Introduction to Retirement Planning

• The fundamentals of retirement planning:

• Describe history of Retirement Planning
• Explain social and financial implications of demographics as they relate to retirement
planning
• Describe the different expectations of individuals approaching retirement
• Retirement Planning
• Describe the role of the financial planner in retirement planning
• Describe the financial planning process as it pertains to the retirement planning
process
• Identify types of retirement decisions tat might be faced by an individual seeking
advice from a retirement planner
• For each of these decisions, describe the advantages and the disadvantages for each
possible choice
 History of Retirement Planning
• Concept was first introduced in Germany in 1880
• Introduced Government Social Benefits commencing at age of 70.

• In Canada first social program for the urban elderly introduced in

1920.
• In 1926 Mackenzie king promised to introduce an Old age pension Act
and the Act was passed in 1927.
• Canadians 70 years of and older began to receive $20 per month and it was
subjected to means test.
 History of Retirement Planning
• In 1951 Prime Minister Laurent introduced Old Age Security.
• This program provided universal pension of $40 per month to all
Canadians aged 70 or more and smaller amount to individuals 65 to
70 who passed a mean test.
• In 1966, Prime Minister Lester Pearson lower the basic eligibility age
to 65 and added guaranteed income supplement for low income
individuals.
• He also introduced Canada pension plan and Quebec pension plan.
 Demographics and Retirement
• Government social programs and number of people choosing retirement:
• Before the programs introduced in 1921, 60% of the population aged 65 and older
were still working.
• By the Mid 1990s, this was down to 30%
• Between Mid 1970s and Mid 1990s declined from 24.5% to 16.4%.
• Since Mid 1990 labour participation rate started to increase
• Between 1996 and 2004 men aged 65 and over still working increased to over 21%.
• Reasons for the increased labour participation rate:
• Aging Canadian population
• The Baby Bloomers' strong attachment to work
• Attaining higher level of education
 Demographics and Retirement
• Older women labour participation rates increased steadily since
1970s.
• Government social benefit programs are expensive.
• In 1921 life expectancy was age 61 and pensions did not start until
age 70.
• Today life expectancy of male is about 78 years and female is almost
83 years.
• More seniors particularly women are elected to collect CPP benefits
at the age of 60
 The Baby Boom and Baby Bust
• The period of time from 1947 to 1964 is often refereed to as the baby
boom.
• After World War II the number of babies born increased.
• In 1959 the number of births was peaked.
• 10-year period following 1964 is referred to as the baby bust.
• The baby boom and baby bust in combination are referred to as baby
boom tidal wave.
• Only four countries experienced baby boom tidal wave of severity.
• They include Canada, United States, Australia, and New Zealand
• As a result this countries are experiencing aging of their population
 The Age Pyramid or Population pyramid
• An age pyramid is two conventional bar graphs
• One showing the percentage of the population that I comprised of males for
various age groups
• The other showing the percentage of the population comprised of females for
various age groups.
• Its shows the distribution of the Canadian population as of a
particular point.
 Increased Life Expectancies
• Life expectancy: is the average number of years of life remaining for a
person at a specific age, assuming the current mortality rates prevail
for the remainder of that person’s life
• The life expectancies has been increasing.
• Reasons for the increase:
• Advances in medicine, hygiene and living standards
• The increase in life expectancy is more for female than male.
 Changes in the population’s Age structure
• Median Age: is the point where exactly one-half of the population is
older and the other half is younger.
• The median age in Canada has been rising.
• It is projected that Canada’s population will age rapidly until 2031.
• By 2031 the entire baby boom generation would have attained age
65.
Implications for Government Retirement Programs
• OAS is funded out of general tax revenues and CPP benefits are funded by
the contributions of labour force.
• Programs worked reasonably when about 10% of population was aged 65
or over and life expectancies were about five to seven years less than
today.
• At that time 6 to 7 workers were making CPP contributions for every CPP
recipient.
• By 2031, about 24% of the population will be aged 65 or over
• And there will be only 2.6 workers to make contributions for CPP recipient.
• It will place enormous strain on government social programs.
 Implications for Society
• The baby boom tidal wave has been, and will continue to be a
important factor in the shaping of our society, our culture and our
economy.
• Education
• Housing market
• Investments
• Retirement houses, golfing, vacation packages
• Medical system
 Lifecycles and Retirement Expectations
• Different people have different expectations of retirement.
• Objectives, lifestyle expectations, and risk tolerance will all play a part
in developing an individual’s retirement plan.
The Role of the Financial Planner in Retirement Planning

