Norma Walton: How Much is Enough?

North American society promotes the concept that having money creates happiness.  Certainly having enough wealth to cover your basic needs is important – a roof above your head, sufficient money for food, a clean supply of water, basic clothing and a healthy environment.  A lack of those essentials will create misery.

money happiness

Once you achieve the above, there is value in considering how much more money you need.  Beyond covering your basic needs, below are some reasonable objectives that you may want to consider when you decide how much money you require:

  1. A reasonable spending plan: Charles Dickens proposed the theory that if your income is $100 per day and you’re spending $99, you will be happy.  If your income is $100 per day and you’re spending $101, you will be miserable.  That is wise advice.  If your expenses exceed your income, you will be constantly scrambling to cover your bills and will head into debt, which is stressful.  Focusing on reducing your expenses or increasing your income so that your income is greater than your expenses is time well spent.
  2. A plan to pay off existing debt: My grandparents’ generation saved their money before they would buy a car.  They saved their money to fund their vacation.  They paid off their mortgage as soon as they reasonably could and would have considered it baffling to refinance to pull out wealth from their house.  Debt often causes stress and tension in your life.  Debt sometimes makes you feel out of control of your financial situation.  Hence a focus on paying off debt will permit you to enjoy your money more as you pay the debt down.

    3d people - human character person carrying word "debt" on his back. Debt concept. 3d render
    3d people – human character person carrying word “debt” on his back. Debt concept. 3d render
  3. An emergency fund or line of credit: If you were to lose your job, do you have enough money to survive until you find a new one?  For some this amount will be one year’s worth of income savings; for others this amount will be a month or two.  It is prudent to have some money available if something happens that impacts your ability to earn an income for a period of time.
  4. A retirement fund: The Canadian banks focus on retirement planning.  They sit down with their customers to discuss how much you would need to save to fund a comfortable retirement.  They create charts and objectives for savings to try to get people thinking about where they want to be when they are ready to retire.  This is a good exercise for most people and helps people set goals for savings and calibrates their financial expectations for when they finish working.
  5. An insurance policy to provide for your dependants: If you were hit by a bus today, who would be in trouble without you around?  Think about the financial needs of your dependants and ensure that you have term life insurance in a sufficient amount to cover those needs.  Once you no longer have dependants who need your income to survive, you can reduce or eliminate that insurance.

piggy bank

Once you turn your mind to how much money is enough for you, you can review the above items and create a plan to ensure you have what you need.

Retirement Planning

“When you retire, you switch bosses – from the one who hired you to the one who married you.”
– Gene Perret, a comedy show writer and producer


Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.


Our living standard we can manage while working and the one we will have when we no longer work is a balancing act.  We have to sacrifice today by setting aside money to have resources to fund our retirement living needs.  The more resources we can set aside, the better our retirement lifestyle.  Or, we might be able to afford to retire at an earlier time.

The point of quitting work feels like stepping off the edge of a cliff.  Once we have committed, that may very well be the end of our ability to generate income.  As we approach the edge of that cliff, we may experience anxiety.

Retirement planning seeks to help ease that anxiety through preparation for that time:

  • to help you set aside enough so you can become financially independent,
  • to give you the confidence with Retirement Cashflow Projections to know that you can afford your chosen retirement living standard, and
  • to get you to think about what you’ll do during retirement so that you can have a happy and meaningful life.


Bringing your dreams into focus

When you are years away from retirement, you might simply have a hazy picture of what it might look like.  The key thing is that you are saving as much as you can.  As you feel you are getting closer to retirement, that’s when we need to take out the binoculars to see more clearly what it might look like.

Here’s where you need to sit down with your spouse and visualize your future and think about the following:


What is your life’s passion?

What activities would make your life meaningful, happy and complete?

  • If you could do anything you want, time and money aside, what would you do?
  • If you had only five years left to live, how would you spend those years?
  • How would your answer differ if you had 20 years left to live?
  • How important are religious / charitable pursuits or giving back / helping people?



What would you most like to do if you had more time or resources?  Use your imagination to create the possibilities for your future.

