Retirement Planning: It’s About Income and Lifestyle

Retirement comes with its own set of challenges.  Sometimes these challenges are not solely related to money.   Misconceptions may cloud your perception of the ideal retirement.  Trying to fit into a mold designed for someone else will not help you live the retirement you were designed to enjoy.  The books below highlight either specific chapters or focus entirely on the softer side of retirement.  Conversations should involve more than determining your sources of retirement income.  Your lifestyle deserves attention too.  

If someone is approaching retirement or has already retired, you may consider giving one of these books which will help them transition from a working lifestyle to their ultimate retirement.  If you are considering retirement yourself, you may see another side of retirement. Every person’s retirement will be different.  Some may choose to work part-time while others will do volunteer work; some may choose to travel while others will stay close to home.  Some may relocate to another city while others will simply downsize to a smaller home.  Certain decisions will be easy while others will be complicated.  Finding what works now will be as important as making changes as the years pass. To create the life you dream of having, perhaps one of the following books can help.

10 Things I Wish Someone Had Told Me about Retirement

In the book, 10 Things I Wish Someone had told me about Retirement, one enjoyable activity which Rein Selles recommends is to design a “retirement card”.   Business cards identify people by their name, title, and contact information.  Your retirement card, the same size, has one notable change.  It answers the usual question people ask, “What are you going to do when you retire?”  On the card, you will state your name, one thing you would like to do “retired” and where you hope to do this.  You may be interested in knowing if retirement isn’t in your plans, the chapter, You Cannot Retire from Yourself, gives you permission to keep working if you love your present job and want to work beyond 65.  Pressure from others is not a good reason to retire.

Retire to the Life You Love  

 

The design on the cover of Retire to the Life You Love shows the Six Circles of Life.  At the heart of these interlinking circles is you.  You are the inner circle.  Nell Smith takes the approach to help you be who you are. Inside this book, you will discover personalized tools to create a lifestyle which brings you joy, happiness and contentment.  Her holistic approach will help you think about certain aspects related to retirement you may have never considered.

 

 

Your Retirement Income Blueprint

In Daryl Diamond’s book, Your Retirement Income Blueprint, he emphasizes that retirement is driven by two hubs.  The most obvious one is the “Money Hub” and the other, not so obvious, is the “Time Hub”.  During retirement, knowing what you will do with your time and what you want to do, are vitally important.  Your activities may be related to following your passion or may be solely recreational such as golf, gardening, travel, volunteer work, or helping the children.  You will need to consider whether health issues might impede your retirement activities and where you wish to reside.The benefit of having enough time to plan ensures you will make the correct decision.   Having a list of questions to kick start the planning process is useful.

 

 

Don't Retire, Rewire! 

 “Flunking” retirement is a possibility.  Many people have failed because they felt they were missing something.  Their solution may be to return to work.  The premise of this book, Don’t Retire, Rewire was written with the understanding that you are not retiring from something but rather to something.  To find the turn key to that “something” you may need to rewire.  A chapter in this book helps you understand your drivers.  What motivates you to work today? The reason this is so important, as the authors share, is that these drivers will create your new future.  Their motto: use your today to build your tomorrow.   

 

Benefit of Reading

Christopher Morley once said, “When you give someone a book, you don’t give him just paper, ink, and glue.  You give him the possibility of a whole new life.”  I sincerely believe these authors are motivated to share ways to create a whole new life in the last phase of life’s journey. Taking every opportunity to learn how you can accomplish this will ensure you are not disappointed.  Whether you re-discover your talents, re-ignite a passion, or re-design your life, you want to ensure you are happy and content.  Life is too short to be lived any other way.  Take the challenge today and dream what your retirement might look like in the future.   Jeri Sedlar and Rick Miners shared, “if you know who you are today, you can build on who you want to be tomorrow.”

When It's Time . . .

You arrive a junction in your life when all the preparation you did for retirement is now here.  It’s like a banquet. All the food preparation is complete; now it’s time to feast. In March, the blogs focused on “Retirement Planning” which certainly is an important topic, considering we are all heading in this direction.  Understanding how to create a retirement income with your hard-earned, scrimped-and-saved dollars is an overwhelming and often confusing task. 

Along comes Daryl Diamond, a retirement authority, who takes “complicated” and once again simplifies the process into a logical format anyone can clearly understand.  The mystery of arranging your investments is unraveled so that you have peace of mind knowing you can minimize risk and earn a reasonable rate of return. 

