Addressing Major Gaps In Your Retirement Plan

A good majority of my clients reach out to me looking for retirement planning advice. They want to know if they have enough assets to retire comfortably, how much longer they should work, what type of investment strategy makes sense in retirement, when to take CPP and OAS, and how to set up tax efficient withdrawals from their savings and investments.

My conversation with Kornel Szrejber for the Canadian Financial Summit this year was about addressing the major gaps in your retirement plan. Below is a summary of what we discussed – but you can check out the full interview, along with the rest of the line-up, at the Canadian Financial Summit website.

Investing Is Just One Part Of The Plan

A common mistake that I see Canadians make is focusing only on what investments to buy, as opposed to seeing the investments that they choose as just one piece of financial planning and their financial wellbeing.

Can you talk about what trouble we as Canadians can get into, if we are only focusing on what investments to buy as opposed to looking at the whole picture?

It is common for Canadians to focus on their investments rather than looking at all aspects of their finances. In fact, most of the clients that come to me want to talk about investing.

Yes, investing is important. Setting up a investment strategy that matches your risk tolerance and time horizon, and more importantly one that you can stick with for the long term is crucial to your overall retirement plan.

But, when you step back and look at the bigger picture, you’ll see that financial planning is about so much more than investing.

It’s a comprehensive look at your spending. It’s about making sure you and your spouse are on the same page – understanding your values around money and aligning that with your spending habits. It’s about disaster proofing your life by having appropriate life and disability insurance, a will, and an emergency fund. It’s about mapping out both your short and long term goals so that you can prioritize your savings into the appropriate vehicle(s).

Attributes of an Early Retiree

You’ve worked with many individuals and families here in Canada. Are there any patterns that you’ve noticed between those that are struggling financially vs those that are on-track to retire early? (i.e. actionable things that people can do to be one of those that are on-track).

The people who seem to have it together tend to have a reasonably low cost of living and can max out at least their tax-sheltered accounts (RRSP/TFSA) each year.

They have clearly defined short- and long-term goals that keep them focused on saving. Many have a high income, but that is not a prerequisite to a good financial future.

They also automate many of their financial decisions, so they pay themselves first through automatic contributions, they set alerts to pay their credit card balance in full each month, and their investments automatically rebalance (through a robo-advisor or an asset allocation ETF).

Conversely, those who are struggling usually have some high interest debt and have trouble getting through the month without dipping into credit. They may or may not have a good handle on their expenses, but there’s just no wiggle room or margin for error.

That means, when something comes up, and it always does, any progress made goes out the window and they can’t seem to get ahead. They treat credit card debt like a way of life and not like the ‘hair-on-fire’ emergency that it is.

And, they typically don’t know exactly where their money is going from month to month.

Another major reason why so many people struggle financially is because their list of wants exceeds their ability to pay for them. I love the line from Paula Pant, author of the Afford Anything blog, that goes:

“You can afford anything, you just can’t afford everything.”

I think this is so true when it comes to our personal finances and all of those short-term goals and aspirations that we all have. Money is finite and we simply can’t do everything we want – at least not all at once.

So, I think the people who are on track to retire early have a good sense of where their money goes and they’re able to prioritize saving for retirement while juggling all of their other short-term needs and wants.

Not Enough Attention Paid To These Retirement Planning Decisions

Are there any important financial decisions that you find Canadians tend to oversimplify and make quick decisions about, when in reality they actually need thorough analysis and have a very significant impact?

Usually anything involving a bit of math.

One that comes to mind is when you leave a job and whether to keep your pension or take the commuted value and invest it in a LIRA. This is not a decision where you just want to take the advice of a friend or colleague. It requires some thoughtful analysis.

This is actually a decision I’ve had to make for myself when I left my day job earlier this year, and even I sought an outside expert opinion help me decide.

Another critical decision is when to take CPP. I’ve heard so many myths about CPP and that you should take it as soon as possible (i.e. at 60), but in many cases the most optimal age to take CPP is to defer it to age 70. This enhances your benefit by 42% and provides longevity insurance.

Finally, there’s the question of whether to contribute to an RRSP or TFSA. If you’re below a certain tax bracket it probably makes more sense to invest in your TFSA rather than an RRSP, and vice versa.

Impactful Financial Decisions

What would you say are some of the most impactful financial decisions that we can make to set ourselves up for success? And which ones can we do ourselves vs having to seek out the help of a fee-only financial planner like yourself?

Starting to invest at a young age and, more importantly, setting up a system to make the contributions automatic. You can start with as little as $25 or $50 a month. It’s not about the starting amount, but about building the habit of saving over time.