  • Hobbies — restoring an old cars, designing and making quilts, gardening, writing a novel, golf, sports, making wine/wine tasting, interior design / renovating, antique collecting, refinishing, cooking / home entertaining, internet, crafts, movies
  • Volunteer work — building homes for the homeless, teaching people, volunteering with a charity
  • Starting a business / full or part time work in a new field
  • Learning — going back to school, learning another language, getting your pilots license
  • Relaxing and enjoying life — reflecting, reading, quiet time, art / music, photography
  • Caring for parents, children or grandchildren


Who do you want to spend more time with?

  • Spouse or partner — consider new activities you may try together
  • Family — how far away are your parents, children and grandchildren?
  • Friends — how do you hope to entertain and remain socially active?
  • New friends — how will you meet new people? (consider classes, clubs and organizations)


Where do you see yourself living?

Where you want to live is an important part of the picture.  Do you want to be part of a community? Do you want to try a new climate or lifestyle?  Do you want to live in multiple locations?

  • Stay in the area — loft in the city, current home, smaller/maintenance-free home
  • Move closer to family — spend time with children, grandchildren or parents
  • Winter getaway – living part time here and part time in some sunny destination
  • Change your lifestyle — simplify life, live abroad, on the go
  • Relocate near activities you love — active outdoor setting


Where do you dream of traveling?

  • Where do you want to travel? — Southern Europe, Middle East, Asia; historical sites, trace your roots, visit friends or family
  • How do you want to travel? — motor home, car, bicycle, motorcycle, plane
  • How much traveling do you want to do? — number of trips each year, duration
  • Who do you want to travel with? — spouse or partner, friends, children, tour groups


How do you intend to stay healthy and active?

Your lifestyle is changing.  Think about this in broad terms, including mental and physical health – a healthy soul and a nurturing environment.

  • Physical fitness — if you’re not taking care of yourself now, you should start as soon as possible. There are few things worse than suffering with serious health problems.  So don’t let the golden years be torturous.  Consider: health club, personal trainer, walking, hiking, dancing, mountain biking, sports, golf, exercise videos, boating
  • Mental fitness — classes, concerts, playing chess or bridge, writing a book, meditation


How do you want to make your lasting mark?

What do you want your legacy to be?  Remember, legacy doesn’t necessarily mean money.  It may mean your values or lessons you learned.  It is what’s important to you — what you want to pass on to others.

  • Family — children, siblings, parents, friends, pets
  • Schools — your alma mater, your children’s schools
  • Charities or causes — food shelves, shelters, the arts
  • Spirituality — your place of worship, helping people, getting to know God
  • Medical/scientific organizations — research or treatment for diseases that affect you or those close to you



But Can You Afford It?

Once you’ve got an image of what retirement can look like, you then have to price out what it will cost.  You don’t want to retire and then discover that you don’t have enough money to do the things you want to do.  Nor would you want to put off retirement longer than necessary because you’re not sure how much you actually need.

You might find that the Retirement Cashflow Projection tells you that you simply can’t afford to live that lifestyle.  That’s where one looks at whether to delay retirement or choose a lower lifestyle.  The end goal of the projections is to get to a point where your goals are achievable.

The better job you do with figuring your needs, the better and more realistic your Retirement Cashflow Projection will be.  And the custom built portfolio that we build for you will then be better suited to grow to meet your needs through time.

Once you’ve priced out your retirement activities and know exactly how much you need to save, you’re in a better position to take full advantage of tax-sheltered retirement plans like RRSPs, spousal RRSPs, TFSAs, pension plans, supplemental pension plans and other incentives that might be available to you.



If you’re interested in getting your dreams in focus and making them a reality, please call: (604) 288-2083 or email me:

Work in Retirement

Myths and Motivations Career Reinventions and the New Retirement Workscape

A Merrill Lynch Retirement Study conducted in partnership with Age Wave

I wanted share this with you.  It is about hope and the future for older workers and retirement bound individuals.  In my role I see more and more evidence of these events.  I share this because of my many friends and contacts and family members that need to read this.

