Formulating a good financial plan forces us to take a good look at the present—and the future.

One of the things that investors of all ages fear is that they won’t have a good financial plan in place so that they have enough retirement income to live on once they’ve stopped working. Addressing this concern is usually a high priority for many of our Successful Investor Portfolio Management clients.

To alleviate this worry, we recommend to them—and you—that you base your 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.

Most accountants or tax preparers can do the math for you, based on numbers you provide. However, coming up with realistic numbers is the hard part. That’s because in part, it depends on your personal preferences.

For instance, a financial planner can give you some idea of what others are saving. But you should base your savings on the way you want to live, rather than on the averages. You also need a realistic view of how much retirement income you’ll need once you’ve stopped working.

Remember to take taxes into account

As for the tax structure, it keeps changing. But it’s safe to assume that you’ll pay a lower rate of tax on dividends and capital gains than on interest, and that you’ll generally pay taxes on capital gains only when you sell.

As for the return you expect, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds. For stocks, the market returned 10% or so yearly on average over the past 80 or so years. Aim lower — 8% a year, say — to allow for unforeseeable problems and setbacks.

Having a good financial plan is important but 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.

Two bonus tips for making a good financial plan even better

1. Turn retirement income planning into a game

   Retirement income planning doesn’t have to be about moving money around. Sometimes it’s easier to live frugally. People who come from humble circumstances often develop a degree of both frugality and industriousness early in life.

   Finding part-time work while in school, and making every penny count, becomes a game for them.

   It’s easy to let frugality evaporate in mid-life, when money becomes more plentiful. But some find that if they return to frugality later in life, it’s more fun than ever. It’s a little like taking pleasure from a game that you haven’t played since you were young.

   Your enjoyment of, or distaste for, frugality is partly a matter of attitude. But that’s under your control. Don’t think of it as penny-pinching. Think of it as taking charge of a part of your life, so that more of your money goes to things you choose.

2. Split your retirement income with your spouse to save taxes

   A good financial plan includes your loved ones. If you make considerable more money than your spouse, you may want to set up a spousal RRSP. Registered retirement savings plans, or RRSPs, are a form of tax-deferred savings plan designed to help investors save for retirement. RRSP contributions are tax deductible, and the investments grow tax-free.

   When you later convert your RRSP to a registered retirement income fund (RRIF) and begin withdrawing the funds, they are taxed as ordinary income.

   A spousal RRSP is one way to achieve equal retirement income. Suppose you are the higher-income spouse. You can make contributions to a spousal RRSP, and claim the tax deduction. Your contributions to the spousal RRSP will count toward your annual RRSP deduction limits.

   Your spouse can still contribute their full deduction to their own separate RRSP. When the money is withdrawn from the spousal RRSP years later, it is taxed in the hands of your spouse. That’s an advantage if he or she is still in a lower tax bracket.

   A spousal RRSP is also a way to defer taxes if you are no longer able to contribute to a personal RRSP because of your age. As long as your spouse is 71 or younger, you can contribute to his or her spousal RRSP and still claim the tax deduction.

   Note that withdrawals from a spousal RRSP are generally subject to a “three-year rule.” If a spouse withdraws funds from an RRSP within three calendar years after the higher-income spouse’s last contribution, the higher-income spouse must declare the withdrawal as income on his or her tax return. The exceptions include spouses living apart due a marriage breakdown and the death of the contributor in the year a withdrawal is made.

When creating a good financial plan, we recommend keeping it simple and safe, rather than taking on extra risk. We always advise investors to take the safe route to retirement planning. Save more now, work longer, or plan to spend less. Retirement leaves you with lots of free time, and filling it often costs more money than people anticipate. But postponing retirement, or working part-time as long as you’re able, can pay off in higher current income, more contentment and greater long-term security.

What do you consider a good financial plan? Share your thoughts and experiences with us in the comments.