Be a savvy financial consumer and understand where incentives may be misaligned, or when the seller may not have your best interests at heart. That’s the essence of financial literacy.

Spend less than you earn, obviously, and try to avoid debt where possible.

Don’t buy more house than you can afford, and if you do buy make sure you stay there for 10 years.

For those seeking advice, I’d say the biggest decision is about retirement readiness. Do you have enough to retire and live a comfortable lifestyle?

The answers require a lot of math and careful analysis about your spending, rates of return, and determining how your various income streams all fit together at different ages in retirement.

That’s why William Sharpe calls retirement income the nastiest hardest problem in finance.

In reality, any major life event such as marriage, having children, buying a house, changing careers – anything that’s going to require a major shift in your own personal finances could benefit from some expert advice, or at least a sober second thought.

Reviewing Your Investment Portfolio

For anybody new to this, what are investment portfolio reviews, and what are the different things that you like to look for when analyzing if someone has any critical flaws in their investment portfolio?

I’ll typically look at a client’s investment statements to determine their asset mix and whether it’s appropriate for their age and stage. I’ll look at their holdings and see if there’s anything missing, or in many cases if there’s a lot of overlapping funds with similar holdings. There’s some odd stuff out there.

If it’s a managed portfolio, I’ll look at the fees and ask questions about what other value-added services (if any) they get from their advisor like tax planning, estate planning, goal prioritization, or if they’re just getting an email once a year at RRSP season.

One client recently asked for a second opinion on his managed portfolio and I determined that his low(ish) cost, well managed portfolio was well worth the fee and that he should stay put.

I’ll always share low-cost solutions like bank index mutual funds, a robo-advisor, or a self-directed ETF portfolio. More importantly, I’ll share the time, effort, and complexity required to manage each of those solutions to determine the best fit for my client.

The goal is not simply to go with the lowest fee but to find a solution that the client can implement and then stick to for the long term. That means meeting my clients where they are. For example, if someone has a bank managed portfolio of mutual funds I can point to the same bank’s suite of index funds at half the cost and suggest they talk to their advisor about them.

Investing for Early Retirement

For those that are working towards an early retirement or are already there, is there a particular portfolio structure that you like.

I’m a big fan of simplicity and would suggest either opening a self-directed online brokerage account (I use Wealthsimple Trade) and buying an asset allocation fund like the ones offered by Vanguard and iShares. Alternatively, if they’d prefer not to manage their own money, to open a robo advisor account and invest through a digital platform.

The simpler, the better. So, if you have multiple account types like an RRSP, TFSA, maybe a LIRA from an old job, plus a taxable account, I’d suggest just using the same asset mix in each account rather than tinkering with different ETF combinations in each account.

I don’t see the point of investing for income in the asset accumulation stage, but certainly once you’ve reached retirement age, depending on your level of assets, you could switch to an income or dividend strategy if your goal is to preserve your capital.

Related: Vanguard’s VRIF – Your New Retirement Income Solution

I’m likely to recommend a bucket strategy that includes 1-2 years’ worth of spending in cash savings, another 3-5 years of GICs in a ladder of rolling maturity, and then long-term investments in low cost, globally diversified ETFs. Use the GICs to replace the cash you spent, and then sell off some investments to replace the GIC(s) that matured.

Final Thoughts

It’s a common mistake to focus solely on your investments while ignoring other potentially more important aspects of your finances – the major gaps in your retirement plan.

Retirement planning requires careful analysis to put everything together, from your investments to your government benefits, workplace pensions (if any), housing situation, and legacy & estate planning. 

There are enough low cost and diversified investment solutions out there to consider investing to be solved. Find the investing solution that works for you, automate it, and get the hell out of the way so you can focus on the other areas of financial and retirement planning that deserve your attention.

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19 Comments

  1. Sylvia R on October 15, 2020 at 11:37 am

    Hello! I retired at age 60 and am now 61 1/2. I have not taken my CPP as I have rental income and don’t ‘need’ it yet. I am concerned, however, if I wait until age 65, that the retired years will be considered zero years as I’m not paying into CPP. If so, will each zero year more than cancel out any benefit I will receive by waiting to apply? I already have very low income years that I hope will be removed plus child-rearing years. Would I be in a better position if I were to take my CPP now, and not add additional zero years? Thanks in advance for your advice!

    • Robb Engen on October 15, 2020 at 4:32 pm

      Hi Sylvia, you can check your estimated CPP benefits at http://www.cppcalculator.com – it’s a great resource and gives a better estimate than the calculator you’ll find on My Service Canada specifically because you can ‘zero out’ future years before 65.