Retirement used to mean the end of work. But now we’re at a tipping point: a majority of people will be continuing to work after they retire — often in new and different ways. Nearly half (47%) of today’s retirees say they either have worked or plan to work during their retirement. But an even greater percentage (72%) of pre-retirees age 50+ say they want to keep working after they retire, and in the near future it will become increasingly unusual for retirees not to work. This new phenomenon is driven by four forces:

  • Increasing life expectancy, which has produced a retirement that can last 20 years or more.
  • Elimination of pensions for most workers, shifting the burden for funding retirement from employers to retirees.
  • Recent economic uncertainty, which has been a wake-up call for many people that it is not financially sustainable to retire without some employment income.
  • Re-visioning of later life, as new generations seek greater purpose, stimulation, social engagement, and fulfillment in retirement. While some are delaying retirement, a growing number of people are continuing to work after they retire. Because this is largely uncharted territory, pre-retirees who anticipate working in retirement are confronted with many questions and uncertainties: Will I be able to find work in my later years? If so, for how long? How can I balance work with other things I want to do? What kind of work might I be able to do? Will I enjoy it? Will it help me be more financially secure? What can I do now to best prepare for working during my retirement years? These pre-retirees can learn essential lessons from people who are now working in retirement. This landmark study— based on a nationally representative survey of 1,856 working retirees and nearly 5,000 pre-retirees and non-working retirees—is the most comprehensive investigation of the successes, pitfalls and innovative career paths in today’s retirement

Retirement Myths (2)

Busting the Four Biggest Myths

By examining the experiences of working and non-working retirees, the Work in Retirement: Myths and Motivations study dispels important misconceptions.

Myth 1: Retirement means the end of work. Reality: Over seven in 10 pre-retirees say they want to work in retirement. In the near future, it will be increasingly unusual for retirees not to work.

Myth 2: Retirement is a time of decline. Reality: A new generation of working retirees is pioneering a more engaged and active retirement—the New Retirement Workscape—which is comprised of four different phases:

(1) Pre-Retirement,

(2) Career Intermission,

(3) Reengagement

(4) Leisure.

Myth 3: People primarily work in retirement because they need the money. Reality: This research reveals four types of working retirees: Driven Achievers, Caring Contributors, Life Balancers and Earnest Earners. While some work primarily for the money, many others are motivated by important nonfinancial reasons.

Myth 4: New career ambitions are for young people. Reality: Nearly three out of five retirees launch into a new line of work, and working retirees are three times more likely than pre-retirees to be entrepreneurs.

Here is the link to the full Report.


Joe G. White is Owner of MFR Inc. “The Franchise Rainmaker”. He provides professional advice to people looking to engage in franchise ownership He can be reached at 647-724-0742 or

Success through knowledge


Year End Review 2014 and 2015 Preview

Let’s Talk About the Market Numbers…

Note that this report pertains most directly to portfolios operated under the guidelines, rules, and disciplines of Market Cycle Investment Management (MCIM). MCIM produces disciplined “High Quality Growth & Income Portfolios”, designed to maintain and/or to grow income regardless of the direction taken by markets or interest rates.


Both markets have been good to MCIMers this year: Investment Grade Value Stock Index (IGVSI) equities produced plenty of profits and dividend income, while the income Closed End Funds (CEFs) produced much higher yields than many “experts” would admit even exist… and occasional profits.

On the negative side, new equity investment opportunities were scarce, and many income CEFs reduced their payouts slightly, reflecting more than six years of historically low interest rates. I suspect that both conditions will be reversed soon.

A recent (unaudited) review of known MCIM “Working Capital” produced some interesting numbers, even without including year end dividends:

• Roughly 35% of total realized income was disbursed
• Nearly 25% of growth purpose capital remained in “smart cash” reserves for scheduled disbursements… and anticipated lower prices on equities. (Smart cash comes from income and profits)
• Roughly 65% of total earnings was reinvested in new and old securities
• New “Working Capital” was produced at a rate somewhere between 9% and 10%
• Less than 20% of investors made additions to investment programs, eschewing income yields in excess of 6%
• None ot selected MCIM portfolios lost Working Capital… even after culling “poorest performers” throughout the year.

Working Capital” (total cost basis of securities + cash) is a realistic performance evaluation number…. it doesn’t shrink either during corrections or as a result of spikes in interest rates. It continues to grow so long as dividends, interest, profits and deposits exceed realized losses and disbursements.

