If you’re thinking about what your finances will be after you retire, know this: it’s never too early to begin planning. Given the constantly changing economy, the often volatile nature of the markets and the fact that you want to be financially independent when you arrive at your golden years, most experts agree that when it comes to planning for retirement, the earlier you begin doing it, the greater the likelihood that you’ll be able to achieve your financial goals when the time comes to leave work for the final time.
That’s exactly what Rempel believes. A fee-for-service financial planner based in Toronto, Ed Rempel reviews numerous plans each year for clients of all ages who go to him seeking advice. He says he often sees the same thing.
“Cookie-cutter plans,” he says. “In other words, financial plans that are based on a template, not the clients’ real-life needs. “You go to a financial advisor who asks you some questions and plugs your responses into a computer and prints out something similar to what their last client received. It’s not specific for you. It’s just done as quickly as possible, so the advisor can start talking to you about investments. I call it financial quackery.”
When Ed Rempel reviews retirement plans, he looks for five specific things that indicate that the plan is solid and written to prepare you for the financial future you want.
- The plan’s overriding objective NEEDS to address your specific goals and objectives.
This seems like a no-brainer, says Rempel, but he adds that many people would be surprised at how many planners don’t do it. In his own practice, Ed Rempel reviews with you your goals and how much money you want to have during your retirement years. This is detailed, including where you want to live, what cars you will want and how much you would like to spend on entertainment and travel.
“Anyone who’s a financial planner needs to discuss certain things in detail with their clients,” he says. The first thing is to specify the amount you need to have to retire on, and discuss what it will take to achieve that by the date you provide. This also includes an in-depth, big picture look at your current savings, income, anticipated income, investments you now have on hand, and other financial factors.
- Your plan needs to include a retirement budget.
Even though retirement may be a few or several years down the line, it’s crucial to think about how you’re going to use your retirement money. It’s easy when you’re on the younger side to think that you’ll cross that bridge when you come to it, but retirement planning needs to be practical. “Let’s say you and your spouse want to travel to many interest places all over the world after you retire,” he mentions as an example. “Well, your retirement plan needs to take that into account.” But, he says, those are the dreams you can live at that age if you plan for them. Before you can plan those things you also need to consider the basics, like how much you’ll need to spend on housing, food, transportation, and other everyday things. A retirement budget will ensure that you can have a comfortable life.
- Your plan should include solid, long-term investments as a cornerstone.
Long-term is the key. When Ed Rempel reviews many financial plans, he often comes across investment products and vehicles that are “okay,” but won’t really provide the returns you want in the long run. So how should you invest? That, he says, depends on how much money you have to invest and your comfort level with risk. When advising his clients on how to plan for retirement, Rempel suggests investments based on what their future needs will be. Younger people often have a higher tolerance for risk, but in many cases, they’re not looking at the long term, at least not now. With a serious plan for retirement, your plans should include a diverse mix of strong investments that — over time — will add up to a healthy nest egg.
- Inflation and taxes need to be taken into consideration.
Times change, and so does the cost of living. An effective retirement plan will always be written with two important things factored in: inflation and taxes. This is where financial planners provide expertise that their clients rarely have. Believe it or not, Ed Rempel often reviews plans that don’t include this, then advises people to modify their plans so there are no surprises. Inflation is expected to double the cost of living the next 25 years, but it is the most common thing missing from many simple financial plans. “Again, as the economy changes, you want to be absolutely sure that your retirement has been prepared to address those issues,” he says.
- Your pension should be factored into your retirement plan.
If you work long-term for a company or organization that offers a pension plan, it’s likely that you’ll be offered the choice between taking it as a lump sum or as guaranteed lifetime payments. These are two separate scenarios. With a guaranteed pension, you’ll have the security of knowing they will last through your lifetime. With a lump sum, you get the money in one payment and can invest it yourself and potentially end up with more than you’d draw from a pension over your lifetime. This can be completely reliable long-term, if you invest effectively. You can also pass it on to your kids. This is where a conversation with your financial planner will be helpful, as he or she helps you determine which route to take to retire with the most money.