Retirement Planning

What is Retirement Planning?

In its simplest form, retirement planning is the process of building a personal "paycheck" for the future. It is the roadmap you create today to ensure you can stop working tomorrow without sacrificing the lifestyle you enjoy.

While many people think of it as just "saving money," true retirement planning is much more comprehensive. It is a dynamic strategy that coordinates your lifestyle goals, investment assets, tax efficiency, and legacy wishes into one cohesive plan.

Why Retirement Planning Matters

With life expectancies increasing and traditional company pensions becoming less common, the responsibility of funding 20, 30, or even 40 years of life now falls on the individual. A proper strategy ensures you don’t outlive your money and that you remain prepared for "life’s surprises," like inflation or healthcare changes.

5 Steps to a Proper Retirement Planning Strategy

To move from "saving" to "strategizing," follow these five essential steps. This framework ensures your plan is robust enough to handle the transition from your working years to your retirement years.

1. Define Your Vision (The "Lifestyle Goal")

You cannot plan for a cost you haven't defined. Start by asking:

At what age do I want to retire?
Will I travel, volunteer, or start a "passion project" business?
Do I plan to stay in my current home or downsize?
Action: Estimate your "Replacement Ratio." Most experts suggest you need 70% to 85% of your pre-retirement income to maintain your current lifestyle.

2. Audit Your Income Sources

Retirement income is rarely one single check. It is usually a "bucket" approach. Identify which of these you will have:

Government Benefits: (e.g., CPP and OAS in Canada).
Workplace Pensions: Defined benefit or defined contribution plans.
Personal Savings: RRSPs, TFSAs, or non-registered accounts.
Passive Income: Rental properties, dividends, or business interests.

3. Focus on Tax Efficiency & "Decumulation"

It’s not about what you make; it’s about what you keep. The Decumulation Phase, which is the period when you start taking money out and is where many people lose wealth to unnecessary taxes.

Strategy: Determine which accounts to draw from first (e.g., drawing from a TFSA vs. a RRIF) to stay in the lowest possible tax bracket throughout your retirement.

4. Manage the "Silent Risks"

A bank account balance is only one part of the story. Your strategy must account for:

Inflation: The rising cost of goods that erodes your purchasing power over 30 years.
Longevity Risk: The risk of living longer than your money lasts.
Health Care: Preparing for potential long-term care or out-of-pocket medical costs.

5. Integrate Estate and Legacy Planning

A proper retirement strategy doesn't end with you. It includes a plan for what happens to your remaining assets.

Ensure your Wills and Power of Attorney are up to date.
Consider Philanthropy or charitable giving as a way to reduce taxes while supporting causes you care about.
Use Legacy Planning to pass on your values and stories, not just your bank balance.

To discuss further or for questions of clarification please contact Mark Albert, CEA, EPC at either: 416-659-6655 or markalbertpfs@gmail.com.

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What are Warning Signs that you need to start Retirement Planning Today?

1. You Don't Know Your "Number"

Many people treat "The Number" as a vague, unattainable $1 million or $2 million figure. However, a "Number" without a lifestyle context is just a guess.

The Risk of the "Blind Spot":
- If you don't know your number, you are essentially flying a plane without a fuel gauge. You might be saving $1,000 a month, but if your desired lifestyle requires $3,000 of passive income, you may be unknowingly underfunding your future by 200%.

The Simple Math Start:
- A common benchmark is the Rule of 25:
  - Take your desired annual retirement income (minus guaranteed sources like CPP/OAS) and multiply it by 25. That is a baseline target for a sustainable 4% withdrawal rate.

2. You’re Within 10 Years and Haven't Run a Tax Projection

The decade before retirement is known as the "Fragile Decade." This is when your tax strategy matters as much as or more than your investment returns.

The "Tax Torpedo":
- Many retirees are shocked to find that when they start taking RRIF withdrawals alongside CPP and OAS, they get pushed into a higher tax bracket. This can trigger the OAS Clawback (the pension recovery tax), effectively taxing your income at a much higher rate than expected.

The Decumulation Order:
- Planning now allows you to decide which "bucket" to empty first. Should you melt down your RRSP early to keep your lifetime tax bill lower? Or should you leave your TFSA to grow tax-free for as long as possible?

The CEA Perspective:
- From an executor’s standpoint, a lack of tax planning doesn't just hurt the retiree—it creates a massive tax bill for the estate. Projections help ensure you aren't leaving 50% of your hard-earned RRSP to the government upon your passing.

3. Your Lifestyle Relies Entirely on Your Salary

This is the most dangerous form of "Wealth Illusion." High earners often confuse a high standard of living with financial security.

The Cash Flow Cliff:
- If your lifestyle costs $8,000/month and 100% of that comes from your active paycheck, your "retirement readiness" is currently zero. You are one job loss or health crisis away from a lifestyle collapse.

Lack of "Passive" Momentum:
- Retirement planning is the process of building a "Money Machine" that replaces your "Work Machine." Warning signs include:
  - No Dividends/Interest: Your accounts don't generate enough to cover even a single monthly utility bill.
  - High Debt-to-Income: You are still using your salary to service a mortgage or high-interest debt rather than building equity.

The Buffer Goal:
- Ideally, as you approach retirement, you want to see your "passive" income (rental income, dividends, or projected pension) begin to cover your Fixed Expenses (housing, food, insurance). If it doesn't cover those yet, you haven't yet reached "Escape Velocity."