How can you tell Daryl Diamond is my favorite retirement expert?  It’s probably obvious that his name, along with his books, have been mentioned in three blogs including this one.  In 1993, Daryl developed a retirement income process, he dubbed “The Cash Wedge.”    The question he set out to answer was, “how do we maximize returns and minimize risk while still participating in the markets?” 

People do not like risk.  They will do anything to protect their principal investments.  Who can blame them?  Markets can be a scary place to invest your money.  However, settling for rates of return which are between 1% and 2% over 1 to 5 year terms is also just as scary.  Those seeking a rate of return that is absolutely guaranteed may only do so with GIC investments (Guaranteed Investments Certificates).  Can we afford to park our investments at today’s rates for long periods of time?    

Imagine if you retire when you are 65, you can still expect to live for another 19.7 years based on the information shared here from Statistics Canada.  Investment withdrawals combined with benefits from Old Age Security and the Canada Pension Plan must work in conjunction to support your needs over this twenty-year period.  If longevity is prevalent in your family, then you need to prepare for a longer time frame.  The point to this tale is to look at the markets to optimize returns on your investments.  Sometimes it’s our lack of understanding that prevents us from doing so.  The information presented in “Can Investing be Easy” explains properly diversifying a combination of cash, fixed income, and equity investments is essential to maximize rates of return.

Once we have our retirement nest egg built, we suddenly feel reluctant to stay in the markets.  The tendency is to protect the money earned from income and equity investments by shifting the majority into GIC investments.  However, your time horizon in retirement is still ten years or greater.  So what’s the answer?   Implement the “Cash Wedge Investment Strategy.”  

Daryl Diamond’s “Cash Wedge Investment Strategy” is shared in his books, Buying Time and Your Retirement Income Blueprint.  The concept recommends that our overall investments have a built-in safety feature for protection from volatile markets by simply allocating a portion to guaranteed investments or money market funds to cover three-years of annual lifestyle expenses.  Our “Cash Wedge” is the money expected to be withdrawn and spent in the current year.  Since markets generally recover within three years from any downturn in the markets, having an additional two years in guaranteed investments is for added protection. The remainder of the investments is held in fixed income and equity mutual funds which may even include a combination of individual interest-bearing or dividend-paying securities.

 

In Daryl’s blog, The Cash Wedge: An Income Delivery Process, the above diagram illustrates how this strategy is achieved.  The illustration shows the distribution of your portfolio to the different asset groups: 

 

• Money Market Fund
• 1 Year Bond/GIC
• 2 Year Bond/GIC
• Fixed-Income
• Equity Funds

These proportions would be tailored specifically to your particular needs and risk tolerance.  

Since our expectation is to earn returns higher than GIC investments, this is possible with exposure in the markets.  When the bond and equity markets are performing well shifting the gains (profits) to replenish the “Cash Wedge” will extend the life of your retirement income.  If the bond and equity markets are under-performing, then withdrawals will be made from the guaranteed investments.   Working closely with an investment advisor with the knowledge and expertise to walk us through this process is recommended.

 “The Cash Wedge” is our safeguard against unpredictable markets.   Positioning a specific amount of our retirement income in safe investments for the allotted time frame of three years offers peace of mind knowing that changes are not required to our lifestyle.  We will have established a consistent stream of income regardless of market conditions.

 

To learn more, Daryl Diamond provides explicit details about creating your Cash Wedge at his website, www.boomersblueprint.com.   Click here for his three parts series.  

 

 

 

Pumping Your Oil Wells

I bet you never thought you owned an oil well!  Anyone with a source of retirement income has one. It’s not surprising that many will have more than one. Multiple sources of retirement income come from government and employer programs as well as personal plans. Comparing these sources to oil wells is a great way to recognize the best way to pump income to support our lifestyle during retirement.  The “revenue” flowing into our hands from our “oil wells” may come from both taxable and non-taxable sources.  The typical questions, so often asked, are: from which one do I pump first and when do I start?  The usual answer is, “It depends.”  The reason the answer isn’t so simple is because everyone’s situation is unique.  Lifestyle, sources of income, age of retirement, and even longevity play a significant part in the decision process.  Because we are not the same explains why our retirement plans cannot be either.   However, certain guidelines can be followed when pumping income to meet our lifestyle and manage taxes effectively.  

