Looking to Retire Soon? Consider This 3 Step Process

Retirement Income & Investment Advisors, Calgary

Unfortunately, Canadians make a lot of mistakes with their retirement planning.

With so many conflicting messages from various financial institutions all shouting for your attention, it's no wonder there's so much confusion. We are going to simplify this for you and show you the easiest retirement income strategy you can use.

Canadians fall into 3 main groups when it comes to retirement. 

First, many Canadians are in the lower-income bracket with only government benefits and little savings to make it through retirement. They usually have low expectations for retirement, travel infrequently and can live adequately on a low income. They pay little taxes and really, have simple planning needs. 

The second group, which represent the smallest group of retirees, are the high net worth households that have in excess of $1,000,000 in savings and have little risk of running out of money. Their biggest challenges are often taxation, estate planning, divorce, business succession planning, cross-border concerns, etc. They require a great deal of planning with many advisors working collaboratively to achieve their long-term goals.

That leaves a third group which is probably the largest group. You most likely earned a decent income throughout your life and worked hard to accumulate somewhere between $200,000 and $1,000,000 of retirement savings, usually spread across RRSP's, TFSA's, work pensions and maybe a non-registered account. The big firms may take you on as a client, but give you little attention. You are the group that we choose to work with and we have customized a process that can help you eliminate mistakes, make the most of your resources and create a satisfying retirement.

Consider creating a simple retirement income plan with a 3 step process. 

The first step in developing a retirement income plan is to determine how much income you will need. 

The second step is to calculate how much savings you need to create the income, and

The third step is to decide how you want to manage your retirement savings.

Most people retire close to age 65 and will need between 50-70% of their pre-retirement income. 


Take Couple A for example - Both aged 65 and have no debt. 

Pre-retirement total income: $100,000 

Retirement income target: $60,000

Government benefits: $35,000

Income shortfall: $25,000

Step 1: Let's assume the couple will each qualify for the full OAS of $613/month and about $862/month in CPP. (That's $35,400/year combined) Keep in mind that during retirement you should no longer have mortgage payments, work expenses, CPP and EI contributions, or retirement savings contributions and your income taxes will be much lower. Payroll taxes alone will be about $25,000 of savings in retirement. You will need to factor in the cost of a health plan and travel insurance. So, in this case, couple A can determine their post-retirement income target to be $60,000/year. 

Step 2: Is determining how much retirement savings you will need in order to make up the difference. They have $35,000 from government benefits, so they will need to create an additional annual income of $25,000.

We always start with the simplest solution and in this case, $500,000 of retirement savings can create an annuity with a lifetime annual income of $25,000 for a 65-year-old couple. The payment will continue to the surviving spouse regardless of how long they live. This annuity payout is based on the time of writing this article, which is 2019. These rates are subject to change of course and you need to get an up to date number at the time of your plan. We deal with multiple annuity providers and can shop around for the best rates and features.

Step 3 is deciding how you want to manage your retirement savings to ensure the income shortfall can continue for the duration of your life. Keep in mind that retirement income has to be sustainable, predictable, tax-efficient, perpetual. 


Let's look at 3 options:

Option 1: The simplest retirement plan you can create with no investment decisions to make or worries about where your next dollar will come from is an immediate annuity, as described above. Basically, exchanging a lump sum of money for a guaranteed lifetime monthly income stream.

The cons:

The annuity income isn't indexed, meaning it loses some of its buying power over time. The government pensions are indexed and will soften some of this impact. Your income needs may change over time and you may require more income, but, contrary to what most people believe, your spending will most likely decrease over retirement. 

If you both die prematurely, there is no estate value for your heirs. The probability of this happening is rather small. There's a high probability with a 65-year-old couple that one of them will live into their 90's. This is of greater concern for a single person.

The pros:

No more investment decisions and longevity risks are eliminated as the income will be paid for as long as one spouse is alive.

Market volatility and watching investment accounts grow and shrink will no longer be relevant or of any concern. The annuity checks a lot of boxes - sustainable, predictable, tax-efficient and it's perpetual. (Perpetual, in that it continues to a surviving spouse)

Option 2: A Cashable annuity of $568,000 will give the same amount of guaranteed income. The difference is that you still have access to your money and the balance of your investment account can be distributed to your family upon your death. If you live a long life and the account balance goes to zero, your income stays at the guaranteed level forever. 


You do have to make some investment decisions, and you'll need an extra $150,000 of savings to generate the same income as the joint-life annuity. 


