Today we’re talking about how a sound retirement income plan can help you retire early. Pretty exciting topic and very important and crucial. This is true if you’re either approaching retirement, you’re young and you’re preparing for retirement or even you’re in retirement
All right, so how to retire early with a sound financial plan. The easiest tip I can give you here is to work with an investment firm like ours that offers holistic financial planning way before you retire. That’s the easy answer because if you work with a firm like us, you get to work with an actual financial planner whose sole job is to make sure that there is enough cashflow in retirement for you and your family to draw down, while factoring in your tax and estate needs, as well as your goals and objectives in retirement.
Now, if that’s not quite happening right now, here are a couple of tips that I’m going to suggest to you. You’ve definitely been told to start saving, so I’m not going to drive that point right now. What I’m suggesting is that you at least start a pre-authorized contribution plan. Start something that’s monthly or bi-weekly that aligns with your pay days. Build the habit and eventually you won’t even notice the funds missing. Get started on the habit of saving and do it young. And if you have kids, get them to start doing it young. The only problem is how do you know when you’re saving enough.
The idea of saving enough is a pretty simple one. Using a financial plan and a financial projection, we can forecast what the dollars you’re saving today are going to look like at retirement, and then you will have the decision to make for yourself. Is that enough for me to retire on? Am I satisfied with that cashflow at retirement?
If the answer is no and you’re saying, “my $500 a month gives me $80k of income at retirement if I retire at 65”, well then you basically have a few different choices. One, you can save more. Two, you could retire later. Three, you can spend less in retirement, or four, you can die earlier. No, I’m kidding! You can’t control when you die, and you can’t control the planning around when you die. Typically, most financial planners will plan until you or your spouse are in your mid-90’s as a conservative planning standard.
Regardless, those are the choices that you have to make. The key is for you to own that data, and once you have that knowledge, you and your family can make the decision. Are we okay with living on $60k a year at retirement and saving less today or do we want to defer some of our expenses now and save more for later?
Now, aside from just saving, the first tip I gave you was saving and planning. The important part is tax planning while you’re working, before retirement. Tax planning can and should include optimizing of your savings. It’s a simple one that most people don’t do.
They’ll either put all their money in their TFSA, or RRSP, with maybe some in a RESP. They’re not necessarily thinking of optimizing different tax brackets for themselves and their spouse. It’s very important to consider where the savings are actually going. We’ve decided there’s this much in the pot, which account are we going to put it into? How can we optimize our value?
Now, if you have a corporation, you even have that extra added on tool that you could save money through your corporation. And then eventually at retirement you can dividend it out. Or you could pay yourself a salary, pay a much lower tax bracket while accumulating way more wealth now. So those are a couple of different things, different topics for tax planning while, you know, while you’re working.
Now, the other topic we’re going to talk about in order to retire early with a sound financial income plan is factoring in the CPP and the OAS. This is one that people just are struggling with and they can’t understand. The issue is, should I take my CPP or OAS early?
Well, this is a decision people screw up all the time. If you’re working and you have a high income, you may not want to be adding additional taxable income through CPP or OAS. This can both push you into a higher tax bracket and may lead to OAS claw back.
If you’re getting the OAS clawed back, why would you want to take it? The OAS and the CPP both can be deferred and as both are deferred until age 70, they increase a fixed percentage for every month deferred.
You’re increasing the indexed income that you’re going to get for the rest of your life. At the end of the day, planning in advance can help you save as many dollars as you can while you’re working. You’re going to have the data, the knowledge to decide how much to spend in retirement, then you’re going to actually spend that money in retirement.
A lot of times the projections that are being used are using kind of a relatively conservative income number. I would suggest it’d be important for you to review this on a regular basis.
It’s important to review it because income levels change, return levels change and family situations change. Start with a financial plan annually, or every two years. Take a look at it, sit down and review it, and then by the time you get to your retirement, there are no surprises. You know exactly what your cashflow is going to be. You know exactly what accounts we’ll be taking the money from, and then your portfolio manager has already built the portfolio so that the transition is as smooth as possible, and that’s proper interjection and proper teamwork between the planning side and the portfolio management side.
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