Four steps to a retirement income plan

Source: 2010 Fidelity Retirement Survey, Wordle.net. Non-retirees’ (45 and over) perceptions of retirement. Note: In a word cloud, the size of the word corresponds with the frequency of responses for a particular term.

In Fidelity’s 2010 Retirement Survey, freedom, enjoyment and family are some of the key concepts Canadians indicated they think about when imagining their retirement. But while most Canadians have very positive feelings about the next stage of their lives, many also associated the term “financial stress” with retirement.

As we envision a retirement that will provide us with both satisfaction and purpose in life, we also have to ensure our goals are realistic and achievable within the context of our finances.

Whatever goals you decide on, Fidelity recommends developing a written retirement income plan with the help of your financial advisor. A well-written plan should act as a bridge between your finances and your goals.

What follows are four simple steps to creating a retirement income plan. Your financial advisor can guide you through the process while discussing the types of investment strategies available to you in order to meet your goals.

Step 1: Estimate anticipated expenses in retirement.

The first step begins by dividing your anticipated living expenses into those that are deemed essential (must-haves) and discretionary (nice-to-haves). This is often easier said than done; it can take careful consideration, as what is essential to one person may not necessarily be essential to someone else.

Step 2: Determine income sources for your essential expenses.

Match guaranteed or lifetime sources of income to your essential expenses. These can be payments from the Canada Pension Plan or Quebec Pension Plan, Old Age Security or a company-sponsored defined benefit pension plan. Any gaps between your essential expenses and lifetime sources of income can then be filled by drawing down on savings. This can be done either by creating a conservative pool of income-generating assets or by purchasing an annuity.

Step 3: Determine coverage for your discretionary expenses.

Create a plan to fund discretionary expenses from your savings. A financial advisor can provide guidance on tax-efficient strategies that can help maximize the income from your savings while still generating growth in your portfolio for future years.

Step 4: Conduct an annual review with your financial advisor.

Consider how a child’s wedding, an illness in the family or market fluctuations can affect your overall finances and future. Getting in the habit of reviewing your retirement plan at least annually, or whenever there’s a change in your situation, can be the most important step to keeping you on track.

To get you started, Fidelity has created an easy-to-use investor worksheet to go through with your financial advisor. Use it as a guide when building a comprehensive retirement income plan to help ensure a satisfying and financially secure retirement.

Planning for retirement income - Investor worksheet