Guaranteed income for life with estate value for your heirs if you should die before all the money is paid out as income to you. And, you always have access to your money should you need it. There will be slightly higher fees and tax implications. Agian, this option provides predictable, sustainable, tax-efficient and perpetual life-long income.

Option 3: Fully invest your retirement savings portfolio in the stock markets and take $25,000 each year, which is 5% of your balance. If your market returns are at least 5%, theoretically, you will never run out of money.


The downside risk is that you have no guarantees of what the market returns will be for the next 25-30 years and you run the risk of running out of money before you die (longevity risk). If your savings are in RRSP's you will eventually have to convert to RRIF's and may be forced to take out more than you want, as the RRIF minimum withdraw amount increases every year.


You have access to your money so you can withdraw more or less in any given year as you have the need and you could possibly have more of an estate to leave to your family. You can defer your income until a future date and continue to grow your money. With the right asset mix, you can have predictable, sustainable and tax-efficient income, however, one significant market downturn can set you back and take many years to recover.

** More on annuities: These products are only available from a life insurance company.

Annuity income is 100% protected through Assuris. The first $2000/month of income has a 100% protection from each insurance company and 85% protection above $2000.00. Learn more from their site: Assuris

Retirement income planning is all about managing risk.

You need to decide how much risk you want to carry and how much of the risk you wish to share with a financial company. An annuity allows you to shift all of the market risk and longevity risk to an insurance company. Many people will divide their retirement savings into "buckets" by using a combination of the 3 options above thereby reducing the risk they carry on their own. 

Here are some key points to ponder:

1. Statistically speaking, if you take a sample of 20 adults age 50 and look at them 20 years into the future, this is what will have happened by age 70. 

  • 10.5 will be healthy
  • 1.5 will have died.
  • 8 will be dealing with a life-threatening illness like cancer, stroke or heart disease. *Source: 2008 Critical Illness Tables

If you reach age 70 the odds increase greatly, every year, that you will also reach 90.

Our experience and the research shows that the best years to enjoy a retirement lifestyle is between the ages of 50 and 70. After that, the enjoyment of life gradually decreases for various reasons. If you are in a relationship, there's a 50% chance that one of you may have a premature death or a serious health crisis by age 70. Be careful saving all of your money for the years of least enjoyment. Spend more of your retirement savings in the early years and use what's left, along with the equity in your home, for the latter years.

2. There are no two plans alike and although we talk about the average couple statistically, there is no average couple. Your plan needs to look at your own probabilities and possibilities and then be created with the best outcome. Not everyone retires at 65 - some earlier and some later. Not everyone gets to choose their retirement date and are often forced into it with little notice. Levels of stress, eating and exercise habits, hereditary, smoking are all major contributing factors to vitality and longevity.

3. You don't know how long you'll live or how healthy you are going to be. You don't want to be the richest person in the cemetery. Additional reading: "All The Money in the World"

4. There are 3 major contributing factors to a happy retirement: Something to do, someone to do it with and not having to worry about money. Annuitizing a large chunk of your retirement savings is the best way to achieve the third factor. Not having to worry about money will allow you more peace of mind and ability to focus on your purpose and social connectivity.

5. The research shows that cognitive abilities decrease with age, however confidence increases. We think that we can handle more, but in reality, we can't. We will struggle to make decisions relating to our health and financial well-being. This leaves many seniors vulnerable to being taken advantage of and there are many news stories to verify this. Link to this research.

With this in mind setting up a retirement income plan as early as possible makes the most sense, but also setting up a plan that is easy to follow for many years, especially in the latter years, makes even more sense. For example, it's a good idea to have a Will, Power of Attorney, and Personal Directive early in retirement before your cognitive abilities start to diminish. The same applies to financial matters, such as banking and investments, as well as funeral arrangements and life insurance requirements.

It's important in retirement to have a trusted advisor that you can work with for many years to come. 55% of pre-retirees will change advisors when they transition to retirement because they realize they need specialized planning with a focus on income protection.

If you are in or within a few years of retirement and would like to work with an Advisor who specializes in retirement planning, book a spot in our calendar for a meeting time.

We can help you create a sustainable, predictable income from your portfolio in the most tax-efficient manner to ensure you never have to worry about running out of money.

Ready to retire soon? Click here to Book  an Appointment


Willis and Nancy Langford

Retirement Income & Investment Planners

Willis is a Certified Financial Planner


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