Why the Best Retirement Plans Start With Your Life, Not Your Investments

Start With the Retirement You Want

Before calculating investment returns or entering account balances into financial planning software, consider what you want retirement to make possible.

Perhaps your ideal retirement includes travel, golf, gardening, attending sporting events, spending more time with family, living somewhere warm during the winter, or remaining in your current home. You may even want to continue working because you enjoy it.

Whatever that vision looks like, it should guide the financial plan.

Retirement planning should not begin with, “How much money do I have?”

It should begin with, “What do I want my money to make possible?”

Understand What That Lifestyle May Cost

Once your desired lifestyle is clear, the next step is estimating the spending required to support it.

Retirement spending is rarely the same every year. Many retirees spend more during the early years when they are healthier and more active. Later, travel and entertainment expenses may decline, while healthcare, home support or long-term care costs may increase.

A strong plan separates essential lifestyle expenses from additional spending that may be adjusted when circumstances change.

This creates a clearer picture of how much income you may need throughout the different stages of retirement.

Build a Coordinated Retirement Paycheque

Retirement income may come from several sources, including:

• Workplace pensions
• Canada Pension Plan benefits
• Old Age Security
• RRSPs and RRIFs
• TFSAs
• Non-registered investments
• Corporate assets
• Rental income

Each source has different tax consequences and levels of predictability.

The objective is not simply to begin withdrawing from every account at the same time. The goal is to coordinate those sources so your income supports your lifestyle as reliably and tax-efficiently as possible.

The appropriate withdrawal order will depend on your age, income, tax brackets, family circumstances, estate goals and the types of accounts you own.

Look Beyond This Year’s Tax Bill

Delaying taxes and minimizing taxes over your lifetime are not always the same thing.

Leaving every dollar inside an RRSP may reduce taxes today, but it could result in larger mandatory RRIF withdrawals later. Those withdrawals may increase taxable income, affect Old Age Security benefits or leave a surviving spouse with a larger tax burden.

That is why retirement planning should consider lifetime taxation, not only the amount of tax paid in one particular year.

The better question is not simply, “How little tax can I pay today?”

It is, “How can I manage taxation throughout retirement while maintaining the income and flexibility I need?”

Test the Plan Before You Depend on It

A retirement plan should also be tested against situations that may not go as expected.

What happens if markets decline during the first few years of retirement? What if inflation remains higher than expected? What if one spouse passes away earlier? What if you live longer than projected or need additional care?

A plan that only works when everything goes perfectly is not a strong plan.

Although we cannot control markets, inflation, health or longevity, we can create flexibility. This may include maintaining a cash reserve, preserving TFSA assets, reducing debt, coordinating insurance and estate documents, and having access to different sources of income.

Build Backwards From the Life You Want

Building a retirement plan backwards means beginning with the life you want to live.

From there, you calculate the spending, coordinate the income, manage taxation, test the risks and design the investment portfolio to support the overall strategy.

The money matters, but it is not the destination. It is the tool that helps you create greater security, flexibility and enjoyment throughout retirement.

Watch the video to discover why your retirement plan should be built around your life, not only around your investments.