, you may need to increase your total cash flow over time. Your money today isn’t worth what it was 10 years ago and it may be worth even less in another 10.

Understanding Trade-offs

The level of cash flow you require in retirement combined with your portfolio growth objective may require certain trade-offs to minimise the risk of running out of money. You may have to tolerate equities’ short-term volatility to capture their high longer-term returns. That means you may need to remain disciplined enough to endure fluctuations without deviating from your long-term strategy.

Your retirement planning strategy should help you understand what is affordable and realistic in the context of your long-term goals. Depending on your financial situation, you may have to balance your cash flow needs—discretionary purchases, living expenses and desired retirement income—against your return expectations. It is also important to remember many of your spending needs and wants can change over time. Understanding these trade-offs will help you work toward your retirement goals.

The Key to a Comfortable Retirement is Planning

Here are a few of the most common questions to ask when approaching retirement:

  • What are your goals?
  • Do you plan to leave a legacy or pay for the needs of grandchildren?
  • Have you factored inflation into your planning?
  • How long will you and your partner need income?
  • How will your spending habits change over time?
  • What impact will withdrawals have on your retirement investment portfolio?
  • Do you need financial planning advice and information from experts?

Your retirement planning should be built around a fundamental understanding of the above factors and, hopefully, a desire to work toward retirement by starting your planning now. Education is a key part of your ongoing retirement planning. Understand what makes your retirement unique. Know when to start receiving pension benefits and how much money you should withdraw from your portfolio and other retirement savings such as RRSPs and TFSAs.

Our Advisers Can Help

Our qualified professionals at Fisher Investments Canada can help you better understand the impact your portfolio income needs can have on your investments. Contact us now or download one of our retirement planning guides to learn more.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid.
Past performance is no guarantee of future returns.