Retirement planning is a tricky business for many. There are many factors that need to be considered such as income, comfort with risk, health status and need for money in the future, family situation, and others. Because effective financial planning requires time, discipline and understanding, then evaluating, all the options and possibilities, many people aren’t sure where to begin.
Some people will try to cobble together a retirement plan themselves, which might work to an extent, but there are bound to be things they won’t consider simply because they “don’t know what they don’t know.”
Others will go to a financial planner for advice. Working with an expert really is essential, but fee-for-service financial planner Ed Rempel cautions you to watch out for so-called “retirement planning experts” who won’t take the time to craft a plan that’s based on your specific wants and needs.
“We all want our clients to do well, but there is a problem shared by many planners,” says Rempel. “I call it financial quackery. People believe their planners are writing effective retirement plans for them, but many of them are cookie-cutter plans that don’t even come close to preparing them for the retirement they want.”
Ed Rempel reviews many plans brought to him by individuals and couples, and encounters this situation again and again.
He’s personally written retirement plans for thousands of Canadians, and says that, after a few decades in the profession, he finds it a bit of a personal mission to help people who have been “duped,” in his words.
The biggest problem, says Rempel, is that many of these retirement plans don’t take the clients’ desired retirement lifestyles into account.
“You can’t plan for the lifestyle you want until you articulate—in discussion in detail and on paper—what that intended lifestyle is,” he says. “I always tell clients to make a list of how they’re spending their money now, and adjust each expense for their desired retirement lifestyle and then calculate the before-tax income they will need.”
When Ed Rempel reviews his clients’ finances, he often suggests what he calls a “magic number” approach to retirement planning. This means adjusting your desired income by inflation for the years until you retire, then subtracting the amounts you expect to get from work and government pensions to get the amount your investments need to provide for you. Finally, multiple that amount by 25 or 28 to get your magic number, which is the amount of investments you’ll need for the retirement you want.
Regarding that number, Rempel says to “use 25 if you’re an equity investor, 28 if you’re a balanced investor, or 40 if you’re a GIC or bond investor.”
Next, he says, determine how much you can invest. This means figuring how much you need to invest per year.
“Use a reasonable rate of return based on how you plan to invest and decide whether investing that amount is possible for you.” He says it’s important to take into account your tax refunds, using an optimal mix of RRSP and TFSA for your incomes.
Finally, work with your financial expert to create a plan that will help you achieve your specific retirement goals. “This is where many so-called retirement planners don’t get it right,” says Rempel. Often, when Ed Rempel reviews plans created by others, he notes that they’ve developed a plan for a client that’s not client-specific. “It’s the same plan they’ve provided to perhaps numerous others with only your name and a few details changed, without regard for your specific situations,” he notes.
What it all comes down to, he says, is developing a plan that takes the retirement lifestyle you want into account. “Picture yourselves being retired and free to do what you want,” he says. “Assume, for the moment, that you have all the time and money you want,” he suggests. “Talk it over with your spouse. What is the life you want to live?”
Rempel says that certain rules of thumb that were used in the past, such as, ‘You will need 70% of your income’ is not good enough. “The lifestyle you want is very personal, and you need to plan with that as your objective. He has written financial plans for people that want to retire on 40% of today’s income and for 180%. You are different and unique.
He says that there are a number of considerations you and a qualified professional will need to make when planning for your retirement. These include minimizing your tax obligations over your life, optimizing your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), maximizing your pensions, and others.
From experience, he says the benefits of having a financial plan are much bigger than you may realize. It’s like driving without or without a GPS.