Early retirement

Question: I am retiring in the next two year and have started to wonder about how to best utilize my assets. What comments do you offer?

Answer: Financial planners must make certain assumptions about both controllable and uncontrollable parameters when developing a retirement plan for their clients.

Controllable parameters are ones that you have control over and include the amount of annual savings, the asset allocation of the investment portfolio and the level of retirement expenses to meet a desired lifestyle and the retirement date.

Uncontrollable parameters are those that you have little control over and include life expectancy, investment returns, inflation and income tax rates. Conservative estimates should ideally be used for each of these parameters, since the retirement planning period is extensive and a change in any one or two of these - such as lower investment returns and/or higher taxes - can have a dramatic effect on the outcome.

A retirement plan is a dynamic document that must be revisited annually by you and your planner. The purpose of the review is to ensure that the plan's assumptions remain realistic and that clients are on track in implementing their plan based on their desired retirement objective.

It is essential for you to understand the implications of retiring earlier than planned. A number of factors when compounded can result in a dramatic change in the retirement plan. For example, retiring only five years earlier has three key consequences.

1) Decreased accumulation period - You cannot make any additional RRSP contributions and there is less growth of existing investment assets.

2) Reduced pension income - Both government and employer pensions are actuarially reduced years if clients retire prior to the normal retirement age. This results in lower pension income for the entire retirement period.

3) Increased retirement period - You must fund an increased retirement period since provision must be made for extra years of retirement expenses.

In order to assess whether you will have sufficient retirement assets, both as a couple and as a single survivor, it is essential to complete a comprehensive retirement plan for a number of "what if" scenarios. All should be completed using conservative assumptions for all uncontrollable parameters.

Once you have a good understanding of the price tag for both your best-case and worst-case scenarios, you can implement a workable and realistic plan to ensure that you have sufficient assets to last your entire retirement period.

Question: How can you draw down on registered assets and non-registered investment assets in the most tax-efficient manner?

Answer: The question is critical for you if you are planning at and during retirement. Financial planners cannot complete an investment plan and construct a well-diversified investment portfolio without first completing a comprehensive retirement plan. To determine the best way for you to draw down on your registered assets and non-registered investment assets, five factors should be assessed.

1) After-tax income - Your desired level of after-tax income will affect the optimal draw down of retirement income options. If you require significant income and/or have significant government and employer pensions, there is less flexibility to minimize taxes.

2) Tax brackets - Yours and your spouse's current and future tax brackets should be assessed based on your current and future "fixed" income (including income from pensions and other registered assets).

3) Registered assets and non-registered investment assets - The total dollar value of each spouse's registered assets and non-registered assets must be determined together with the ratio of each spouse's registered assets to non-registered assets. The amount of income required from current investment assets must also be assessed. Finally, assets that may be used to provide income in the future, such as a cottage, should be identified.

4) Strategic asset allocation and portfolio tax efficiency - The strategic asset allocation of your joint, integrated investment portfolio should be determined. A balance must be found between your need for income in the short term and the required portfolio growth over the long term. The portfolio must be constructed to ensure both tax-efficient growth and a tax-efficient draw down of your retirement assets.

5) Estate planning goals - Your estate planning goals also affect the optimal draw down of retirement income options. Clients must ensure that there are sufficient assets for both spouses, as well as for a single survivor. As well, if you have a fixed estate requirement this must be taken into account.

In order to draw down on both registered assets and non-registered investment assets in the most tax-efficient manner, financial planners must develop your optimal balance based on these five factors. This balance is defined as the combination of retirement income options and cash flow management, investment planning and tax strategies that will allow retirees to achieve your retirement objectives.

How can one maximize your residual estate, while ensuring you have sufficient retirement assets?
Most of you have the following key retirement goals:

. Primary goal - Maximizing after-tax income and minimizing the risk of outliving retirement assets.
. Secondary goal - Maximizing estate assets.

Therefore, financial planners should complete the retirement plan first, prior to developing the estate plan. If you have insufficient retirement assets, then financial planners should focus on ensuring that you first maximize your after-tax income and minimize the risk of outliving your retirement assets. Retirement income options that maximize retirement income for both spouses together and for the surviving spouse should be selected with little focus on minimizing estate taxes and liabilities.

Effective planning at retirement is based on the integration of cash flow management, taxstrategies, investment planning and estate planning. The decisions you make at retirement in each of these areas are critical, since they affect your finances for the rest of your lives.

This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert.