Expert Interview with Kurt Rosentreter on Planning Your Retirement

President Theodore Roosevelt once said, “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty.” And if you consider retiring in your golden years a goal worth having, well then you better be prepared to work for it, says best-selling author Kurt Rosentreter, senior financial advisor for Manulife Securities. There are no easy ways to save for retirement, Kurt says. It requires discipline, focus, annual work and sometimes sacrifice. Saving for retirement needs to be a priority ahead of expensive annual vacations, watching TV, buying $4 lattes and leasing expensive cars. “Too many of us are living for today and not realizing until it is too late that we are more on our own than any generation before us,” Kurt says. Whereas our parents and grandparents had defined benefit pensions waiting for them at retirement and didn’t need to save, most of that is gone now, and we are on our own when it comes to planning and saving for retirement. Kurt and the team at Credit Canada recently checked in to offer their insight on why retirement planning is so critical and how to do it. Here’s what they had to say:   How can retirement be different for different people? Individual Canadians have their own personal goals and go through life with different resources and perspectives. Retirement encompasses a phase of life – sometimes more than 30 years. Life and financial means will be affected by many life events like marriage, divorce, birth, death, career change and more. Retirement is one of the few major goals in life that many of us will have in common – but how we get there and what it looks like will depend very much on our own personal circumstances. Some of us will work for an employer that provides a defined benefit pension that may provide all the financial means you will need to take care of your entire retirement. Some of us will start a business where it is up to us to save enough money that if we retire at a certain age that money will fund our needs for the rest of our life. Some of us will be able to count on a spouse with a second income to share the costs of retirement – others will have to go it alone. Some of us will get sick along the way, may change careers several times or get an inheritance that makes retirement planning easier or harder. But overall, one thing is consistent: We all need to think about what retirement means to us and put a plan in place to achieve the goal.   Why is it important to sit down and define what retirement will mean for us as individuals? No one wants to be disappointed, and failing to plan your finances for your retirement phase of life could leave you drastically short of money. This could mean you will end up having to work far longer than you wanted to, or it could mean you go through retirement with far less money than you would like. Also, with so many costs that are hard to anticipate (what will healthcare cost you when you are 80 years old?) you need to be proactive today to ensure you have enough money to take care of yourself. The government is doing less and less to take care of Canadians – you need to provide for yourself.   When should we start thinking about retirement? The best time is when you get your first job in your 20s and then every year after. The next best time is right now if you haven’t started yet. The reality is that the amount of money you will need to retire is likely several hundred thousand dollars if not millions. You cannot easily amass that amount of money if you start saving at age 40 or 50. You need to take advantage of the power of the time value of money, compound earnings and growth of your savings over decades. It will also be far easier to save a little bit each year than a lot of money all at once. If you were not able to start thinking about retirement at a young age or life threw you a curve and you are starting over, it is more important than ever to create a retirement plan that looks at your assets today, looks at your ability to save, looks at your future goals for retirement, and develop a realistic saving and investment plan over your remaining period of time. We all need to know the “retirement math,” meaning we should know what we need to save yearly, what average rate of return to strive for with the investment of our savings, how many years we need to save and what all the savings will produce in retirement income when we stop working. We also need to consider other factors like how long it will take to pay off your home mortgage if you have one, financial commitments to help children or elderly parents, how a spouse will also save towards a joint retirement, pensions you will get from CPP and OAS and other factors that are also relevant to your retirement. Annually, we all need to reflect on our progress towards retirement goals – if you want to have $60,000/year to spend after you retire, and want it to last until the end of life, you or a financial planner can quantify what steps you need to take today to make that happen. You need to look at this detailed “retirement math” every year to know you are on track.   How should our retirement strategy evolve as we grow older? In your 20s: Start saving in your RRSP once you have your career started. Put money away in a TFSA to save for a deposit on a home purchase if that is a secondary goal. In your 30s: Increase contributions to RRSPs and TFSAs toward retirement balanced against any pensions or savings plans with your employer; contribute to RESPs for children if a third goal is to pay for post-secondary education for kids someday; if you bought a home, try to limit the amortization to no more than 20 years until you are debt-free. In your 40s: Maintain a spreadsheet that is numerically tracking your progress on retirement goals, children’s savings goals and mortgage free – by your 40s, you should be seriously focused on medium- and long-term financial goals, have serious annual savings strategies in place, know the math so you know what you need to save and what you are striving to get to. By your 40s, you should have an integrated financial plan based on your goals with annual reporting of investment returns and progress toward the target. In your 50s: Complete your financial commitment to your adult children; finish paying your mortgage by your early 50s at the latest and spend much of this decade aggressively building your retirement at a point in time when your career income should be the highest of your working years. Either on your own or working with a financial planner, benchmark yearly progress towards a savings goal that will provide for your retirement cash flow needs in what could be only a few years away. If you work in a company that provides you with a defined benefit pension in retirement, note that these years of your highest income earnings are often crucial to maximizing the pension value. In your 60s: Before you retire, make sure you know you have enough saved by reviewing a cash flow forecast of what your savings will generate for you on an after-tax basis until end of life. The forecast should run to age 100 and consider what your plans will be for your home (as a lot of money is tied up in a residence), when you will claim CPP, OAS and converting RRSPs to RRIF. Tax planning is essential here, so make sure to sit down with a qualified tax accountant to review how tax-smart your cash flows are laid out each year. Do not retire fully until you know you absolutely have enough money for the basics (food and shelter), the fun stuff (vacations and leisure), occasional costs (new cars, home repairs) and unexpected costs (healthcare, helping kids). In your 70s to Age 100: Track your annual spending on a spreadsheet and monitor trends over the years to ensure you don’t spend excessively and compromise your long-term asset base. No one wants to worry about running out of money at 88. I’m not saying you need to do a formal budget and track every expenditure, but I am saying you need to know what you spend in total each year and what impact that has on your capital overall. A general rule is not to spend more than 5 percent of your asset base in a year. If you spend more than that, you may deplete your savings base too fast.   What are the most common questions your readers have about saving for retirement? Common questions include:

