Fixed Income Investments - Friday April 29, 2011

Despite what most people think, fixed income investments are not risk free. Some risks to consider are inflation risk, tax risk and renewal risk. Market risk is applicable in bonds and GIC's if you want to sell them before maturity. Generally speaking if you hold them to maturity you will receive both you principal and interest you are promissed. Bonds and GIC's are the least effective investments when dealing with inflation, tax or renewal risk. Laddering and diversification are two commonly used startegies to reduce these risks.

The Four D's - Thursday April 28, 2011

Yesturday I referred to Daryl Diamonds book Buying Time. Once again I will highlight some information that can be useful in retirement income planning. He refers to them as the four D's Defer, deduct, discount and divde. Tax can be one of the most significant costs in retirement and therefore a significant saving. Using a retirement navigator will address these issues. Beyond that you should talk to a professional tax advisor to address these 4 D's in more detail.

Boomers & Their Parents - Wednesday April 27, 2011

Daryl Diamonds book "Buying Time" points out Boomers and their parents have significant differences between them. For starters Boomers are about to retire and they expect to retire earlier, live longer and do more in retirement. However most do not know how much money they will need to do this, and they are not as financially prepared as they need to be. Whereas, their parents are retired and have lived frugilly but we find there is a great deal of inefficiency in how money is used for personal objectives, taxed by government, is used for health-related expenses and ultimately passed on to future generations. Buying Time delivers a combination of technical information and solutions that addresses the different yet connected problem,s of two generations moving through retirement at the same time.

Planning - Tuesday April 26, 2011

Yesturday I talked about life altering experiences in retirement and using a retirement navigator to address these retirement realities. The fact that these changes impact our situation is one of the reasons we emphasize using an advisor with whom you can work on your financial, lifestyle, investment and health risk management issues. A financial plan gives you a great snap shot of your current situation. In our opinion, it becomes wealth management when you have analized the gaps, established a roadmap and implementing the plan so you turn your objectives into reality.

Stages of Retirement - Monday April 25, 2011

Many of us think of retirement as one phase of life when in fact its comprised of many different stages over a 20-40 year period. Some of these stages may include:
starting your retirement,
arrival of grandchildren,
healthcare issues,
caring for spouse or aging parents,
changing accommodations or loss of a spouse.
All of these things can change your experience of retirement and in many cases these are life altering events. It goes to show you that planning for retirement goes beyond just financial concerns. Using a retirement navigator to set your objectives, consider asset use, health risk management and wealth transfer helps prepare you for these retirement realities.

Income Projections

Yesturday I talked about the differences in gross & net income while you are working vs when you are retired. So how should you determine what you should use as a number to project out your income over time and how long your money will last based on certain assumptions about inflation and returns. Three commonly used methods are:
1. 70%of your pre-retirement earnings
2. Do a budget based on actually spending
3. Maximum income to exhaust your money at a set age, say 90

I prefer starting with the budget based approach because it is usually an eye openeing excercise to see what you are actually spending your money on. The only caveat is that it's hard to teach an old dog new tricks.

Gross & Net Income in Retirement vs Employed

One of the changes that most people don't realize is that there can be significant differences between gross income and net income when you are employed vs when you are retired. For example when you are employed a gross income of $4,000 per month can be reduced to a net income of about $2,200 per month when you consider deductions for CPP, EI and group benefits. In addition taxes can be more onerous at a higher income level. To end up with the same net income of $2,200 in retirement you may only have to claim a gross income of approximately $3,000 depending on taxes at the time because you don't have all those deductions in retirement.

Realities of Net Worth in Retirement

It is sometimes a large psychological shift for early retirees to shift from receiving a regular paycheque to one created from benefits and income from our own assets. At the time you retire you are basically finsihed saving money, unless you are an underspender of course. usually ists a shift from accumulating to drawing income and is the point in time when you have your greatest net worth. If you are within 10 years of retiring it's a good idea to prepare for that psychological shift and realize the reality of it.

Costs in Retirement

I was reading a book written by Daryl Diamond and he points out a few considerations that will change your income and costs in retirement compared to your working years. A few points worth noting are costs related to work disappear. Transportation, clothing specific to work,and meals and lunches if you ate out alot. Group insurance benefits (disability and life) are commonly terminated or at least reduced when someone leaves their employ. A key planning point to examine is which, if any , of those benefits may be appropriate to continue on an individual basis. Health considerations also enter into their decision. Someone in poor health may want to take advantage of the non-medical conversion option available in group plans. With the departure from employee benefit programs, the costs of dental care, some medical requirements, and prescription drugs fall to the individual. These costs can be quit high. All of these points should be considered when you are looking at your income needs in retirement.

Health & Wealth Management

According to Advisor Analyst client insights babyboomers 55 and over control over 60%of personal financial assets and are looking to live an active second half of their life. What that tells me is not only is wealth important to support your lifestyle but health is an important consideration too. Your run to the finish line might be painful if one of the two fails you. As part of your wealth management plan what about incorporating a health management plan? We use a lifestyle navigator to address the health side of the equation.

Be realistic in Retirement

Sometimes the best advice to give for someone who is considering retirement and doesn't have sufficient savings is to be realistic. One solution is to accept that you may have to have a part time job. A surprisingly high percentage of retired people say they would like to work part-time, some because they have to and some because they want to.

The main Mission in Retirement- Monday May 2

At every stage of life people have a mission. For example as kids become teenagers they fight for independence, as they become adults they fire their parents and as they hit retirement they want freedom. As they age they go back to fighting for independence and maintaining control. They may lose their physical strength, their health may fail, friends pass away and people stop asking for their opinion. Seniors react to the combination of those losses by seeking greater control. housing and driving are 2 great examples where control issues are most obvious. Whether you are the children of aging parents or you are the aging parents, you can prepare for this by having a well crafted plan that helps you address these realities and maintain control while you can.

Babyboomers & Retirement Planning-Tuesday May 3

Dan Richards advises advisors about retirement planning and his article this morning had some interesting points about baby boomers in retirement. Over the coming decade, nearly 10,000 boomers per day in North america will be turning 65 and retiring. They are different than retirees before them. They are all part of a group he calls "second-half champions". This refers to a more vigorous lifestyle than their predecessors. The challenge is living an active lifestyle longer requires more money and requires more creative planning to make your income last and address the sometimes less tangible needs of aging retirees. I will talk about some of those areas this week so stay tuned!

OAS Clawback - Wednesday May 4

Old age security and the Age Amount are 2 government administered benefits which can contribute greatly to your retirement income and cash flow. Changes have been made to theses programs in recent years to adapt to the expected increase of futuire benefit paymenst which will have to be made as Baby Boomers move through retirement. You may no loner get the full benefits if your incopme crosses certain thresholds. For example some retirees get OAS clawed back. Based on 2011 figures, the threshold for OAS clawback is $67,668. Any income above this amount is clawed back at the rate of 15% of the incremental amount over the threshold. By employing income splitting strategies and controlling Net Income with tax-effective investment income, you can minimize the loss of these benefits.

Drawing Income - Thursday May 5

Building on yesturdays tip to look at the order you should draw on your various sources of income. This involves determining which assets and benefits to use, and when to use them. One school of thought is to draw on the least flexible and least tax efficient assets first to make up your base income. This would allow you to reserve the variable and/or tax favoured sources as discretionary in order to manage income and taxation levels at different stages of retirement.