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3. Will both my spouse and myself have sufficient assets for our retirement?
In order to assess whether you will have sufficient retirement assets,
both as a couple and as a single survivor, you must complete a comprehensive
retirement plan for a number of "what if" scenarios.
Best-case Scenario: Ideally, your advisor should develop a retirement
plan for your "best-case" scenario (your earliest retirement date
and highest desired retirement expense level), such as retiring at
age 60 with retirement expenses of $60,000 p.a. after tax in today's dollars.
Worst-case Scenario: In addition, your advisor should develop a retirement
plan for your "worst-case" scenario (your latest retirement date
and lowest desired retirement expense level), such as retiring at
age 65 with retirement expenses of $48,000 p.a. after tax in today's dollars.
Your advisor should assess both of these scenarios using conservative assumptions
for all uncontrollable factors, such as a longer planned life expectancy,
lower returns and higher tax rates. This will provide you
with a "sensitivity analysis" for a range of "what if" scenarios using different
retirement expense levels, rates of returns, inflation rates and tax rates.
The purpose of developing your retirement plan is to ensure that you understand
the "price tag" for both your best-case and worst-case retirement scenarios.
This will help you to work with your advisor to implement a workable,
realistic plan to ensure sufficient assets for your entire retirement.
4. How can I minimize my income taxes when I draw down retirement
investment assets?
This question is of critical importance if you are planning at and
during retirement. Your advisor cannot complete your investment plan
and construct a well-diversified portfolio, without first completing a comprehensive
retirement plan. In order to determine the optimal way for you to draw down
on your retirement investment assets in a tax-efficient manner, your advisor
should assess the following factors:
After-tax income: Your desired level of after-tax income will
affect the optimal draw down of retirement income options. If you require
significant income and/or have significant government and employer pensions,
there may be less flexibility to minimize taxes since this is
typically fully taxable income.
Tax brackets: Both your and your spouse's current and future tax
brackets should be estimated, based on your current and future "fixed" income
(includes income from pensions and other taxable income).
Retirement investment assets: Your advisor should assess the
total dollar value of both your and your spouse's retirement investment
assets, together with the ratio of each spouse's fully taxable and non-taxable
retirement investment assets (e.g., the capital you draw down is non-taxable).
Further, the amount of income you will require from your portfolio must
also be determined. Lastly, your advisor should also take into account
other personal assets such as a cottage, which may be used to provide
retirement income in the future.
Strategic asset allocation and portfolio tax efficiency: Your
advisor should work with you to determine the strategic asset allocation
of your and your spouse's joint, integrated investment portfolio. You
need to find a balance between your need for income in the short term,
and the required portfolio growth over the long term. Your portfolio
must be constructed to ensure both tax-efficient growth and a tax-efficient
draw down of your retirement assets.
Estate planning goals: Your estate planning goals also affect
the optimal draw down of retirement income options. Ensure that you have
sufficient assets for both you and your spouse as a single survivor and
consider any "fixed estate requirements" (e.g., leaving a specific bequest
to your children).
Your advisor should determine your optimal "retirement mix" based on the above
five factors. The "retirement mix" is defined as the combination of retirement
income options and cash flow management, and investment, tax, and estate
planning strategies that will enable you to achieve your retirement objectives.
The optimal draw down of each spouse's assets should focus on maximizing
your after-tax income over the entire retirement.
Retire right - take action on your retirement plan
Well, you've read about the key retirement planning mistakes and about the
key issues to consider for your retirement plan. So if you are (like most
of us) dreaming of the perfect retirement and are determined to "retire
right," then it's time to take action by beginning with a smart retirement
plan.
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Some Facts and Figures on Canadians and Retirement Planning |
| The author of the article, Bernice Miedzinski, specializes in educating
Canadian financial advisors on retirement planning. While the following
retirement planning information highlights the Canadian experience,
this situation is likely similar in many other countries.
According to a 1999 poll by the Canadian Imperial Bank of Commerce
(CIBC), about 11% of Canadians report they are betting on a big lottery
win to fund their retirement!
According to Statistics Canada, (Summer 1997 Perspectives and
Labour Force Survey) 49% of Canadians hope to retire before the age
of 60 (the average retirement age is 62 today).
In an Angus Reid survey conducted for Fidelity Investments
Canada (February, 2000), 53% of Canadians between the ages of
25-64 with total household financial assets between $100,000 and $250,000
(excludes home) stated they are saving for their long-term goal of
a secure retirement, and 35% want to retire before age 65.
In a Gallup Canada survey conducted for the Canadian Association
of Financial Planners (CAFP) (January 1999), 51.5% of Canadians
stated they have no idea how much money they will need for a comfortable
retirement! |
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Source: Financial Planner, written by Bernice Miedzinski
The writer, a certified financial planner, is the president of a Canada
based financial planning company called Money Skills Inc.
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