Financial Planning for Retirement

No matter what your age or stage of life, you should have a financial plan for retirement. How do you get started?

"Financial planning for retirement should be a career-long process," says Chartered Accountant Kevin Dunn of Peterborough. "The longer you are able to set money aside for retirement, the longer the magic of compound interest will work for you."

Dunn advises that it's not necessary to set aside huge sums of money in your early working years. "Starting young means you don't have to scramble later on to make up for the years you didn't put anything away."

The first step in financial planning for retirement is to answer several important questions.

"What age do you want to be when you retire? What do you want to be doing? Are you going to stay in the same house or downsize? Do you want to travel?" asks Chartered Accountant Christie Henderson, a Partner with Henderson Partners LLP in Oakville.

A big question is how much you will need to live on in retirement?

"Determine what you're spending now and then adjust it for what you imagine your situation will be in retirement," suggests Dunn. "Ask retirees how their spending changed. Involve your spouse and family in this discussion, as they may have valuable input you have not considered."

A sound plan should include investment planning, insurance, retirement planning, estate planning and tax planning. "You also need to consider what will happen if you or your spouse get sick," says Henderson. "A critical illness can eat up your retirement capital, so extended health insurance may make sense for you."

Registered Retirement Savings Plans (RRSPs) should play a role in most retirement plans. "Retirement funds grow tax-deferred within an RRSP," explains Dunn. "You save tax on RRSP contributions while you are working and are in a higher marginal tax bracket. When you take money out of your RRSP during retirement, you are in a lower tax bracket and will pay less tax."

If you don't have a financial plan for retirement, don't panic, because it's never too late to start.
"Calculate what size of nest egg you will need," recommends Henderson. "You may be under pressure to save more in a shorter time, but it's worth it."

Dunn suggests getting out of debt as soon as possible and trimming your expenses. You may even want to consider deferring your retirement for a few years. "Don't take chances by investing your money unwisely and hoping for a home run," he warns. "Create a reasonable and manageable plan."

Dunn and Henderson agree that most people don't take financial planning for retirement seriously enough or start soon enough.

Many rely too heavily on government pensions. Other common mistakes include dipping into retirement funds before retirement, not taking full advantage of employer pension benefit plans and underestimating the level of income needed to support a retirement lifestyle.

"Some people think they're going to win the lottery, which is not the best way to plan for retirement," says Henderson. "You need to plan and be diligent."

Henderson adds that your retirement planning should go beyond financial elements. "If you had a busy career then you need to think about what will keep you active and happy in retirement," says Henderson. "Retirement can be the best time of your life if you plan for it."

When developing your plan, be sure to consult a Chartered Accountant.

"A CA can help ensure you have considered all the possible income sources, expenses and other financial variables," says Dunn.

For more information contact a Chartered Accountant.





Brought to you by the Institute of Chartered Accountants of Ontario.