Generally we see safer investments for retirees as ones that focus on a long-term conservative strategy and make calculated use of RRSPs and RRIFs to boost returns

Retirement planning is becoming more difficult for Canadians because they’re living longer and need larger retirement nest eggs. This often manifests itself in “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you may not have enough money saved to be able to earn the retirement income stream you were banking on.

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To alleviate this worry, we recommend Successful Investors base their retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:

1. How much you expect to save prior to retirement;
2. The return you expect on your savings;
3. How much of that return you’ll have left after taxes;
4. How much retirement income you’ll need once you’ve left the workforce.

Note, though, that if you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble.

Moving into “too safe” investments for retirees can sharply cut your long-term returns

This applies as well to “risk-reducing strategies,” of which there are many. One of the most common is the urge to “go into cash” (also known as “taking money off the table”) when you foresee a market downturn. Like all risk-reducing strategies, this one can seemingly work from time to time, by getting you out of the market before a drop. But it’s even more effective at ensuring that you are out of the market when prices are shooting upward.

In the stock market, downturns do come along from time to time. But they are far less common than fears of downturns, which are virtually non-stop.

Safer investments for retirees: How to use RRSPs and RRIFs to add to your long-term investing success

RRSPs (Registered Retirement Savings Plans) are a great way for Successful Investors to cut their tax bills and maximize returns of their retirement investing.

RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)

When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

If you want to pay less tax on dividends, interest and capital gains while you’re still working, investing in an RRSP is the way to go.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities (see the pros and cons of annuities at TSI Network) or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income).

Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

Safer investments for retirees should assume conservative yield estimates to account for unforeseen setbacks

As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume there will be increases in the value of the bonds.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning—5% a year, say—to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all Successful Investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Do you believe in safer investments? What do you consider a type of safe investment?

What kind of investments do you have in place as part of your retirement plan?