If you want to put together one of the best retirement investment plans for your future, start with these key tips

Investors often wonder if they are doing the right thing in terms of retirement investing. In particular, many investors who are approaching retirement worry that their retirement planning won’t generate enough income once they’ve stopped working.

Here are some tips for successfully investing for retirement:

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The best retirement investment plans start with four key variables

We recommend 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:

• How much you expect to save prior to retirement;
• The return you expect on your savings;
• How much of that return you’ll have left after taxes;
• 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.

The best retirement investment plans are also started early

When you start early, you then invest a steady or rising amount of that money in the stock market every year. When you follow this plan, you automatically profit from dollar-cost averaging: You will buy more shares when prices are low, and fewer shares when prices are high.

In retirement, you reverse the process. You live off your dividends, and sell stocks only when you need more money. When you do that, you sell your lower-quality holdings first. That way, your sales have the added advantage of upgrading the quality of your portfolio.

A Registered Retirement Savings Plan (RRSP) can be an important part of the best retirement investment plans

These are a form of tax-deferred savings plans where account contributions are tax deductible, and the investments grow tax-free. Funds from your RRSP are taxed as ordinary income when you later begin withdrawing them. RRSPs are the best-known and most widely used tax shelters in Canada.

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.

Using a Tax-Free Savings Account (TFSA) to complement your RRSP

The federal government first made the Tax-free Savings Account (TFSA) available to Canadian investors in January 2009. These accounts let you earn investment income—including interest, dividends and capital gains—tax free.

Generally speaking, your TFSA can hold the same investments as an RRSP. This includes cash, mutual funds, publicly traded stocks, GICs and bonds.

Contributions are not tax deductible, as they are with an RRSP. However, unlike withdrawals from RRSPs (or withdrawals for RRIFs to which most RRSPs are converted), withdrawals from a TFSA are not taxed. In this respect, RRSPs and TFSAs are mirror images of each other in the way they impact your taxes.

This makes the TFSA a good vehicle for more short-term savings goals, like saving up for a down payment on a first home. If funds are limited, you may need to choose between RRSP and TFSA contributions. RRSPs may be the better choice in years of high income when you’re in the top tax brackets, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.

Investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, incurring zero tax liabilities. After that, you can begin making taxable RRSP withdrawals.

Four retirement “strategies” to avoid

• Annuities
• Junior mining stocks
• Penny stocks
• Stock options

Use our three-part Successful Investor philosophy while making stock picks for your retirement

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What important retirement-related moves have you made with your investments in the last year?

What kind of changes to your lifestyle do you plan to make in your retirement? How are you preparing for those changes now?