Written by: Cameron Enns, Investment Advisor
Retirement is full of unknowns. From income stability, to health concerns, to family circumstances, to travel plans, it’s often difficult to predict what that stage of life will hold. A key component of financial planning is creating investment plans today in order to better prepare for retirement. Working with a financial planner to build a retirement projection can help bring clarity to your current financial situation as well as retirement.
Consider John and Mary Smith, a fictional couple who are each 40 years old. The Smith’s have been attempting to predict how their retirement may look so they have created estimates based on their current financial situation but would like some more clarity on the topic. Sitting down for a meeting and gathering relevant information is the first step towards building an accurate projection for the couple. While meeting with John and Mary, the following information is gathered:
-They each earn $68,000.
-They each plan to retire at 65.
-They have no personal savings or employer pension plans.
-They have been making the average annual contributions to CPP during their lifetime.
-They have a $200,000 mortgage remaining on their home. They are on track to pay this amount off by age 65.
By using the information that John and Mary provided, an estimate of their retirement income can be generated. Assumptions are made regarding rates of return and inflation by using historical averages. The graph below shows John and Mary’s current projected retirement income based on the information given as well as assumptions used.
The purple bar represents employment income until 65, while the blue and light blue bar represent OAS and CPP respectively. As you can see, there is a large gap between income earned in the years before 65 and income earned in retirement. In this situation the Smith’s come to the realization that even though their mortgage will be paid off, something needs to be done today to ensure they have more than just CPP and OAS to meet their needs in retirement.
Several additional scenarios are evaluated with the Smith’s, including a delayed retirement to age 70, starting regular investment contributions, and increased payments to their mortgage. Upon review of these options, the Smith’s agreed they wanted to prioritize a retirement at age 65. With that in mind, they choose to begin making regular contributions into RRSPs.
The chart below shows a change in the couple’s savings from the original projection. John and Mary now each contribute 15% of their annual income to an RRSP. The rate of return each year is assumed to be 6% on all investments.
The green bars represent RRIF income earned from RRSP contributions made during the Smith’s employment years. This additional income helps to bridge the income gap as the couple transitions into retirement. The drop in income in the second scenario is much more manageable, as long as the mortgage is paid off. The Smith’s take comfort knowing there is an option to provide them with a smoother transition into retirement.
Upon reviewing the impact those changes may have, the Smith’s decide to begin making RRSP contributions. By working with an advisor who is aware of their current situations as well as their goals for the future, John and Mary can receive the advice they need to begin a financial plan that best suits their needs as a couple.
The execution of a financial plan is an ongoing process. Annual reviews allow both the advisor and the client to review their previously determined retirement goals and update any changes to their current financial situation. During this review, updated or new scenarios may be looked at to reflect these changes. Investment changes may also be suggested in order to best accommodate a client’s risk tolerance and investment horizon.
Retirement planning can be overwhelming; something that is sometimes easier to ignore entirely than face what’s ahead. As shown in the example, working with an advisor can help clarify where you are at today, and identify action steps to help you meet your retirement needs and goals.
If you are an existing client, or new to Amity and are interested in this service, please call our office to schedule a retirement projection meeting. We would be happy to meet with you to discuss Amity Trust’s financial services and how we may be of assistance.