Using the “Working Capital Model” facilitates preparation for future income needs with every decision made throughout the history of an investment program… MCIM working capital grows every month, regardless of changes in market value, so long as the investor disburses less than the portfolio is producing.

Year end is always a good time for investors to review asset allocation and projected income needs… if you are over 50 and haven’t considered the subject, it’s time to do so. If you expect to start withdrawing from your portfolios in the next few years, you need to determine if asset allocation changes are necessary.

If your income allocation is not generating at least 6% in spending money, or 401k balances are subject to shrinkage when the stock market corrects, it’s time to deal with these problems.

If you are not taking advantage of 6%+ tax free yields (and a higher range in taxable CEFs), you owe it to yourself to investigate the opportunities.

<<>>                 <<>>                 <<>>

So is there a “Grinch” in your 2015 portfolio performance future? What’s likely to happen?

The Stock Market is about to finish 2014 at the highest year end number ever recorded, and with each new “ATH”, the likelihood of a market correction increases… this 6.75 year rally is the longest, broadest, and most stubborn in stock market history.

So long as income investors are abused with artificially low rates, a gradual reduction in yields is likely to hold income CEFs around current prices… higher future rates are already anticipated in current market values.

Once higher rates become reality, there are several reasons why CEF prices should firm and, over the longer term, rise, with increased income production…

But even if the correction starts tomorrow, what has nearly 40 years of financial history taught us about the MCIM “much-higher-quality-and-income-than-any-other-form-of-investment-portfolio” methodology?

The IGVSI universe, high quality ADRs, REITS, MLPs, Royalty Trusts, plus Equity and Income CEFs should logically have been expected to fare better than the stock market averages during the three financial crises of our lifetimes. Many MCIM users can attest to this, but the logic is clear.

Every security produces income, and reasonable profits are always realized. New equity investments are only made when prices have fallen 20% or more; income securities are added to at lower prices to reduce cost basis and increase yield. Not to mention the fact that MCIMers invest only in the highest S & P quality ranked companies, filtered further by dividend history, NYSE, and profitability.

MCIM users were low on equities in August 1987 but fully invested by November; they owned no mutual funds, no NASDAQ securities, and no IPOs in 1999; they lost virtually no working capital, reinvested all earnings, and rebounded quickly from the financial crisis.

Most investors, particularly Mutual Fund owners and 401k participants were blindsided, not once, but on all three occasions. The S & P 500 has gained only 3% per year in the 15 it has taken to get to its current level!

So if the rally continues, Working Capital growth will continue right along with it. But when the correction comes along, cash reserves and continued income will likely be available to takes advantage of new opportunities that arise in the MCIM select group of potential investment securities.

The longer the correction (the financial crisis took roughly 20 MCIM months to reach bottom on March 9 2009), the more Working Capital will be available when the next round of stock market all time highs is upon us.

And again, most importantly I believe, all programmed income payments will be made on time and without dipping into capital…

The 7 parts of Financial Planning

There are a lot of misconceptions about financial planning – and more and more often the word “holistic” is being tacked on to this process – a meaningless and confusing addition in my mind. Done properly, financial planning has always been about “the whole person” and “the whole family” and about all of those things that are important to the client. It really isn’t financial planning when done properly since finances are not a goal but rather a means – finances are an asset to be used to achive important goals in people’s lives. So here is my take on the 7 parts of “financial planning”.

Life Planning
 What gets you up in the morning?
 For what are you striving in life?
 What excites you about your future plans?
 How do you see your personal or business legacy?
 What is important in your life today?