      Even though you may have more ‘zero years’ you will always get more CPP if you defer it (a bigger slice of a smaller overall pie).

    • Steve Oliver on October 15, 2020 at 6:48 pm

      Hi Sylvia. You can call Services Canada to ask them to let you know you expect to have no pensionable earnings to age 65 and they will estimate for you what your CPP will be then or at any age you choose. I called them myself as I am 64 and I have had no full year pensionable earnings since age 58. You still come out ahead but not quite as well. If I recall, rather than my pension going up 7.2% each year I wait if I was still maximizing contributions to CPP, Ill be getting about 3% more. Not much better than inflation considering if I took my pension now, its indexed to inflation too.

  2. Howard on October 15, 2020 at 1:03 pm

    Hi. I am in almost the same boat as Sylvia. I retired on my birthday at age 60 and have been enjoying the summer off. My future income will be in the form of dividends but for now I really don’t need them and have been reinvesting them while the market is low. My plan is to start collecting CPP at age 61, but I don’t really need it and my health is good. I have the same question as Sylvia, if I wait until age 65 or 70 will there be enough penalty due to zero contribution to make it worth taking it now?

    • Robb Engen on October 15, 2020 at 4:37 pm

      Hi Howard, same answer as above – do an estimate at http://www.cppcalculator.com and it might even be worth paying a small fee to Doug Runchey (through that site) to run a few calculations for you to determine the optimal CPP age.

      Again, you’ll always get more by waiting and if you have the resources to tide you over now it makes a lot of sense to defer CPP to 65 and even to 70 (especially if you’re in good health and want some longevity protection).

      • JGascho on October 20, 2020 at 5:00 pm

        Hi Robb – according to an article on CPP on the Retire Happy site, Doug actually made a comment to a similar posted question. This person was retired at age 55. I won’t post the whole thing here, but the comment that stood out to me was this….
        ” You will definitely not be penalized for the 5 years of zero earnings between age 65 and 70, because those 5 years can all be dropped out under the “over age 65 dropout” provision. Similarly, you can drop out 8 of the 10 zero-earnings years from age 55 to age 65 under the 17% general dropout provision. Unfortunately, that means that the other 2 years of zero earnings will reduce your CPP calculation somewhat.”

        So in my case, I am 60 next year with 39 “M’s”, and intend to retire then. I also intend to wait until 70 to collect CPP. So I would believe that based on his comment I should receive the maximum CPP + 42%. Hopefully I understood this correctly. It sounds like you are able to drop 8 “zero years” up to age 65. I would be dropping only 5.

    • Steve Oliver on October 15, 2020 at 6:50 pm

      Call Services Canada and tell them you will be making no contributions. They will give you up to three estimates of any year you might want a value.

  3. Alan Swanson on October 15, 2020 at 2:13 pm

    So often the retirement planning discussion is complicated by a plethora of industry jargon and so called strategies. After following you for about a year or so now it’s refreshing to see someone speak in plain understandable language that most people can relate to – Thank you and well done.
    I would also like to add that there really is no wrong answer on any of this stuff except failing to plan and/or save at all. So the most important thing is to take some form of saving and planning action and own it. Here is where I find most people struggle. Most people do have the experience or desire or even know where to start and they become paralyzed before they even start planning. None of us will know whether we were right or wrong unfortunately until we ourselves have expired. So keep up the good work encouraging people to at least take action and think about their future because it most certainly beats the alternative of doing nothing and hoping for the best.

    • Robb Engen on October 15, 2020 at 4:40 pm

      Hi Alan, thank you for the kind words. You’re right – at the basic level you need a plan. Not just what you’re retiring from but what you’re retiring to.

      How much do you want to spend to enjoy a comfortable retirement? Where do you want to travel or spend a lot of your time? What hobbies do you enjoy now that you want to do more of, or what’s something new you want to try? Where do you want to live, and do you see yourself renting or owning?

      Many of my clients think they need to work much longer than they have to – always saying “one more year” without fully understanding whether they already have enough to meet their retirement needs (and then some).

