Retirement Income Planning

Allegiance Wealth Management

If you are planning your retirement or have already made the transition, you know how much work is involved. Your retirement planning doesn’t stop once you have retired. There are lifestyle choices and potential risks that need to be considered regularly. To achieve your goals at retirement, you need to understand the risks you may face, as well as periodically revisit your retirement plan.

There are eight common factors that contribute to a successful retirement.

  1. Positive view on aging and life transitions: How you have handled other life transitions can hint at what transitioning to retirement might be like.
  2. Strong vision and values: What is your primary aim in life – that which gives you a sense of purpose and defines “fulfillment”.
  3. Healthy aging: Poor health can prevent you from enjoying your retirement.
  4. Positive view of “work”: Seeing work as a chore rather than rewarding can create hurdles when it’s time to retire.
  5. Nurturing family relationships: Researchers have found people in satisfying personal relationships have fewer illnesses and higher levels of goof overall health.
  6. Supportive social network: Good relationships offer a number of emotional benefits.
  7. Meaningful and fulfilling activities: There’s a difference between activities that fill time and fulfilling activities. Only you know the difference.
  8. Financial comfort: You’ll need sufficient financial resources to fund a quality retirement.

To establish a retirement income plan to meet a fulfilling and meaningful retirement, we need to follow four steps of planning.

Consider your lifestyle

Many people continue to work past their retirement age because they may not have considered an alternative or prefer a semi-retired lifestyle. Some continue because haven’t adequately prepared financially. Retirement can cause stress or even depression for retirees who suddenly find themselves no longer working, either by choice or as a result of forced retirement.

Scenario Consideration
Imagine what your retirement would look like if money were no object. How would you spend your time? What would fill your day? Retirement planning is not just about financial health. Do you have a plan in place that also takes your social and emotional health into account?
If you are a business owner, how will your lifestyle change when you decide to retire or sell the business? Giving up a business can be a considerable loss. Being an owner provides a sense of pride and accomplishment. In retirement, what will give you a sense of pride and accomplishment?
If you have worked at a company for a number of years, doing a job you love, what impact will that have when you are no longer working? Suddenly losing the daily routine of work can have significant consequences to your emotional well-being if there is no plan to replace it. What will motivate you in retirement?

If you are not sure how you would respond to these scenarios, it may be time to consider lifestyle planning – an equally important piece of the retirement planning puzzle. Lifestyle planning means identifying how your want to spend your retirement years – what specific activities you want to engage in – and developing an income plan to support it.

Calculate income needs

If, today you enjoy taking courses, gardening and traveling, there’s a good chance you’ll want to enjoy those activities during retirement. Most people don’t dramatically change their lifestyle at retirement. Do you have a retirement income plan in place to accommodate those activities once you retire?

One way to start your lifestyle planning process is to create a list of activities you enjoy today. Decide if you want to continue those activities in retirement or add new ones. Once you have started a list, next attach a monthly or yearly expense to each.

Another common way to calculate total income needs at retirement is to multiply your pre-retirement (after-tax) income by 70%. This method can give you a ballpark estimate, but does not account for lifestyle choices. So it is important to remember this method may not capture all your income needs. For example, golfing 12 times a year may cost $500. But when retired, golfing there times each week from June to October may cost $2,100, or more.

Retirement spending

How you plan to spend your money in retirement is aligned with your lifestyle goals. However, there are some generalized income needs during different phases of retirement. For this, let’s assume a retirement age of 60.

Early retirement years

Most retirees require income in the first 10-20 years to support a more active lifestyle. The majority of your activities will revolve around the specific lifestyle choices you have made (travel, outdoor activities, social clubs, continuing education, etc.). There may be other important expenses to consider, such as caring for a parent. Be sure to include these in your calculations.

Later retirement years

In later years of retirement (80 and older), income needs tend to shift to support increased healthcare costs, may be even in-home care, etc. Having a sound lifestyle plan should account for both increased healthcare and maintaining the activities you enjoy. As you age, you may need supportive living arrangements, which can be very costly, particularly for a private residence.

Determine potential sources of retirement income

As Canadians, we have a number of income options available at retirement, some sponsored by the government, others by employers, with personal savings an important factor. Below is summary of the different sources of retirement income that may be available to you. It is important to remember that registered income plans are governed by pension legislation, both federally and provincially. So depending on your province of residency, certain restrictions may apply.

Registered Retirement Income Fund (RRIF)

A registered program for income taking upon the maturity of RRSP at age 71. Generally, you cannot make contribution to an RRIF as assets must be transferred from other registered plans. There is a minimum withdrawal requirement after the plan is established. The benefit of using RRIF for income is to defer taxation on assets that are left within the plan. RRIF also offers great degree of control and flexibility of investment choices.

Life Income Fund (LIF)

A registered income plan established from registered pension plan (RPP). Similar to a RRIF, growth of assets within a LIF is tax-deferred until withdrawal. There is a legislative minimum and maximum withdrawal amount based on the value of the plan. The purpose of the legislative income amount is designed to make income lasts for life. LIF also offers great degree of control and flexibility of investment choices.

Group Pension

Employer sponsored savings program that is designed for the purpose of retirement savings purpose. Group pension can be in a form of a Registered Pension Plan (RPP) or a group savings plan like Group-RRSP and Deferred Profit Sharing Plan (DPSP).

Canada Pension Plan (CPP)

Government sponsored retirement program which aims to provide a monthly taxable benefit to retired contributors. If you have worked in Canada before retirement, you are most likely eligible for the benefits as you may have made contributions in the past. The earliest age to be eligible for CPP benefits is 60.

Old Age Security (OAS)

Government sponsored retirement benefits available to any Canadians who are 65 or older and have resided in Canada for at least 10 years. OAS provides a monthly payment even if you are still working or have never worked. OAS benefit is an income-tested benefit, meaning there could be a reduction of benefit when a retiree is a high income earner.

Insured Retirement Program (IRP)

The Insured Retirement Program (IRP) is a financial planning concept which provides tax deferred accumulation and tax-free income. By overfunding a tax-exempted life insurance policy and creating significant cash values, the concept illustrates how these values can be used to secure loans from a lending institution. The amounts borrowed can then be used to supplement retirement income, fund investments, make gifts, etc. The loan will finally be settled at death by the insurance policy.

To establish a secure income plan for your retirement, simply contact one of our advisors today.