Cash Flow Management
 Sources, reliability and expected duration of current and future income
 Taxation of current and future income
 Expenses review and analysis
 Includes any Education funding requirements
 Income tax planning – personal, investment and business sources of income

Debt Management and Net Worth Enhancement
 Good Debt versus Bad Debt
 Analysis of Debt amounts, repayments, interest rates and purpose
 Restructuring opportunities for enhancing Net Worth growth
 Net Worth targets
 Non-retirement financial goals and objectives (education, asset acquisition, travel, etc.)
 Funding of goals from surplus or designated cash flow
 Includes all assets other than personal effects and non-realisable collectables, antiques and jewelry

Investment Management
 Individual Risk Tolerance Profiles
 Full investment analysis and review including purpose, goals and priority
 Targeted holdings and transition plans as appropriate
 Tax efficiency and effectiveness
 Includes business review from investment perspective including eventual disposition plans

Risk Management
 Lifestyle protection
 Asset protection
 Cash-flow protection
 Retirement protection

Estate Planning
 Legacy planning
 Survivor income and bequest planning
 Tax planning for your estate and legacy
 Charitable bequests (if applicable)
 Special needs bequests (if applicable)

Retirement Planning
 Current sources of income, duration, taxation and indexing
 Expected sources of income, duration, taxation and indexing
 Lifestyle objectives – 3 stages of retirement – lifetime income requirement
 Tax efficiency and effectiveness of income
 Protection of lifetime income from erosion by inflation

Each client has different priorities and it isn’t my job as a planner to tell them what to do or in what sequence things should be done, with one exception. Without Life Planning be done first, the rest is just a bunch of meaningless numbers with no importance or urgency attached – and also a waste of everyone’s time!

The ‘Perfect” Canada Pension Plan Client

What would you think of the Financial Advisor who sets you up in a financial product that works like this?
• You invest $4,700/year into this plan-up to your age 65. Contributions are mandatory. And while the contributions are tax deductible all benefits received are fully taxable.
• These contributions must be made beginning the year you start working full time (you might be age 19 out of high school or perhaps older after University).
• If you die as a single person (non married, no children) say, 5 or 10 or 20 years later there is a death benefit of $2,500 (maximum) payable to your estate. Nothing else is payable from your contributions.
• If you die and you are married and you do have one or more children the $2,500 death benefit is payable and there is also a maximum (it could be less or much less) monthly pension of about $555/month payable to your surviving spouse and additional $228 per month (maximum) for each of the dependent children while they are dependent.
• If you become severely disabled you might qualify for a disability benefit. In order to qualify the disability must be both ‘severe’ and ‘prolonged’. The definitions are: Severe means that you have a mental or physical disability that regularly stops you from doing any type of substantially gainful work. Prolonged means that your disability is long-term and of indefinite duration or is likely to result in death. The maximum disability benefit is about $1,213/month to age 65.
• At retirement (age 65) you will receive a monthly pension of about $1,012/month from this product—and you will receive it as long as you live.
• But here is a catch—if you and your spouse are both retired each receiving the maximum pension (keeping in mind you have each contributed over the past 40+ years while working) and one of you dies—even if this is just a few days after retirement—the benefit payable to your surviving spouse is limited to the Death Benefit of $2,500 (maximum) –which is taxable. In other words you have contributed $4,700/year for over 40 years, you die one month into retirement and your contributions of over $188,000 over the years will provide a benefit to your surviving spouse of only $2,500.
Is this a good deal?
I would suggest you would be quite concerned (or even upset) about a Financial Advisor who put you into a plan that required you to deposit $4,700/year for, say, 40 years (over $188,000 in total contributions) that provided you with a pension of only about $12,000/year—and no value other than a $2,500 death benefit to your surviving spouse or estate upon your death during retirement.
What I have just described above is a simplified version of the Canada Pension Plan. Some will note that the individual’s annual maximum contribution is only one half of the $4,700 I quoted above—this is because your employer must make a contribution equal to your contribution—so there is, in fact, $4,700/year going into the CPP on your behalf.
Some will also argue that you must allocate some cost for the premature death and disability benefits that are payable under the CPP. This is a valid argument but even after you take these costs into account—is it a ‘good deal’ for the surviving retired spouse to receive absolutely nothing (other than the $2,500 death benefit) from his/her deceased’s pension?
And others may point out that the CPP benefits are indexed—but then, so are the contributions each year.
The title of this article is the ‘PERFECT’ Canada Pension Plan client. The ‘perfect’ Canada Pension Plan client (from the government’s point of view) is the person who is working and contributing to the CPP beginning in their 20’s, never has a CPP disability claim and lives to ‘retirement age’ (early pension available as early as age 60) and then dies after receiving one monthly CPP pension cheque. Total contributions over, say, 40 years would be almost $190,000 (ignoring inflationary increases) and the total benefits paid would be one month of pension ($1,012) plus the $2,500 death benefit. Is this a good deal? For whom?
At the time of this writing (November 2013) there are ongoing discussions and political posturing to ‘enhance’ the Canada Pension Plan by increasing contribution levels (and the so called ‘benefits’). Would this be a ‘good deal’ in the eyes of most Canadian taxpayers? I suspect that most people do not fully understand the workings of the Canada Pension Plan. And I would suggest many (most?) politicians don’t understand either-but it makes for good political noise.
As a professional I cannot imagine how I could possibly justify recommending a financial product that works like this—that would require thousands and thousands of dollars contributions for a pension benefit that may end up being worth less than the first year’s contributions.

