Creating Your Own Pension Plan
Have you ever thought about how you want to live out your retirement years? Picture your retirement. Visualize where you will be living. Will you stay in your current home or will you downsize? Perhaps a vacation property is in your future? Planning on travel? What about hobbies, maybe gardening, reading, painting, feeding the grandkids heaps of chocolate and sending them home? Will you be involved in the community as a volunteer? Are you hoping to leave an estate to family or a favorite charity? Will you need your income payments to be flexible?
Keeping in mind when you ask yourself all of these questions that things do change as your life phases change. Financial obligations change and so do the costs associated.
I bet you don’t dream about penny-pinching and potential cat food eating. Am I right?
So, the question, will you have a pension when you retire? People that don’t have a pension will need to create their own. Not everyone has a pension plan. Maybe you are self-employed and wondering how you will make it in retirement with no pension.
It’s All About Guaranteed Income
There are only two ways to create income: You work to earn your money or you have your money work for you. If you plan and invest wisely, your money will work for you throughout your retirement.
Now that you have a picture of your retirement, you can plan how you get there. For example, as an independent contractor there will likely be times when your income is low or potentially absent. Also, you don’t have a company pension plan you can pay into which are often matched by employers.
There is no set rule, however, it has been our experience over the last 40 years that those without a pension plan should invest 18% of gross income to start on a path to a successful retirement. Keep in mind that it is important to work with percentages as opposed to fixed dollar amounts. This will provide you flexibility as your income fluctuates up and down throughout cycles and seasons.
We are living longer; many of us may well be enjoying our retirement longer than our working careers. To ensure a guaranteed income for life, which will adjust for inflation, it’s suggested that we accumulate $20 for every $1 of retirement income we require.
Here’s an example. We have done some planning and determined that we will require a gross annual retirement income of $65,000. We have contributed to the Canada Pension Plan (CPP) and expect a retirement benefit of $10,000 each year. As well, we will be entitled to an Old Age Security Income (OAS) of $6,000 leaving a shortfall of $49,000. That would require you to put aside a $763,868 investment @ 2.5% compound interest per year to supply the $49,000 for 20 years by retirement. Substitute these numbers with your numbers and see what your picture is starting to look like.
Now you have the magic number or maybe you saved a chunk of money knowing that you didn’t have a pension plan, how do you get monthly income efficiently from that chunk of change?
What is the next step? Where do you invest this money? Where is the best place to allow your savings to work for you? There are a number of options available:
- Registered Retirement Savings Plan (RRSP),
- Tax-Free Savings Account (TFSA),
- Guaranteed Investment Certificates (GIC),
- Mutual Funds,
- Segregated Funds,
- Guaranteed Investment Funds,
- a stock portfolio, or
- perhaps real estate to name a few.
Once you determine how much income you need, now you have to figure out how to get that income from your investments. Should you simply invest your money and have a monthly withdrawal go into your bank account. It would be a good idea if you are not sure what your retirement plans are yet but you still need some monthly income to get you through.
The truth is, each investment vehicle whether it be an RRSP, TFSA, or an Investment Savings Account all have their purpose. However, they all have their limitations as well. RRSPs are fantastic because they allow you to defer your taxes until you’ve ideally reached a lower income in your retirement years. But what if you want to buy yourself a shiny new boat in your retirement and you’re stuck declaring an extra $20,000 on your taxes? TFSA’s are terrific but are subject to much lower contribution limits. Investment Savings Accounts play a great part as well but who likes paying capital gain tax?
If you definitely need money to get you through your regular monthly payments consider looking at annuities. You can exchange a lump sum of cash for guaranteed monthly income, no matter what the stock markets do. Keep in mind you can change your RRSP into a RRIF to take monthly income from it anytime. However, you do have to declare it on your income taxes.
Making investment choices in today’s marketplace is not easy. Stick to these simple rules:
- Seek out financial advice,
- Review the investment options; and,
- Have access to ongoing service.
At Bowie Financial, we call that the Power of Three. Most importantly, make sure the investments that you make pass the SWAN test. Will your choice allow you to Sleep Well At Night!
Retirement should not be a surprise. You will retire and retire with confidence.
At this point, you may be considering seeking the advice of a financial planner who is licensed in your province. If you already have an advisor, don’t hesitate to ask all your questions, and tell them what you want your retirement to look like. Are you confident that your current advisor, broker or bank is providing you with the best advice? It is often prudent to get a second opinion. A second opinion never hurts.
What if you find jargon going over your head or product explanations too complicated to follow? Consider basing your decision on relationships, either through recommendations or your own good judgment. Attend free seminars/webinars and if you are unsure, attend more than one. Don’t judge your attendance based solely on the speaker. Very often you will learn as much from fellow attendees. Also, don’t go alone. Better to have someone you can share ideas with. Focus on a topic. The government complicates retirement issues; find someone who can simplify them!
Planning your retirement is not a one-day event. The tools in this article should help you get on your way to a solid retirement income plan. Take each step and work through it. Retirement should not be a surprise. You will retire and retire with confidence.