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By Doug Dahmer
Special to the Financial Independence Hub
As a Retirement Income Specialist, I have spent the past 10 years helping those transitioning from their savings years to their spending years to discover the secrets of how to optimize their future income streams, while minimizing the amount of taxes they pay. These years of experience have provided me with a great number of valuable lessons. I have reduced this learning to a list of top 10 success rules for retirement income planning.
In a world where (unless you work for a government agency – police, nurses, teachers, government employees etc.) the guarantees of a corporately sponsored retirement income stream have virtually gone the way of the dodo bird. Corporate defined benefit pension plans have been replaced with defined contribution plans and group RRSPs.
Upon retirement, the vast majority of baby boomers are now faced with the daunting challenge of determining how to convert a large lump sum of accumulated retirement savings into a recurring income stream that lasts as long as they do. These risks and responsibilities were previously carried out by disciplined and talented pension plan managers. They have now been quietly delegated to the individual – and this has occurred without providing the adequate tools to perform the tasks.
It is my hope that the following 10 rules are helpful to those who have been left to their own devices to cobble together a safe, secure retirement income.
1.) Take ownership in your future success
A plan is not a plan until, the people who have to live with the choices contained in the plan, have played an active role in crafting these choices. The level of commitment one has toward following the prescribed progression of choices contained in the plan is directly proportional to the confidence you have that these choices will lead to successful achievement of the life outcomes most important to you. By taking ownership in your own plan helps keep you focused on the aspects of your life you have control over — choices — while identifying the need to put protective mechanisms place to mitigate the potential damage of events that are beyond your control.
2.) Your Retirement Income Formula is not a static product
Retirement Income Planning is not a “One and Done” event. It is also not an exact science. Every pilot before leaving the ground files a detailed flight plan knowing full well that no flight has ever gone according to plan. The pilot must constantly monitor where they not only relative to their desired destination but also relative to their original flight plan. Retirement Income Planning, like flying, contains no roads to follow or signs to provide directions. Wondering too far off course can lead to mid-air collisions or running out of fuel. Confidence in your Retirement Income Formula comes from testing it, stressing it and constantly re-adjusting it, as life unfolds. Only by engaging in a planning process that evolves with your life, will you achieve success and security. As daunting as this may sound, like filing a flight plan, when you have access to the right tools this task can be made significantly easier.
3.) Link your life plan to your financial plan
The key to financial success in the second half of life is to directly connect your desired life plan to your investment plan. If your money managers do not have an intimate understanding of your year-by-year cash flow demands or the specific portfolios you plan to source these funds from, you are not getting the level of protection – or service – that you deserve.
4.) Create forward knowledge of how much you need and when
Better financial decisions will always be made when you have advance knowledge of the what, the when, and the how much of your desired lifestyle. People who blindly chase the unknown savings target of “more” are the people who make the most financial errors.
5.) Don’t trust your future to outdated ‘rules of thumb’
Conventional wisdom that served past generations well, is no longer applicable. Baby Boomers are in the process of redefining retirement. Governments are having to respond to the financial implications of a rapidly aging society. Within this state of flux, tremendous new opportunities exist for those who find them. Devastating risks await those who fail to recognize the new reality. Probably the largest mistake baby boomers are currently making is the date they choose to start their Canada Pension Plan. A poor start date choice can frequently cost the average couple well over $100,000 over the balance of their lives.
6.) Embrace variables, not averages
Contrary to popular belief, your year to year spending during retirement does not follow a straight-line. Your spending throughout the first half of life passed through years of significant variation. This reality does not change once you retire. The second half of life passes through three distinct phases: your Go-Goyears, your Slow-Go years and your No-Go years. Each of these phases have distinct differences in how much you spend and where you spend it. In addition, this variability is further magnified by the purchase of new vehicles, the need to replace a roof, buy a new furnace, and / or fund the special big vacations on your bucket list.
Significant financial advantages are available to those who embrace the reality of the variability in annual spending over the second half of life. Most of these significant strategic financial opportunities lie in the valleys between the years of higher spending.
7.) Don’t do what you’ve always done
Too few people realize that the investment strategies that served you well during the first half of your life, turn and work to your disadvantage during the second half of life. When the flow of funds switches from adding to your investments (saving years), to drawing down on them (spending years), many investment strategies turn on their head, and quickly turn punitive. For example, ‘dollar cost averaging’ turns to ‘dollar cost ravaging’ and ‘tax deferral’ leads to expensive ‘tax traps.’
8.) Optimize your recurring retirement income streams
Just like tuning a race car, the best performance is achieved when all parts of the system work to get there optimally. Your Retirement Income Formula is no different. To get the most out your draw-down plan, it needs to be optimized. Integrate your recurring income streams (Canada Pension Plan, Old Age Security, Defined Benefit Pension Plan, Annuities,etc.) with all other elements of your plan to maximize the benefits you receive.
9.) Tax planning is a critical success factor
Taxes don’t stop with retirement and neither do the opportunities to create tax efficiencies.
For many, effective tax planning in retirement can yield greater benefits than it did during their working years. However, like changes in investment strategies, those who continue to rely upon the tax strategies of the first half of life, will create a myriad of punitive tax traps during their second half.
10.) Make small mistakes
Markets will rise and fall. Investment mistakes will inevitably be made. All money managers make them. The difference between a good money manager and a bad one is that a good money manager keeps their mistakes small. A money manager whose main priority is to protect you during significant market downturns is critical if you hope to avoid the ‘mathematics of catastrophe’. Always remember volatility helped you during your savings years if you followed the disciplines of “dollar cost averaging.” However when the flow of funds reverse, and you start to draw down upon your funds, you need to put pension like disciplines in place to avoid “dollar cost ravaging.”
Let me conclude with the following wisdom:
We all are mature enough to understand the reality: you can’t have it all. To get more of one thing, we usually must accept less of another. Planning is simply a process of consciously deciding how we choose to allocate our limited resources (time, energy, health, money, relationships). Not all of our choices will be good choices. Later in life we will look back in regret at our poor choices, realizing that if we had only known then, what we now know, we would have made a better choice. However if we invest the time (planning time) to increase the quality of our choices, we will make more good choices over bad.
In the end, I can promise you this:
The more good choices you make, the better your life will be.
Doug Dahmer is the founder of Retirement Navigator (www.RetirementNavigator.ca) a fee for service Retirement Income Planning Company. He is also the creator of the planning to determine the best time to start collecting your Canada Pension Plan ( www.CPPOptimizer.com ) and also the do it yourself planning software Better Money Choices. (www.BetterMoneyChoices.com)