Buckets of Money: A Retirement Income Strategy

Some retirees are able to live solely on the earnings that their investment portfolios produce, but most also have to figure out how to draw down their principal over time. Even if you’ve calculated how much you can withdraw from your savings each year, market volatility can present a special challenge when you know you’ll need that nest egg to supply income for many years to come.

When you were saving for retirement, you may have pursued an asset allocation strategy that balanced your needs for growth, income, and safety. You can take a similar multi-pronged approach to turning your nest egg into ongoing income. One way to do this is sometimes called the “bucket” strategy. This involves creating multiple pools of money; each pool, or “bucket,” is invested depending on when you’ll need the money, and may have its own asset allocation.

Buckets for your “bucket list”

When you’re retired, your top priority is to make sure you have enough money to pay your bills, including a few unexpected expenses. That’s money you need to be able to access easily and reliably, without worrying about whether the money will be there when you need it. Estimate your expenses over the next one to five years and set aside that total amount as your first “bucket.” Safety is your priority for this money, so it would generally be invested in extremely conservative investments, such as bank certificates of deposit, Treasury bills, a money market fund, or maybe even a short-term bond fund. You won’t earn much if any income on this money, but you’re unlikely to suffer much loss, either, and earnings aren’t the purpose of your first bucket. Your circumstances will determine the investment mix and the number of years it’s designed to supply; for example, some people prefer to set aside only two or three years of living expenses.

This bucket can give you some peace of mind during periods of market volatility, since it might help reduce the need to sell investments at an inopportune time. However, remember that unlike a bank account or Treasury bill, a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corp.; a money market attempts to maintain a stable $1 per share price, but there is no guarantee it will always do so. And though a short-term bond fund’s value is relatively stable compared to many other funds, it may still fluctuate.

Refilling the bucket

As this first bucket is depleted over time, it must be replenished. This is the purpose of your second bucket, which is designed to produce income that can replace what you take from the first. This bucket has a longer time horizon than your first bucket, which may allow you to take on somewhat more risk in pursuing the potential for higher returns. With interest rates at historic lows, you might need some combination of fixed-income investments, such as intermediate-term bonds or an income annuity, and other instruments that also offer income potential, such as dividend-paying stocks.

With your first bucket, the damage inflation can do is limited, since your time frame is fairly short. However, your second bucket must take inflation into account. It has to be able to replace the money you take out of your first bucket, plus cover any cost increases caused by inflation. To do that, you may need to take on somewhat more risk. The value of this bucket is likely to fluctuate more than that of the first bucket, but since it has a longer time horizon, you may have more flexibility to adjust to any market surprises.

Going back to the well

The primary function of your third bucket is to provide long-term growth that will enable you to keep refilling the first two. The longer you expect to live, the more you need to think about inflation; without a growth component in your portfolio, you may be shortening your nest egg’s life span. To fight the long-term effects of inflation, you’ll need investments that may see price swings but that offer the most potential to increase the value of your overall portfolio. You’ll want this money to grow enough to not only combat inflation but also to increase your portfolio’s chances of lasting as long as you need it to. And if you hope to leave an estate for your heirs, this bucket could help you provide it.

How many buckets do I need?