• Services include:
• early working years: the benefits of identifying retirement objectives and starting to
save and invest early.
• Peak earning years: importance of accumulating sufficient retirement resources and
investing
• Review existing resources and pension plan memberships and projecting savings
required to reach retirement objectives
• Counselling clients approaching retirement about the financial and other
adjustments that they will face at retirement.
• Counselling clients regarding their distribution options of pension benefits
• Evaluating advices given to client by other advisors to ensure that they are consistent
with his or her overall retirement plan.
• Counselling clients who have retired about liquidating assets to meet living expenses.
 The Six-Step Planning Process
• Step 1: Establish the Client-Planner Engagement
• Step 2: Establish Objectives and Gather Data
• Step 3: Clarify Present Status and Identify Problem Areas and
Opportunities.
• Step 4: Identify Appropriate Strategies and Present Plan
• Step 5: Implement the Plan
• Monitor and Update
 Phases of Retirement
• Beginning the Planning process
• Implementing the plan and building the retirement fund
• Monitoring progress
• Approaching retirement
• Retirement and distribution of assets
 Step 1: Establish the Client-Planner Engagement
• Purpose:
• Ensure both client and planner what to expect from each other.
• Make each party aware of his or her responsibilities
• The planner should detail what services he or she is able and willing
to provide
• The planner must disclose how he or she is to be compensated for
the services
• Conflicts of interest, meeting schedules
• How decisions are made going forward
 Step 2: Establish Objectives and Gather Data
• Clients should be specific in stating their objectives
• Where do I want to live when I retire?
• Do I want to take on second career?
• Will I keep busy with volunteer work?
• Do I want to travel or go back to school?
• Clients may not be able to achieve all of his or her objectives. You
should encourage them to prioritize their objectives.
 Step 3: Clarify Present Status and Identify
Problem Areas and Opportunities
• Gaining understanding of:
• Current financial position as well as future income potential.
• Be aware of other financial obligations or objectives (Ex: children education)
• Current financial position can be estimated using worksheets
• Income and expenses and resources available to investment
 Step 4: Identify Appropriate Strategies and
Present Plan
• Having good understanding of your clients current financial position
and his or her retirement objectives, you will be in position to project
the income needed at retirement.
• Once you determined the funding that will be needed at retirement ,
you can develop strategies for accumulating those funds.
 Step 4: Identify Appropriate Strategies and
Present Plan
• Factors affect clients need for retirement funding:
• Estimated financial need during retirement
• Anticipated income from retirement pension plans
• Current value of retirement plan assets that might be used to provide
retirement funds
• Time remaining until retirement
• Current savings towards retirement
• Life expectancy of the clients spouse
• Expected inflation rate
• Expected return on investments
• Anticipated income tax rates
 Implement the Plan
• Once the strategy for accumulating retirement funds is developed,
client must implement that strategy.
• You should encourage client to make their RRSP contributions early in
the taxation year.
• Also encourage to establish regular and automated system of
contributions.
• At this point, client may seek the advice of investment specialist.
However, you still have to review client investment choices to ensure
that they are consistent with the retirement plan.
 Step 6: Monitor and Update
• Monitoring is an essential component of the process because
assumptions will not remain valid over the long planning horizon.
• Perioding reviews and updates are needed to evaluate progress
towards your client’s retirement objectives.
• The frequency of monitoring depends on the client.
• For younger clients, updates every three to five years might be
sufficient unless there is a significant change in the client situation,
such as inheritance, divorce, career change, or birth of a child.
 Documentation
• The plan must include full documentation of the data gathered and
the assumption used to develop the plan.
• A statement regarding the uncertainty of these assumption should
also be included.
 Assessing in Specific Retirement Decisions
• Advice in dealing with specific retirement decisions:
• Early retirement offers
• Retiring prior to normal retirement age
• Life annuity vs. registered retirement income fund
• Pension benefits upon termination of employment
• Life annuity vs. guaranteed investment certificates