# Advice and strategies

## Early bird gets the worm: Saving for retirement

When the Minister of Finance originally established the rules regarding the RRSP, calculations were based on the scenario that by setting aside 18% of their income for 35 years, a person could accumulate sufficient funds for retirement. This capital, combined with social retirement programs (e.g., Old Age Security and the Québec Pension Plan), would yield an annual income of approximately 70% of their gross earnings before retirement.

The chart below illustrates the amount a person would accumulate by saving 18% of their income starting at the age of 30, assuming an employment income of \$50,000 since age 25.

Annual contribution necessary to reach a target amount by age 65

Assumption: Annual RRSP contribution of a person with an income of \$50,000 that increases 2.25% each year. The amount saved generates a 4.5% annual compound return.

The red lines represent a saver who began to put money aside at the age of 30. The dark blue and light blue lines illustrate the consequences of delaying saving under the same conditions.

The dotted red line refers to the annual savings (left axis), while the solid line shows the growth of capital, which reaches \$1,137,593 at the age of retirement. This amount is substantially more than the saver’s current income of \$50,000, but you need to take into consideration that the indexed salary would reach \$121,759 by the age of 65. In reality, this person will have put aside 9.3 times their annual gross income by the time they retire.

If this person decides to take charge of their retirement plan at 40, rather than at 30, he/she will have to save 28.43% of their income (dotted dark blue line) in order to reach the same goal. This would require having to make significant lifestyle changes in order to meet such a savings goal. If the person finds this level of savings unmanageable, they will have to do with less income at retirement. For example, if saving a maximum of 18% is realistic, the final RRSP amount would only be \$720,249, or 63% of the ideal goal. This person would therefore have to rethink the feasibility of some of their retirement projects.

Finally, should this person decide to start putting money aside only at 50 years of age (15 years before retirement), they will have to allocate 53.25% of their income to savings (dotted light blue line) to reach the same ideal objective. Should they instead decide to save only 18% of their income, the future RRSP balance would only be \$384,539, or 34% of the desirable amount.

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## The advantages of saving over time

A clear advantage of saving early is that you are investing in financial markets for a longer period of time. In our example, the first investor would have had money invested for 35 years, while the third one for only 15 years. Markets are less volatile over the long run, so we can assume that the first investor would benefit from the advantages that come with periodic investing. We also note that the financial plan is much easier to achieve if you begin to save at a younger age.

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## Planning for your Retirement

You probably have a good idea of what you want to do once you've retired: renovate the family home, travel the world, purchase a vacation property, etc. Ambitious or not, your retirement dreams can come true if you plan them right today.

Did you know that according to statistics from the Canadian Institute of Actuaries, if you are now 65 years old, there is a 50% chance that you or your spouse will live to be 90 years of age?

Even if we have the chance to be supported by public plans, in order to maintain your lifestyle at retirement, it is often necessary to plan for additional sources of income. The sooner you begin planning your retirement, the sooner you'll be ready to take advantage of your accumulated savings.

To implement a savings strategy that will help you live out the retirement of your dreams, you must of course evaluate your current assets in relation to your objectives, but you should also take into consideration the fiscal consequences of your investments, your succession plan, your income sources and every other factor that can impact your savings ability and your future income.

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## Understanding the 4 stages of Retirement

Typically, we go through four life stages during which it is critical to review our savings and investment strategies to ensure that we remain on the right path to our dream retirement:

• Accumulation
This stage concerns you if you are just starting your career and have very few invested assets with relatively high expenditures. For instance, you may be considering purchasing your first home, in the process of paying back school loans or planning to start a family.

• Preservation
This stage applies when you have begun accumulating retirement savings, and have a stable career and family life. What matters most at this point in time is to preserve your wealth, while continuing to grow your assets with calculated risks.

• Disbursement
This stage refers to retirement. This is when it is important to properly manage your wealth by using the right disbursement strategy so that you may optimize your pension income.

• Transfer
This stage concerns your wealth after your passing. It is important for you to have prepared the transfer of your assets and implemented the right succession plan in order for your loved ones to be cared for as you had intended.

Although each stage is typically associated with a certain age group, your situation may differ. That's why it's important to evaluate the solutions that are right for your unique life path and desires. To do so, you must take into consideration the different savings solutions and retirement income options available, namely regarding:

• Pension plans;
• RRIF (registered retirement income fund);
• LIF (provincial or federal life income fund);
• LIRA (locked-in retirement account);
• RRSP, TFSA;
• Government plans;
• Investment income;
• Annuities; and
• Any other strategy that may affect your retirement income.

