Retirement doesn't have to be an all-or-nothing proposition if you start planning earlier

People are increasingly taking a phased-in or gradual approach to retirement

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By Andrea Drolet

My oldest son is now 14 and, shockingly, I realize he’ll be off to post-secondary or on some other adventure in four years as he leaves childhood behind. In eight years, my youngest will hopefully follow in his path, leaving my husband and I as empty nesters. Do you ever think about that? How in the blink of an eye, the chaos of raising kids will be over and you’ll need to think about what’s next for you? Dare I say it … you might retire?

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Retirement looks very different than it did in our parents’ day. I remember my father turning 55 and he just stopped working one day. For the most part, our parents’ generation simply stopped working and started collecting some form of retirement income, but what I’m seeing now amongst my clients is a trend to a phased-in or gradual approach to retirement.

Many clients are reducing their work commitment by shortening their workweek, and employers are offering more options for condensed or shortened work schedules. I’m also noticing clients choosing to swap their full-time positions for a contract position that will give them greater control over their work commitments.

I think these trends will continue, and we’ll see people integrate more of a retirement mindset earlier in their careers, allowing them to have some of the perks of retirement while they are younger, but in exchange, working beyond the traditional age of 55 to 65.

What constitutes a successful retirement? The definition of success is very individual, but having enough resources to fund your retirement is certainly a key requirement. Without enough income, something will break and your retirement plan (or lack thereof) goes out the window.

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Your first step should be to engage with someone who is a certified financial planner (CFP), or someone who can provide you access to one. A CFP will look at your situation holistically and start by researching what retirement means to you.

I start my retirement planning conversations by asking my clients to “describe the bubbles that float around your head when you picture being retired.” That is going to look different for everyone. Are you a traveller? Do you want to stay in the home you raised your family in? Will you have elderly parents to care for? Hoping for grandkids?

All these thoughts are where your retirement plan starts, and we build from there. To be successful in retirement, you need to have a good idea of what will make you happy, so we can build a wall around that picture of happiness to ensure you achieve it — and then keep it.

Once we have an idea of your destination, we need to figure out how you’re going to get there. There are two key steps here: how much are you going to want to spend on your lifestyle in retirement and how are you funding that lifestyle?

The first step is the most crucial. I’ve had clients who tracked their expenses for two to five years prior to retiring, giving them a very high level of comfort about the amount they annually need to cover all their expected costs, including incidentals and travel. Armed with that information, I was able to confidently confirm that the resources they had available would secure them throughout their retirement with little risk of depletion.

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It is critical that you know what you will need to spend to live with a high level of certainty. Otherwise, we’re just guessing. A client once asked me how much they would roughly need to save to retire and be secure? Although there is no straight answer, I estimate that for every $50,000 in pre-tax income that you need, you should have $1 million in savings, not factoring in fixed-income sources that may exist.

Let’s look at those fixed-income sources. Pension plans through your employer are usually either a defined-benefit plan that will give you a pre-set, predictable income amount, or a defined-contribution plan that builds a lump sum you will use to generate income independently from your employer.

I won’t go into all the specifics as there are so many options, but understand that you’ll either have a pre-determined income provided by your employer or you’ll take the savings you saved with that employer to create your own income stream using those funds.

In addition to employer pensions, there are also government pensions, namely, Canada Pension Plan and Old Age Security, with amounts that can dramatically vary depending on your work history or your residency in Canada.

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You will need to figure out what each of these sources will provide, then subtract that from your target income amount, which is the amount you need in your bank account every month to cover your lifestyle costs. The shortfall between those predetermined sources and the amount you need to live your best life is what you need to generate from your savings.

As you get older, and your retirement picture starts to become clearer, you can then begin putting down some rough numbers. For example, let’s say you earn $100,000 a year, and you want to maintain that income in retirement. As a starting point, aim to build $2 million in savings, assuming you will have no other income sources.

Even if you do have other sources, I suggest you not worry too much about those sources at this point since we’re just roughing out the picture. This gives us a good baseline to build on, but keep in mind that so much can change before you get to that destination.

This continuum of planning will flush out and become more and more precise as you get closer to that retirement target. If you are working with a CFP as part of your wealth-management team, they’ll be helping you to firm up those targets as your projected expenses and income sources become clearer and more accurate.

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The fun part begins when you finally get to that point where you’re told, “You can go now.” Your definition of retirement is only constrained by the picture you establish.

My biggest joy in more than 25 years of helping clients achieve their wealth goals has been when they start with a vague idea of what retirement means to them, but they do the steady work of setting money aside for that invisible future, and then together one day, we say, “Let’s retire.”  There are no easy formulas or solutions.  It’s your retirement, so go get it.

Andrea Drolet is an investment adviser with RBC Dominion Securities.

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