  4. Steve Oliver on October 15, 2020 at 7:03 pm

    Robb, im a DYI managing my own and my wife’s registered plans and our combined Non Reg plan. 8 plans in all! Its a monster to monitor let alone make changes to anything. We are 65 and 64 now. It will be a nightmare to organize the new accounts once we choose to switch to RIFs or are forced to after age 71. I have no plan to manage that. Its beginning to scare me. Financial Planners will be drooling to get all of our accounts and collect annual percentage fees on the wealth I built, not what they built. I have avoided MERs for 20 years. That has kept 50% more for me, due to the compounding effect of 1.5-2% fees, in my pocket and I have beat the average TSE return by at least 2% a year as well. Giving my wealth to any firm to skim off from the top does not sit well with me. But I realize if I get ill, we have no back up. What can I do without giving away so much money to some planner so he can drive a BMW and vacation in the carribean every winter on my money?

    • Robb Engen on October 16, 2020 at 10:36 pm

      Hi Steve, you’re smart to consider the type of investing and retirement income system you want set up in case you no longer have the mental capacity or desire to continue managing everything on your own.

      I’m a big fan of asset allocation ETFs (VBAL, VRIF, etc.) since it’s just one fund that can be held across accounts and easily managed for investing and withdrawals.

      I also like what the robo advisors can do for retirees – too many older investors think robo advisors are for Millennials and Gen Z, but they’re actually well positioned to serve retired clients due to low fees (0.40% at $100,000+ managed), plus they assign you a fiduciary portfolio manager to assist with decumulation and help you manage your withdrawals.

      You can pair this with a fee-only planner to help build a roadmap for you – ensure you can meet your short and long term goals, estate planning and legacy goals, and plan for tax efficient withdrawals.

    • Steve Oliver on October 17, 2020 at 11:57 am

      Hi Lou. Where i argue with Rob, the bond plside of it earns nothing now and is very high risk if interest rates go up in say 3-5 years. Anyone owning bond etfs could lose 50% and more. So no way I’m risking that. So I am currently about 30% cash, I call it cash but its the TD high interest fund through TD Web Broker that use to pay 1.6% but now pays next to nothing at 0.25%. At least it’s insured up to $100 K per account we have.

      I am toying with the risk of buying some perpetual shares paying 5% such as ones at GWL. But they are so illiquid. Hard to sell more than a 1000 shares. But I might but I need quite a bit more than that.

      Utilities are reliable payers but will nose dive like bonds if rates go up. But the offset is their growing business and dividends.

      I toyed with depositing $100 K at a trust company that pays 1.5%. We have an account with Hubert Financial for 10 years now. They have always paid. But putting more money with them is risky as they only manage assets of $6 BILLION. Its not small but not big either.

      What are you doing to earn on your cash side or fixed income side.

      What will Robb charge and what if he has nothing to add for me?

      Many friends of mine said I should be a financial planner. But I have no interest working at some schlock branch working on dead accounts. I could be helping people with minimum $1 Million.

      • Robb Engen on October 17, 2020 at 12:49 pm

        Hi Steve, it is irresponsible and incorrect to assume that bond ETFs could lose 50% or more. Yes, rising interest rates will cause bond prices to fall, but will also cause their yield to increase. If your bond fund yield was 2.1% and it’s now yielding 3.1%, why would that not continue to be an attractive investment?

        • Steve Oliver on October 17, 2020 at 1:33 pm

          Hi Robb. You may not understand the impact on the price of a bond when rates go up. If I have a 5 year bond that I bought for par yielding 1% not 2% at today’s rates, for $100, and suddenly market rates go to 2%, then my bond price drops to, $50 to yield 2% in order for me to sell it. I am still only earning 1% because I paid $100. Id have to hold it to maturity to get my $100 back.
          The bond portion of VBAL would be equally devalued. So forget buying any etf with a bond portion unless you are prepared for the risk of devaluation until those bonds mature. Only when the etf is able to convert those low yield bonds to current yield bonds will the value of the etf be restored and you can earn the new higher interest rate.

          So given I could invest say, $100 K in a bond etf, to earn $1000 a year, its not worth the risk. Ill wait and look for other options.

          The govt of Canada is so much in debt it is going to have to pay higher rates on bonds soon. Perhaps as much as 1-2% more than the similar econpmies. I expect that within 12 months. Once again we can get 1.5% interest from other trust companies but it requires me to open more and more accounts further complicating my life. So I’m in limbo at the moment.

          • Robb Engen on October 17, 2020 at 1:56 pm

            Hi Steve, in what world does a 1% increase in interest rates cause a 50% drop in bond prices? Won’t happen.

            The relationship has to do with the bond’s duration. VAB, for example, has a duration of 8.2 – meaning your could expect prices to fall by 8.2% for every 1% rise in interest rates. Bonds with lower duration (corporate and short-term bonds) would be less sensitive to a rise in interest rates.

            As long as you stay invested in the bond for the entire duration you won’t lose any of your principal investment. In fact, it’s highly unusual for a bond fund’s returns to be negative for longer than a year or two.

