When it comes to retirement income planning, a key concern is income, as the name suggests. Specifically, the concern is usually whether or not there will be enough income to last for retirement. For many people, merely meeting their day-to-day income needs is not enough; they also want to know that they will have a certain standard of living in retirement. Additionally, retirees want to know that there will be enough of a financial cushion for emergencies. Lastly, many want to leave a legacy beyond retirement; for some, that may mean leaving an inheritance to family members or leaving a donation to their favourite charity.
With retirement income planning, how much money a retiree makes before or even after retirement is important, but, the focus should be on what the retiree can keep. That is why focusing on a tax-efficient retirement income is so essential. Taxes are one of the big eroders of wealth. However, planning for tax-efficient retirement income is possible by using various strategies like income averaging, tax-efficient investing, income deferral, and tax-efficient asset transfers, with the most benefit being available the earlier the client starts.
Retirement income planning has three stages. The first stage is planning before retirement, the second stage is in retirement, and the third stage is after retirement. Let us see how taxes affect each stage.
Before Retirement
Before retirement, a critical factor in achieving tax efficiency is using tax deferral accounts because they help to expedite capital accumulation. Specifically, deferring taxes at this stage means thousands of dollars compounding over time and allowing the investments to grow in all three stages.
In Retirement
The key objective in retirement is to protect accumulated funds with the intention for them to last as long as possible. Many retirees will want to take a more conservative approach with their investments at this stage, so obtaining the rates of return they were accustomed to before retirement will be unlikely. A plan that allows the retiree to withdraw tax-efficient income will play a key role in providing enough retirement income and preserving the capital earned before retirement.
After Retirement
At this stage, there is the consideration for tax-efficient transfers during and after the retiree’s death, allowing for generational wealth-building opportunities. A proper retirement income plan will deal with legacy considerations based on accumulated capital and lead to estate-planning opportunities. The time to address estate planning needs is years before retirement or while in retirement. A will and proper powers of attorney should be in place long before retirement, but if you find yourself without one, the second-best time to set these up is now. Be careful if you equate having a will or power of attorney to having an estate; they are merely the starting point.
Approaching retirement planning as a process with these three stages is the ideal framework of retirement income planning. Additionally, retirement income planning should involve the family and start with opening the first account. The opportunity with starting young is that there is enough time to use suitable investment strategies to create wealth that will last longer.
