March 10, 2022
I also cover this in a YouTube video. Click here to watch!
What are the 3 Secrets to a successful retirement plan? And what do Canadians need to have in place before they decide to retire? That’s what I’m talking about in this week’s blog.
Think about it for a moment. When our parents retired, they typically retired at age 63 or 65, and their life expectancy was maybe 12-15 more years after that. So if they started working at age 25, they worked for 40 years, retired at age 65 and supported themselves in retirement for 15 years.
Fast forward to today: if you’re married, and you and your spouse both retire at age 65, there is at least a 60% chance that one of you will live to age 90; that means that you worked for 40 years, retired at age 65 and now you need to have enough money in place to support yourself for 25 more years… And guess what: we are all living longer! The oldest known person in Canada was Phyllis Ridgway, who died at the spectacular age of 114 in June 2021. So, in her case, if she started working at age 25, she worked for 40 years and retired at age 65. She would have been retired for 49 years, which is nine years longer in retirement than in her working life. Phyllis may be the exception, or not.
Cash Flow is King
The 1st Secret to a successful retirement plan is knowing how much Cash Flow you are spending each and every month. You need to calculate how much your current monthly lifestyle is costing you – for perspective, the average business owner I work with today is spending anywhere from $10K per month all the way up to $40K per month. Long gone are the days when you could retire on $1M… It just won’t last, given our lifestyles and our longevity/
If you assume a 5% net rate of return after management fees, your monthly lifestyle expenses are $10K, and you retire at age 65, you will need at least $1.7M in liquid assets to stay secure – and that assumes no inflation or unexpected curveball life might throw at you. On the other end, if you have lifestyle expenses of $40K per month and you retire at age 65, you will need at least $7M in liquid assets.
The 2nd Secret to a successful retirement plan is knowing how to develop your retirement paycheque. It is made up of at least three types of income:
100% taxable income – something like the Canada Pension Plan, a personal RRSP, or a Registered Retirement Income Fund (RRIF);
Tax-preferred income – like Dividends or a Non-Registered plan that is only 50% taxable on the capital gain;
100% tax-free portion, which is created from your Tax-Free Savings Account (TFSA), or from the Cash Value of a Permanent Life Insurance Policy.
Over the years, many experts have agreed to disagree on the ideal mix of your net worth as you enter into retirement. Typically, you would see the following breakdown:
House or Real Estate should make up 30% of your Net Worth Liquid Investments – such as your RRSP; Non-Registered (seen as NR in the pie chart above) or Corporate Money should make up 50% of your Net Worth; and finally, the Cash Value sitting inside a Permanent Insurance policy should make up 20% of your Net Worth.
When we develop a written retirement plan for our clients, we take them through a discovery process to learn more about their retirement and estate planning goals. For example, we inquire about where, and how often, they would like to travel, as well as any hobbies they may have. Then we have our clients complete the “monthly lifestyle expense spreadsheet,” mentioned as Secret #1.
Usually, we would like to start this process about 7 to 10 years prior to retirement – that way, if there are any course corrections that need to be made, we have time to work it out.
The 3rd Secret to a successful retirement plan is having a back-up plan when the markets crash. The markets go through cycles, and when they go down by 25-30%, you need to have a game-plan in place to continue to pay yourself a paycheque.
When most people retire in Canada, they have a two-legged chair, their liquid investments (like an RRSP or Non-Registered investments), and they have their Real Estate (which is typically their home or a vacation property). However, as we experienced in 2001, 2008, and again at the beginning of 2020, most of these two-legged chairs fell over. The markets came crashing down and people still needed to create their retirement paycheque from investments that were now underwater.
Here are some key facts to consider: when the markets go down 40% – say, 10,000 points to 6,000 points – how much do the markets have to go back up to return to the original 10,000 points? The answer is 4,000 points, but that is now a 67% market increase – which is not a recovery that will happen overnight. So, when the markets are down 30-40%, you need a third leg on your chair so that it doesn’t tip over and allow you to tap into another bucket of money, on a tax-free basis, just to create your retirement paycheque. This will allow you to put a pause on your current liquid investments – allowing them time to recover – while you tap into this other bucket… However, less than 10% of Canadians have access to this third leg on the chair that creates this additional bucket of money.
WHY IS THAT?
Because their current Financial Planner or Advisor may or may not be licensed to talk about the third leg on the chair. Worst yet, their current Financial Planner or Advisor is not even aware of the third leg on the chair.
The third leg on the chair is the Cash Value or CSV that is sitting inside of a Permanent Whole Life Policy.
DID YOU KNOW that last year in Canada, money sitting inside of a Permanent Whole Life Policy was receiving a Dividend of approximately 6%? And for the past 25 years, the Dividend has had an average annual rate of return of 8.4%? Here is another key fact: when this Dividend is declared, it is guaranteed in writing from the insurance company, so it cannot go down in value. All of this is a part of the insurance contract, and we always design our policies for maximum cash flow in retirement.
I usually refer to a Whole Life Participating Policy as the Fixed Income Anchor in your overall investment & retirement plan. So, when life throws us a curveball and the markets hit a speed bump, you must have a three-legged chair in retirement. Otherwise, your chair will tip over and then you will be scrambling to create your retirement paycheque from assets that have been hit hard and are perhaps underwater.
If you would like to learn more about how these 3 Secrets can help you to enjoy your retirement, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
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By John Moakler, BMath, CFP, CLU
President and Senior Executive Financial Planner
Moakler Wealth Management
1 416 840 8544