• When do I convert my RRSP to a RRIF?
• What age is best to start claiming CPP?
• Do I have enough to retire?
• How much can I spend each year in retirement and not run out of money?
• How do I minimize my income taxes during retirement?
• How do I invest my investment portfolio to provide the income I need in retirement without taking a lot of risk?
• How do I minimize my investment product fees so I have more to spend?
• Do I need to downsize my home?

  What are the most common mistakes you think we make when it comes to planning our retirement? The biggest issue is failing to plan – many Canadians never sit down and actually calculate what they need to save to retire with the quality of life they want. Rather, people are saving what they can and hoping it will be enough. They are putting misplaced pressure on their investments, and investment advisors often to make up the difference by striving for above-average investment returns with above-average risk for their age. Regardless of wealth level, everyone needs to know the numbers – the “math” of how their finances are progressing towards their retirement income needs. And because paying off your mortgage and supporting children to independence is tied to retirement financial success, you need to know the math around these other goals as well.   What about more inventive or outside-of-the-box ideas for saving money? Buy a rental property in your 30s or 40s and let the renters pay your mortgage over 20 years. In retirement, you have a paid-off asset with rental income that can act as a form of pension income to you. Plus, because you can raise rents, the profit offsets inflation over time. Kids in their 30s should re-think owning a home in Canada – buying a home for $700,000 to a million when your income is $50,000 to $150,000 may leave you insufficient money to ever retire fully. Either live in a lower-cost community or rent permanently, but you cannot have half your paycheck going to a mortgage for 25 years and then hope to have a decent retirement savings at the same time.   What are your favorite types of retirement investments? No one should have a “favorite” investment product. Your investment portfolio should be methodically designed for your financial goals, your stage of life, your knowledge about investing, fee sensitivity, your tax bracket today and, in the future, your desire or dislike of risk and other variables. Either on your own or with a financial advisor who is capable of offering a wide array of products, you can then build a logical investment plan on paper and carefully select high-quality products. You purchase them at a value-price, monitor the portfolio and adjust regularly. It is easier to say what type of products I don’t like: Front load, rear or low load mutual funds are not suitable for retirees. With embedded annual costs often 2 percent to 3 percent a year, they can erode too much of the annual cash flow that we are trying to generate for you to spend. Also, stay clear of any product that you don’t understand what it is. Stay involved with your finances – retirement math and cash flows along with retirement investment portfolio design is the most complex stage of life when it comes to financial management: tax planning, investments, pensions, various savings accounts often for two spouses, CPP, OAS ,RRSP to RRIf – there is a lot to think about. Work with qualified financial planners only (not product people) to sort out the right moves for you long before you buy a product. Connect with Kurt on Facebook, LinkedIn and Twitter.