This is only one example of a bucket strategy. You might prefer to have only two buckets–one for living expenses, the other to replenish it–or other buckets to address specific goals. Can you accomplish the same results without designating buckets? Probably. But a bucket approach helps clarify the various needs that your retirement portfolio must fill, and how various specific investments can address them.

Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.

Retirement Planning: The Basics

You may have a very idealistic vision of retirement–doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there’s good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs
It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on who you’re talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn’t account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you’re nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.4 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, 2012.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you’ll need to live comfortably.

Calculate the gap
Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you’ll need to save
By the time you retire, you’ll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:
At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you’ll need to carry you through it.
What is your life expectancy? The longer you live, the more years of retirement you’ll have to fund.
What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.
Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

Build your retirement fund: Save, save, save
When you know roughly how much money you’ll need, your next goal is to save that amount. First, you’ll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you’ll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It’s never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan–out of sight, out of mind. If possible, save more than you think you’ll need to provide a cushion.

Understand your investment options
You need to understand the types of investments that are available, and decide which ones are right for you. If you don’t have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon. Note that many investments may involve the risk of loss of principal.

Use the right savings tools
The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. 401(k), 403(b) and 457(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you’ve made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don’t permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are contracts issued by insurance companies. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company). Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees, and other charges

Will You Buy This Life Insurance Policy?

Suppose I offer you a life insurance policy with a level premium for life, that cannot be cancelled, has no cash value, does not pay anyone if the beneficiary dies before you, disallows you changing the beneficiary, cannot be assigned to anyone else, and has a decreasing death benefit.  

I expect that even the least insurance savvy among us would say no thanks.  Yet, there are thousands of these policies issued every day.  How does that come to be?

Because they don’t call it life insurance.  They call it a survivor option on your pension.

Suppose you could have a pension of $3,000 per month, guaranteed for 120 payments if you die sooner, and payable for life otherwise.   Wife suggests that you might want to reconsider that choice.  So you check back and find that, instead of $3,000 per month, you can have $2,432 per month as long as either of you are alive.

What does than mean?

If you give up money while you are living so that someone else can have money after you have died, you bought life insurance regardless of what it may be called.

Compare the joint life annuity to the theoretical policy above.

  • Cannot cancel.  It is a pension annuity and all the terms are set at the beginning
  • Has no cash value.  You cannot stop and get the capital
  • Does not pay anyone if the beneficiary dies before you.  Pays until the second death regardless of the order.
  • Disallows you changing the beneficiary.  All the terms are set up front
  • May not be assigned to anyone else.  Pension law typically prevents assignment
  • Has a decreasing death benefit. The price of the annuity to the surviving wife decreases each year because annuities on older people cost less than annuities on younger people.

That is a poor plan by any measuring system.  Now the planning option.

$2,435 per month is about $1,700 per month after tax and that is what the survivor needs to replace.  The government can look after themselves.  To get that at age 65, the surviving spouse would need about $350,000 of tax paid cash to buy a life annuity paying something around $1,700 per month after taxes.  But the original choice has a 10 year guarantee so we don’t need to buy anything until age 75.  At 75, the annuity would cost about $250,000.  Recall declining cost to buy.

If wife had a $250,000 life insurance policy on husband, then they could take the $3,000 monthly income and use the extra $565 monthly to pay the premium.  There are many variables here and you will need to work out each case on its own merits.

The essential question is, “Can you get an appropriate insurance policy for the after tax value of the foregone pension?”  If you can, an individual policy would neutralize every one of the defects in the joint survivor annuity and at no cost to you.  Go ahead and check.

If you wait until the last minute to do it, you will likely have trouble making a perfect fit.  But you might want to consider creating the insurance when you are younger.  That almost always provides you with a valuable option.  Having the insurance paid for before 65 is a supplementary retirement plan that will produce $565 monthly in this particular situation.  That is an investment that you can readily analyze.

If wife is medically impaired and husband is not, there is no objective reason to take the survivor annuity, but husband might not outlive the sick spouse.  Who knows for sure?

Things are a bit different if the wife is the pension recipient but the concept is identical.

Successful people do better because they know their choices and they create options before they need to make a decision.  That is a good habit for you to begin if you have not done so already.  If you have a pension in your future, talk to an adviser now to give yourself the most control over this decision.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.