Your advisor has the expertise necessary to help you in this process. With his help, you will be able to accurately define your objectives and retirement needs, as well as determine the right strategies to execute at opportune times of your life.

He or she will help you to:

• Assess the right investment strategies for your objectives;
• Project your retirement income over the short, mid and long terms;
• Evaluate your retirement cash assets; and
• Prioritize your disbursements so as to minimize your tax burden.

Plan to live out your dreams.

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## I Still Have Plenty of Time, Why Invest for Retirement Now?

Retirement seems like a long way off. You already have many other things to worry about—managing your career, buying a house, paying off your debts... Why add to the burden by planning for an event that is many years down the road?

It is true that, with all the financial responsibilities they have to face, it is difficult to save money. However, experts are unanimous: when it comes to retirement, it is much easier to start saving when you are young, even if the amounts are small.

People ask: “Shouldn't I wait until my financial situation is on more solid ground before I start saving for retirement?” It's a very legitimate question. However, it is best to make the most of your working life— namely, some 30 to 40 years—to grow your money by capitalizing on compound interest, that is to say, the interest generated on your principal and the interest it earns.

Let's test this theory by using the following hypothetical situation. Between the ages of 21 and 65, Phil invests a total of \$54,000 by saving \$100 per month in an investment with a pre-tax rate of return of 4% 1. When he reaches age 65, his investment will be worth \$150,947 as a result of compound interest. Sam starts this process at age 31, with an investment offering an identical rate of return. However, to save just as much as Phil at age 65, Sam must save \$165.20 per month, or, in other words, \$15,384 more than Phil.

Monthly investment needed to obtain the same total investment value on investment periods of 35 and 45 years2
Monthly Investment Term Total Investment Value
(Pre-tax Rate of Return of 4%)
\$100.00 540 months (45 years) \$150,947
\$165.20 420 months (35 years) \$150,947

By starting to save early, you will have to invest less to accumulate the desired amount. If you’re worried that you won’t be disciplined enough to save, know that there are systematic investment plans you can turn to. These plans regularly debit a predetermined amount from your account. Whichever method you choose, you’ll thank yourself later!

1. Calculations are based on a hypothetical annualized return of 4%. The data in this example show only the impact of a compound growth rate and do not represent the actual returns of an investment made via the periodic investment plan.
2. The content of this graph creates no legal or contractual obligation on the part of National Bank of Canada or its group entities.

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## The 5 Key Risks During Retirement

Good retirement planning begins with understanding the different challenges you will face when the time comes. Your investment and retirement planning strategies must indeed take into consideration the factors that could impede your goals, namely:

Time
Inflation
Health care
Withdrawal rate
Asset allocation

### Time Life Expectancy Increases Over Time.

As a result, retirement now tends to last much longer than it used to. The inherent risk is that some people could end up underestimating their own life expectancy and therefore run the risk of outliving their capital. In other words, we are no longer talking about a 10 or 15-year retirement, but one that may even last as long as 40 years!

### Inflation

Inflation represents the general increase in the price of goods and services over the years, which ends up affecting your purchasing power. In the long run, even a modest inflation rate can wind up making a substantial dent in your purchasing power. It is therefore important to plan to make provisions to regularly increase your retirement income in order to prevent your purchasing power from decreasing.

### Health Care

Accurately assessing your health-related financial requirements during retirement is a very important part of your overall strategy, even if it is somewhat difficult to narrow down some of these factors. Every case is unique, and your own circumstances may change with time. You must therefore try to predict your future healthcare costs by considering your current physical condition. However, keep in mind that your situation could change on a dime. Providing for this possibility will help you avoid unwanted surprises that could ultimately compromise the longevity of your capital.

### Withdrawal Rate

To help you plan your retirement by factoring in these risks in addition to your needs, don't hesitate to call on your advisor who has the tools and knowledge to assist you.

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## Phased Retirement

The Quebec government has introduced legislation to encourage phased retirement. This possibility is offered to workers between the ages of 55 and 69 who wish to gradually retire from the workforce. They can receive up to 60% of their pension income while still receiving employment income, which also helps to increase their retirement pensions.

Before taking advantage of this option, employees first need to reach an agreement with their employer and accept a pay cut of at least 20%. Self-employed individuals are not eligible for this program. Phased retirement does not in any way affect Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits. As for supplemental pension plans (SPPs), conditions vary from one plan to another. Get more details from your plan manager.

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## Publications and tools

My idea Discover a tool to help you plan your savings easily and successfully. iPad application available in the App Store®.