No matter how many years until you plan to retire, there is a benefit to retirement planning to determine your long-term financial trajectory. A retirement plan can help you assess how much you should be saving each month in order to stay on track, and how much you need to have saved in order to retire at a certain age.

Retirement planning checklist

Here is a step-by-step list to begin developing a retirement plan:

  1. Set goals.

    When do you want to retire? Do you intend to downsize your home or travel extensively? Developing clear goals will guide your planning process from a lifestyle and financial perspective.

  2. Assess your current situation.

    Develop a net worth statement that summarizes your assets and liabilities. Just like a road trip, you cannot begin your journey without knowing your starting point.

  3. Develop a budget.

    Start with an honest assessment of your current spending. How will that change in the future? Will your expenses decrease as your children get older? Are there expenses paid by your employer or your business that you will pay personally in retirement?

  4. Determine your potential retirement income.

    This includes not only potential income from investments, but also workplace and government pensions. Canada Pension Plan (CPP) and Old Age Security (OAS) entitlement should be understood and estimated.

  5. Monitor and adjust.

    Using online calculators, homemade spreadsheets, or working with a professional advice-only financial planner, you can ensure you are staying on track to meet your goals.

  6. Make reasonable assumptions.

    FP Canada provides projection assumption guidelines each year to assist with retirement plan modelling. These guidelines “are intended as a guide and are appropriate for making realistic long-term (10+ years) financial projections.”

Projection guidelines

Retirement planning can be more art than science. It is dependent on variables beyond your control that are difficult to predict accurately, including:

  • Inflation
  • Sequence of investment returns
  • Life expectancy
  • Changes in spending patterns
  • Extraordinary life events

FP Canada’s 2023 projection assumption guidelines include the following suggested assumptions:

a) Inflation: 2.1%

b) Nominal investment return rates:

  • Short-term: 2.3%
  • Fixed income: 3.2%
  • Canadian stocks: 6.2%
  • Foreign developed market stocks: 6.5%
  • Emerging market stocks: 7.4%

c) Borrowing rate: 4.3%

d) Year’s maximum pensionable earnings (YMPE) or salary growth rate: 3.1% (inflation + 1%)

e) Probability of survival:

  • 65-year-old man: 50% chance of living to age 89, 25% chance of living to age 94
  • 65-year-old woman: 50% chance of living to age 91, 25% chance of living to age 96
  • 65-year-old male/female couple: 50% chance of one living to age 94, 25% chance of one living to age 98

Dividends have historically provided between 25% to 50% of overall stock returns. It is considered prudent to assume that 33% of overall stock returns will come from dividends and the balance from capital gains.

A safety margin of 0.5% is deducted from projected stock returns to compensate for variability in long-term returns. This reduction aligns with a Monte Carlo analysis outcome that approximates the probability of future stock returns by running 300,000 simulation trial runs.

Investment management fees should be deducted from the nominal investment return to determine a suitable net investment return.

Next steps

A retirement plan requires discipline, commitment, and ongoing reassessment. You can work towards a comfortable and financially secure retirement in the future by committing to retirement planning today.

To speak with one of our expert retirement planners, you can book an introductory Zoom meeting or phone call here: Contact Us