A New Approach: “Topping Up to the Tax Bracket”  

At one time, you may have encountered learning new things and doing them by the book.  If the book says so, then it has to right. The textbook may be perceived to be the logical way initially until we start to put things into practice.  We then recognize potential problems through our experiences, only to realize our strategy needs to change. The reason I am sharing this prelude is that the information which first appeared in the financial planning courses said:

 “Postpone as long as possible the withdrawal of funds in registered plans in order to defer the income tax thereon.”

“Use non-registered funds before registered funds.”

Daryl Diamond, an expert retirement planner, realized this isn’t effective planning.  Deferring withdrawals from registered plans leads to a “very disadvantageous tax trap as you progress into your late 60s and beyond.”

In both his books, Buying Time and Your Retirement Income Blueprint, Daryl Diamond makes reference to the strategy, “Topping Up to the Bracket.”  This profound gold nugget of information helps understand the significance of keeping taxable income within the first tax bracket during retirement. Regardless whether our income is staged at $25,000 or $44,000, the tax rate remains the same. The lowest federal tax rate is 15% and in this example, Saskatchewan’s lowest tax rate is 11%.  If money has been stockpiling inside registered plans, waiting until we are age 71 to begin withdrawals from these types of plans, is not ideal. What is ideal is creating a steady taxable income stream as soon as a person enters retirement.   

If income cannot be contained to the first tax bracket, then the next obvious choice is to maintain income within the second tax bracket, which tops up taxable income to $89,401. The charts show when income surpasses the first tax bracket income, the tax rate is then 35% (Federal 22% and Provincial 13%). These marginal tax rates calculate the taxes prior to applying the personal tax credits. I associate personal tax credits as “gift certificates.”  Any credit which lowers tax is like a gift.   The average tax rate isn’t as terrifying as the marginal tax rates.

Once the calculations of taxes are understood, then we grasp the importance for having a consistent taxable income in retirement.  The situation is better when couples are able to share their eligible pension income with each other. Pension splitting was first introduced in 2007 to allow a person with a higher taxable income to reallocate income to their spouse who has a lower taxable income.  The benefits are obvious: a lower tax bill in their household means more money for other activities.

Different Oil Wells

To begin, we examine possible sources of available income at retirement.  Think of the Canada Pension Plan (CPP) and Old Age Security (OAS) as oil wells which will provide guaranteed income for life.  These wells will never go dry; however, the earliest Canada Pension Plan benefits can be “pumped” is at age 60. For now, Old Age Security is available at age 65.  Gradually the new rules will increase the eligibility to age 67.  If retirement is prior to age 60, then other sources of income will need to fill the void as shown below.   

Life annuity payments from registered pension plans are also oil wells which will never go dry.  Pension plans, either a Defined Contribution Plan converted to a life annuity or a Defined Benefit Plan, provide benefit payments for a lifetime.  Defined Benefit Pension plans are generally bridged with Old Age Security and the Canada Pension Plan. Prior to age 65, their pension benefits will be higher with the anticipation that when CPP and OAS begin, the amounts will blend to provide the same consistent income.

Other oil wells are RRSPs (Registered Retirement Savings Plans) converted to RRIFs (Registered Retirement Income Funds). RRIFs provide the greatest flexibility when coordinating the appropriate flow of income to top up to the tax bracket.

The total monthly income of $3,500 shown in the above projection is all taxable income.  If both spouses maintained the same income level ($42,000), topped-up to the first tax bracket, their combined annual income would be $84,000. They may not spend all this income. Ideally, they’re converting a portion of registered to non-registered savings in a tax-effective matter.  The excess money can be sheltered in a Tax Free Savings Account (TFSA) until the funds are required without any further tax consequences.  

 The intention is to introduce a new way of understanding how to derive consistent income tax-efficiently in retirement.  Investment assets inside a sheltered vehicle, like a pension plan or RRSP, eventually needs to be withdrawn.  At age 71, any registered plan has to be converted to a retirement income fund.  In most cases, sooner rather than later works the best. Combining taxable income with non-taxable sources, utilizing pension splitting, and taking advantage of other tax shelters like TFSAs, are strategies to reduce taxes while keeping income within range of the first tax bracket whenever possible.  Take a look at how you manage your oil wells to determine whether you are doing the best job you can of reducing taxes while maintaining maximum retirement income.