Perhaps you know the illustration of the physics teacher who gave his students a wide-mouth mason jar. He then gave them five big rocks, a handful of marbles, a container of sand, and a glass of water. He said, “You’ve got fifteen seconds to put all of these items in the jar."
The physics teacher then stepped back with a stopwatch in hand and yelled, “Go!” The students poured in the sand, threw in the marbles, and started stuffing the rocks in. After fifteen seconds he shouted, “Times up.” There, still sitting on the table were three large rocks and the glass of water. The students started complaining, “It can’t be done. It’s impossible. All that stuff will not fit. The jar is too small.”
The teacher calmly said, “I can put them all in the jar.” The students responded, “Show us.” So they dumped everything back on the table – separated everything and started over. The teacher then took the jar and placed a couple of the big rocks in the jar. He filled in any gaps around the big rocks with the marbles and continued to fill the jar until it was up to the brim with all the big rocks and all the marbles. The teacher then took the sand and slowly poured it into the jar and watched as it cascaded around the rocks and the marbles – filling all the holes and spaces. He then took the glass of water and poured it into the jar. Everything fit perfectly. He then said, “It all fits – but it depends on the order that you put them in the jar – that is a matter of setting priorities. When you set priorities you can make it happen.”
The sad reality is that most people will spend more time planning out a 2-week vacation than they will planning out the rest of their lives. That's why so many are disappointed with and unprepared for retirement.
That doesn't have to be you. Here's some simple advice on 5 priorities for a successful retirement transition.
1. Life Plan
What will you do when I get up in the morning? Before retirement, you had somewhere to go every day and most likely longed for a day where you didn't have anywhere to go. Now you have 7 days every week that need planning.
Who will you be? Before retirement, you had a job, a position, a profession, a title. Now you are a retiree. You qualify for the seniors discount. You are now a part of one giant group of aging people. Your identity can get lost in that. It can lead to an identity crisis or it can be an exciting new opportunity to be anything you want. You can totally redesign yourself.
Where will you go? Who are you going with? Are you going to be a snowbird or an international traveler? How about a voluntary mission worker in various countries. I had a friend who is now passed on. I met him when I was hired as a painting contractor to paint a church. He was supplied to me as a volunteer helper. At the time he was only 80. He quickly told me about his passion, which was spending the winters in a rundown border city in Mexico. He was so impassioned about his work that I felt compelled to go with him. So that Fall I flew to Mexico to see his work. He had invested his time and money in an old building that was being used as a training center for local church pastors and workers. He was involved with operation Amigo, an organization helping local children get a good education. He was involved with several local churches and orphanages.
He spent about 15 years of his retirement years making a difference. It kept him fresh and excited. He is no longer with us, but his legacy lives on forever.
You need a purpose.
2. Tax Plan
It's true. The government is after your money. They believe they are better stewards of your money than you.
You know better than that and the less you send to CRA the more you have to fund your lifestyle. The more you have to invest so that you can grow your money and fund your lifestyle. The sad reality is that most Canadians send too much to CRA because of poor planning or ignorance. One of those mistakes is waiting too long to draw down an RRSP, especially if the RRSP is on the large side. Although an RRSP is a great wealth-building tool, it isn't a very good income tool because all of the income is 100% taxable. If you wait until you are 72 to start taking a RRIF payment and then your annual income exceeds $79,054 in 2020 you will see a clawback on your OAS benefits and other government benefits like health benefits.
Another common mistake retirees make is interest income from GIC's, which is fully taxable income at your highest marginal tax rate. Taking CPP too early or too late is another mistake. Not understanding how these benefits work, leads to hasty decisions and unnecessary tax payments. Dying with a large RRSP will mean a taxable disposition, where as much as half of your money will be returned to the government.
3. Legacy plan.
How will you protect, preserve, and pass your assets onto the next generation? This has to be done tax wisely, fairly, and quickly. Too many people make massive mistakes here:
- Improper beneficiary designations
- No will so that the entire estate is tied up in court for years, resulting in delays and added costs.
- Wrong ownership of assets. An asset, like a home, held in one partner's name is a deemed disposition upon death and will be dispersed according to the Will if there is one.
A few years ago, I had the honor of hand delivering 4 cheques to the beneficiary of an estate. The one lady came into the office to pick up the cheques for her and her siblings. I got a moment to express my sympathies and have a quick chat. She said her dad did not have the easiest life, but he did everything he could to leave a little legacy to his children.
A few years ago my parents sold their home and from the proceeds gave all of their 9 children an inheritance of $8800. They wanted to give something while they were alive to see us enjoy it. My mom never worked outside the home all of her life. My dad worked all of his life outside of the home. He had a grade 6 education and utilized the skills he had to earn a living. It was important for them to leave a legacy. That legacy inspires me today. I did two things with the money. I bought a really nice dining room set. I can't look at the set without a constant reminder of where it came from. I used the other half of the money to have laser eye surgery. Their legacy gift to me literally gave me sight. I still remember walking out of the clinic in July 2011 and being able to see perfectly, without the aid of glasses. Every day I am reminded of their legacy.
4. Health Plan
I recently had a very unique experience. I played golf with 2 guys who would have been dead if not for a liver transplant. One was in his 20's, the other was in his 60's. If we all knew 'if and when' we were going to get sick, have an injury, or die, it would make planning so much easier - but, we don't know. If we did know, the misery would only be compounded. Every day someone is getting sick, getting hurt, or getting buried. We cannot stop the clock from ticking, however, we can plan for the worse and hope for the best.
How will a heart attack affect your retirement? How about a failing knee or weak hip? How about the need for long-term care?
According to the Canadian Cancer Society, 1 in 2 people will get cancer in their lifetime. You have about a 1 in 3 chance of suffering a disability. a 70 % chance of needing long-term care and a 100% chance of death.
As you enter retirement, you need a health plan. How will you pay for prescriptions, travel insurance, major medical setbacks, long-term care, dental visits, physiotherapy, etc?
5. Investment Plan.
If you are just managing your money, you are not managing your wealth. There are 4 main considerations for managing your portfolio of investments.
- Preserving the capital. If your drawdown is too large you risk shrinking the capital and thus, running out of money. If your investments are too conservative this can happen as well as too aggressive.
- Drawing an income from the capital. This income has to be sustainable, tax-efficient and predictable.
- Managing volatility. You want your portfolio to be less impacted by fluctuating stock markets.
- Outpacing inflation. Most people will spend about 20-30 years in retirement. Well, you don't need to be a mathematician to know that $4000 a month today will not be adequate to maintain your lifestyle 20 years from now.
Retirement can be the greatest time of your life. There's only one way to increase the probability of your success: A quality retirement income and investment plan that will ensure you avoid the obstacles and keep more money in your pockets.
We can help you create a sustainable, predictable cash flow from your portfolio in the most tax-efficient manner to ensure you never have to worry about running out of money.
Learn more about our Flat-fee & All-inclusive Retirement Income Planning Services for those 55+
Retirement Income, Investment & Tax Planning,
Willis J Langford BA, MA, CFP
Nancy Langford CRS
587-755-0159
