It’s never too early to start your retirement investment planning—and our tips will help you do it right

You can take the safe route of retirement investment planning by minimizing extra risk in your investing.

You can also save more now, work longer, or plan to spend less. Retirement leaves you with lots of free time, and filling it costs money. 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.

Retirement investment planning: It’s never too early to start saving

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.

Learn what you can do without

Here’s a tip for something you should begin before you retire. You start by doing 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, like smoking.

Using an RRSP in your retirement investment planning

RRSPs (Registered Retirement Savings Plans) are a great way for investors to cut their tax bills and make more money from 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 while you’re still working, investing in an RRSP is the way to go.

Registered Retirement Income Funds (RRIFs) is a great long-term retirement investment planning strategy

Converting your RRSP to an 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 on 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.

When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that starts at 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95.

If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71.

Stick with conservative estimates as part of your retirement planning guide

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 you can make money trading in 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.

Final tip: Avoid stock options, junior mining stocks, and penny stocks while retirement investment planning.

What strategies are you using for retirement investment planning? Are the ones we’ve outline above helpful to you? Share your thoughts with us in the comments.