            Rising rates mean new bonds are issued with higher coupons, which means more income.

            Read this excellent explainer of bond returns here: https://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/



  5. Lou on October 15, 2020 at 10:45 pm

    Steve, I’m 8 years younger than you and currently following the same footsteps as you.
    I’ve never had an adviser ever.
    Doing it my self / assembling it myself and currently having fun knowledging myself from free web sites like Robb’s.
    My suggestion to you along to what I’m planning to do if this task turns in to a daunting task, is to use a guy like Robb as a fee only planner/adviser. Pay him for his services and be done with that fee.
    There is so much information on the Internet for DIYers.
    Also, with the wealth of information out there, I can’t understand why someone would be paying for a financial adviser continuously for a single email a year to say contribute to your RRSP’s before the deadline every year.
    I used to have the same as you, the 2% MER fee’s and quickly realized that the rich were getting richer and the poor were getting poorer.
    I want to line my own pockets and not some advisers year after year that does nothing for it.
    One quote off of the Internet that I like is, advisers that are not fee only like Robb, they are like blood suckers on you arm, so get out your sharpest knife out of the drawer and start scraping them off if you have them.
    Kudo’s to Robb and Boomer as this is currently my go to site for knowledge and information.

    • Robb Engen on October 16, 2020 at 10:50 pm

      Hi Lou, thanks for the kind words. You’re right that there are great tools out there for DIY investors to save on fees and earn great returns. Advisors can add a lot of value in specific cases, like for those with more complicated needs such as small business owners, those with a professional corporation, US citizens living in Canada, real estate investors, those dealing with restricted stock units, etc. You’d be surprised how many different and unique circumstances are out there, and these issues aren’t regularly covered by us bloggers and personal finance columnists.

      Retirement is another story and even those with basic needs can use some guidance to set up their retirement plan.

  6. Nic on October 18, 2020 at 7:54 am

    Robb, thank you for the work you do to keep your audience informed and knowledgeable. I am a DIY investor, managing a couch potato inspired portfolio of ETFs and employer-sponsored funds for the hubby and I across a number of account types (RRSP, LIRA, Taxable, TFSA, ESPPs, etc). Although I’m a CPA I have only worked in industry and do not have professional experience with personal financial planning or tax. We are well on our way to financial independence and intend to quit the 9-5 in our mid to late 40’s to change things up, fit in some travel, and see where that takes us. I have access to a fee-only financial planner as a management perk through my employer, which involves a comprehensive update to our financial plan every three years. I have been absolutely disappointed with the quality of service provided by this very reputable provider during our most recent update, specifically their inability to adapt their analysis and planning tools to fit the unique decumulation considerations associated with early retirement. The very clear lesson learned by hubby and I through this recent experience is that no one will care as much about our money as we do. I am sympathetic to Steve’s concerns regarding the increasing complexity involved in managing his portfolio through decumulation, wondering who he can trust, and how to plan today for that transition, especially if the transition involves building trust with an advisor today in anticipation of future needs. For us, we feel we are years away from being overwhelmed by the complexity, so in the meantime, I would like to find a tool to run my own decumulation scenarios to better understand our options such as the implications of early RRSP withdrawal to capitalize on the basic personal amount, holding onto eligible Canadian dividends assets longer than was recommended by our advisor to see those tax implications, etc. The more I can learn and understand today, the better equipped I will feel when it comes time to put my trust in someone else. Can you recommend an affordable planning tool that might match my skills while also meeting the ask for significant decumulation scenario flexibility? Thanks again for all your contributions to the personal finance community in Canada.

    • Robb Engen on October 18, 2020 at 12:43 pm

      Hi Nic, thanks for the kind words. There’s a lot of free information out there as you know, especially in the early retirement space. The challenge is in applying it to your own unique circumstances. I don’t know of any planning tools available for a DIYer that are robust enough to run these types of scenarios.

      Even with proper financial planning software, which is expensive but available to anyone, the output will only be as good as the inputs. The lack of familiarity with the software and all of the variables that can be applied to each scenario would likely lead to a less than optimal outcome.

      I have received several versions of this question before and I wonder why those who clearly have the means to pay for advice seem downright allergic to hiring a professional to guide them though the complexities of retirement planning? The odds of you learning something new are extremely high, and even if you don’t there is still value in confirming that the path you’re on is the right one.

      That’s why fee-only, advice-only planning can be an attractive option. Pay for advice as needed, rather than through an ongoing AUM (percentage of assets) model.

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