Retirement planning: Big question #1
Am I going to be OK?
The industry’s approach to answering your big question — “Am I going to be OK?” — tends to rely upon simple mathematical algorithms that provide an average annual spending target that fences in the amount of cash flow that should be spent, if one wants to ensure the sustainability of their chosen annual activities.
Unfortunately, our desired retirement lifestyle choices do not tend to follow this straight-line approach to annual spending. This simplistic approach leaves you having to muddle through how to best fund the peak spending years. The associated uncertainty of how these overages may negatively impact the financial viability to meet future year spending requirements leads to a constant pang of worry and doubt.
What you seek is a modelling process that allows you to organize and calculate a projection of when these peaks and valleys will occur and how big these annual variances will be.
These are the key clues required to solve the complex puzzle of determining where, when and how much of your annual cash flow requirements should be sourced from.
Different cash flow sources have significantly different tax implications
If you have made wise choices as it relates to your accumulated retirement nest egg, you’ll have funds in different account types:
- RRSP, LIRA accounts
- TFSA accounts
- Open non-registered accounts
- Self-employed individuals may also have savings accumulated in their corporate holding account
The taxation implications associated with withdrawals for each of these accounts are different. Choosing how much and when you allocate your withdrawals from these accounts wisely will allow you to add significant tax-efficiency into your retirement funding process.
Define what your “OK” looks like
The question “Am I going to be OK?” contains a lot of smaller questions within it, like:
• Will what you have be enough?
• Will you be able to support your lifestyle in retirement?
• How much longer should you work to save?
The decision of relinquishing your reliance upon a recurring pay cheque will likely be one of the most significant choices you will make. If you choose to rely on your savings to fund your lifestyle too soon, it could have devastating implications. Even worse, it’s hard to recover from. So how can you weigh the implications of important choices like this – before you need to make them? Our free Retirement Designer™ app can help.
Retirement Designer™ provides you with the tools to design specific events you want to accomplish over your retirement journey, whether that’s adding an extension on your home, going on a globe-trotting trip or purchasing a new vehicle. As you enter each desire, Retirement Designer™ will project how much money you will need and provide you with the assurance of whether you’re going to be okay or not.
You’ll quickly discover that the amount of annual cash flow required will vary quite significantly during your retirement. We distinguish these significant year-to-year variations in cash flow requirements as “peak” and “valley” years. High spending years (aka peak years) will be your most challenging funding years as poor planning will quickly force you to climb the marginal tax bracket ladder. Low spending years (aka valley years) can provide opportunities to convert highly taxable sources of cash flow into more tax-efficient sources.
Using Retirement Designer™ allows you to clearly define what you want to do, including associated costs and timelines. The outcome of charting your desired journey will result in a clear identification of your peak spending years and your opportunity years of lower spending.
This choice assessment will not only provide clarity around the big question, “Am I going to be OK?”, it will also help you feel confident in knowing you will successfully fund your retirement and achieve your desires. By pre-testing your choices through the application, you can determine where you can allocate for different cash flows and plan for the unexpected.
Others you may like:
How do I choose to source my year-to-year cash flow requirements?
How do I plan for course corrections in retirement?