Introduction

The Speed of Change

The only constant in life is change, and that is particularly true when it comes to retirement planning. Assumptions that seemed valid 10 years ago have been turned upside down in the intervening years and an entire new set of dynamics has come into play. Consider:

• A decade ago, people were worried that the Canada Pension Plan would run out of money and would not be there to support them when the time came to draw benefits. Today, only the most pessimistic fret about the solvency of the CPP. If the actuaries are right, Canada has one of the most stable public pension systems in the world.

• A decade ago, every Canadian with an employer pension plan believed that it would be the mainstay of their financial well-being in retirement. Today, the stability of the whole private pension system is in question. Financially stressed companies seek to reduce pension benefits that were once taken for granted. In a few cases, plans have actually collapsed into insolvency, leaving people who contributed to them for years with virtually nothing.

• A decade ago, the stock market was seen as the primary source of future retirement wealth. The big gains of the 1990s created an expectation that the good times would roll forever, boosting the assets of RRSPs and pension plans with annual returns of 10 percent and more. Today, after the Millennium Crash, rampant optimism has given way to sober realism. Few people talk of 10 percent returns from stocks any longer. Nor should they; in April 2005 the chief institutional strategist of RBC Capital Markets, Myles Zyblock, published an analysis that predicted annual returns of only 2. 9 percent at best from the Toronto Stock Exchange over the next 10 years.

• A decade ago, guaranteed investment certificates and government bonds were seen as the cornerstones of a retirement income program. Today, after years of ultra-low interest rates, financially strapped retirees are looking elsewhere for cash flow, and income trusts, which were virtually unknown in the 1990s, have become the hottest growth sector on the TSX.

• A decade ago, almost everyone wanted to retire early. London Life’s “Freedom 55” slogan became a national mantra. Today, more people than ever are working past 65, often quite willingly, and mandatory retirement laws are falling by the wayside.

• Guideline #1—Have a plan. You can’t get there if you don’t start. Procrastination only makes the ultimate goal more difficult to achieve. Create a realistic retirement plan based on your age and financial situation and start implementing it.

• Guideline #2—Control risk. Never let greed dominate prudence in managing your retirement assets. A few years of big losses will take a long time to recoup.

• Guideline #3—Be realistic. Set achievable targets. Don’t overreach. As athletes like to say: Stay within yourself. An average annual return of 6 percent will produce a healthy nest egg after 30 or 40 years.

• Guideline #4—Know the status of your pension plan, if you have one. Don’t assume the money will be waiting for you when you retire. Find out how your plan works, read the financial reports, attend meetings. If the plan looks like it is running into trouble, ask hard questions of the administrators. It’s your future happiness that’s at stake, so be aggressive.

• Guideline #5—Keep tabs on government programs. As this book is written, the CPP appears to be on solid ground. But that was not always the case and may not be so in the future. If the politicians start talking about raising the retirement age or fiddling with the benefits, adjust your income projections accordingly. Ditto with Old Age Security.

• Guideline #6—Review your personal timetable. Right now your plan may be to retire at 60. In 10 years, you may have adjusted that to 65. Or poor health may require you to exit the workforce at an earlier time. Your retirement date is a critical component in the entire planning process. The more years you work, the greater the RRSP capital and pension credits you will accumulate and the fewer years you will need to draw on them. If your retirement plans change, revisit all your projections. They will most certainly be affected.

• Guideline #7—Watch the economic climate. The events in the world around you will play a large role in determining which types of investments are most appropriate at any given time. When economic growth is weakening, bonds will normally be a good place for your money. When the economy begins to emerge from a prolonged slump, stocks should surge. Be sensitive to the cycles and you will prosper.

• Guideline #8—Monitor performance. I am constantly amazed by how people can discard the financial statements they receive every month without giving them more than a cursory glance. Treat these as your sentinel trees. If they appear sickly, apply treatment fast. If your assets do not grow at least 6 percent in any given year (excluding new contributions) do a complete analysis to find out why.

• Guideline #9—Know the tax laws. You can save yourself a lot of money both in your savings years and after retirement by understanding the tax laws and using them to your advantage. But remember, they keep changing. You have to stay up to date or use an advisor who will do so.

• Guideline #10—Don’t despair. Despite the best-laid plans, things won’t always go right. There will be setbacks along the way; it’s just the way of the world. Do your best to minimize the damage when they do happen and prepare an action plan to get back on track. Don’t, under any circumstances, allow yourself to fall into a deep funk and let matters continue to slide. Like everything else in life, the winners are those who learn from adversity and fight through it. It’s the same with your retirement plan.

Your personal dreams may be quite different. It doesn’t matter. The important thing is to make them happen. If this book helps you achieve that in some small way, then my wo