Retirement Planning (Class Lecture Notes - Week 1) PDF

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RETIREMENT PLANNING (Chapter 1)Retirement Planning has Two Dimensions:  For those who are already retired o It involves determining how to best make use of financial resources to support a desired and sustainable level of income.  For those who are yet to retire o It involves sorting through retir...

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RETIREMENT PLANNING (Chapter 1)

Retirement Planning has Two Dimensions:  For those who are already retired o It involves determining how to best make use of financial resources to support a desired and sustainable level of income.  For those who are yet to retire o It involves sorting through retirement alternatives and developing a plan to accumulate savings for retirement.  You will also need to gather qualitative and quantitative information from the client. o This includes answering questions, such as the following:  What type of lifestyle does the client foresee in retirement?  When does the client intend to retire, early or late?  Has the client thought about what is going to occupy the retirement years, maybe activities, such as travelling, starting a new business, hobbies or part-time employment.

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The Importance of Starting Early  Many clients do not begin a retirement plan in earnest until they are in their 40s.  If funding is delayed until age 40, a client may be left with only twenty-five earning years in which to fund twenty-five years of retirement.  Therefore, one of the financial planners most important roles in the retirement planning process may be to encourage clients to start retirement funding early. o A client who starts savings for retirement at thirtyfive years before projected retirement date may need to save only $250 per month. o Whereas a client who does not begin saving until fifteen years before the projected retirement date will need to put aside $830 a month.  It may be difficult to convince clients in their thirties to begin saving for retirement because retirement seems so far away.  Many younger clients respond more favorable to the concept of saving for financial independence or for net worth enhancement. Demographics  Increases in life expectancy and the aging of the Canadian population are affecting retirement planning.  Life Expectancy is the number of years, based on statistical averages, that you are expected to continue living.

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Life Expectancies Age

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Probability of Death in Year 0.522% 0.011% 0.009% 0.028% 0.071% 0.071% 0.074% 0.096% 0.132% 0.194% 0.301% 0.484% 0.780% 1.260% 2.040% 3.310% 5.383% 8.776% 14.34%

MALE Remaining Years Expected to Live 79.33 74.81 69.85 64.89 60.04 55.25 50.44 45.64 40.87 36.17 31.56 27.09 22.83 18.82 15.13 11.81 8.93 6.52 4.63

Life Expectancy to Age 79.33 79.81 79.85 79.89 80.04 80.25 80.44 80.64 80.87 81.17 81.56 82.09 82.83 83.82 85.13 86.81 88.93 91.52 94.63

Probability of Death in Year 0.449% 0.009% 0.008% 0.018% 0.030% 0.030% 0.037% 0.056% 0.084% 0.129% 0.197% 0.307% 0.485% 0.782% 1.284% 2.146% 3.654% 6.338% 11.196%

FEMALE Remaining Years Expected to Live 86.30 79.02 74.05 69.09 64.17 59.26 54.35 49.47 44.62 39.83 35.12 30.51 26.03 21.73 17.68 13.93 10.57 7.68 5.35

Life Expectancy to Age 83.60 84.02 84.05 84.09 84.17 84.26 84.35 84.47 84.62 84.83 85.12 85.51 86.03 86.73 87.68 88.93 90.57 92.68 95.35

* Source: Report on Demographic Situation in Canada: 2009 to 2011, catalogue number 84-537X, published 2013. Statistics Canada.

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Canada’s population had the following distribution Age 0-19 20-54 55-64 65+

Year 1961 1991 2001 2011 2021 2031

2008 24% 51% 12% 13%

2012 22% 50% 13% 15%

Population Over 65 Years of Age Number % of Population 2,361,000 9.7% 3,173,300 11.8% 3,884,500 13.6% 4,544,000 15.4% 5,870,600 19.6% 7,128,400 23.9%

* Source: Statistics Canada

The 6-Steps Retirement Planning Process  1) Establishing the Engagement  2) Establishing Objectives and Gathering Data  3) Clarifying Present Financial Status and Identifying Problem Areas and Opportunities  4) Developing Strategies and Presenting the Plan  5) Implementing the Plan  6) Monitoring the Plan and Updating it as Needed

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The 6-Steps Retirement Planning Process (continued)  1) Establishing the Engagement o During this step you should:  Explain the issues and concepts related to the overall financial planning process to your client.  Come to an agreement with your client as to the scope of the engagement and the timelines for completion.  Explain the process that you will follow and the documentation that you will provide.  Clarify the responsibilities of your client.  Clarify your own responsibilities as the planner.  Disclose any conflicts of interest.  Describe and disclose how and by whom you will be compensated.  Come to an agreement with the client as to how the client will make decisions.

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 2) Establishing Objectives and Gathering Data o The primary objective that clients will have with respect to retirement planning will be to ensure that their standard of living is preserved. o Your role is to clarify the client’s objectives, evaluate the financial implications and help the client implement the preferred strategy. o Clients should be as specific as possible in stating retirement objectives. o SMART Goals S (Specific) M (Measurable) A (Achievable) R (Relevant) T (Time Bound)  3) Clarifying Present Financial Status and Identifying Problem Areas and Opportunities o In addition to gaining an understanding of the client’s objectives, it is important for the retirement planner to fully understand the client’s current financial position, as well as his future income potential. o The retirement planner should also be aware of any other financial obligations or objectives that might interfere or conflict with his retirement objectives.

 4) Developing Strategies and Presenting the Plan 6

o Once the retirement planner has a good understanding of his client’s current financial position as well as his retirement objectives, he will be in a position to project the income needs at retirement, and to determine the savings that must be accumulated by the client to fund that level of income. o A client’s need for retirement funding will be affected by:  His/her estimated living needs during retirement  The anticipated income from employersponsored pension plans, the Canada Pension Plan, the Old Age Security program and parttime employment after retirement.  The current value of his retirement plan assets and other investment assets that might be used to provide retirement funds  The remaining time until his/her retirement  The amount he/she is currently savings towards retirement  The life expectancy of the client and his/her spouse  The anticipated inflation rate for the remainder of the life expectancy  The anticipated rate of return on investments  The anticipated income tax rates  5) Implementing the Plan 7

o Once a strategy for accumulating the required amount of retirement funds is developed, the client must take the necessary step of implementing that strategy. o You and the client needs to have a clear understanding of your responsibilities.  6) Monitoring the Plan and Updating it as Needed o Monitoring is an essential component of any financial planning process, but is particularly important in retirement planning because assumptions will not remain valid over the long planning horizon. o Periodic reviews and updates are needed to evaluate progress towards the client’s retirement objectives. o If the investments are not performing as expected, or if inflation or income levels have deviated significantly from the assumptions stated in the original plan, the strategies may have to be modified to ensure that the retirement objectives are still achieved. o Frequency of monitoring will depend on the client. o Many people are satisfied with an annual review. o For younger clients, updated every three to five years might be sufficient, unless there is a significant change in the client’s situation, such as:  Divorce, Inheritance, Career change, Birth of a child

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