Saving and planning for retirement are difficult enough.
But figuring out how to manage retirement finances is often just as complicated, if not more so. In the accumulation years, generally all you need to manage is one to three streams of income at most to cover the monthly costs and set aside a little bit -- or a lot -- for the future.
In retirement, managing several streams of income is the norm, and figuring out how to use them efficiently is a skill set many retirees end up learning on the fly.
Retirement income planning specialist Daryl Diamond has been working with Winnipeggers for more than 15 years, specifically helping them build retirement income plans. That is, financial plans dealing only with how to manage cash flows from work pensions, RRSPs, non-registered savings and government programs -- such as OAS and CPP -- and maybe a little part-time work thrown in for good measure.
Nearly 10 years ago, Diamond authored Buying Time: Trading Your Retirement Savings for Income and Lifestyle in Your Prime Retirement Years to help near-retirees and retired folk deal with this income octopus.
The book sold about 12,000 copies over two editions, and when it came time to make revisions for a third edition, Diamond found the retirement landscape had changed dramatically in the last few years.
Baby boomers are now turning 65. The 2008/09 stock market crash shook our trust in the ability of financial markets to produce higher returns over longer periods of time. And interest rates are at historic lows, meaning fixed-income investments produce meagre returns.
In effect, the game has changed for retirees.
So Diamond decided to write a new book entitled Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement to address these shifts in the financial landscape.
"We wanted to put something out that was less formal of a read than Buying Time and more connective with the consumer," says Diamond, with Diamond Retirement Planning.
"And I like to say that this book also challenges some of the old-school thinking."
The official launch for Your Retirement Income Blueprint is this Monday at 7 p.m. at McNally Robinson at Grant Park, but here's a preview of some of the topics covered in the book -- in case you're such a personal-finance junkie you just can't wait.
So just what kind of "old-school thinking" does Diamond turn on its head?
For one, he discusses at length why it's important to be tax-efficient, but that doesn't necessarily mean paying as little tax as possible every year during retirement. The goal, he writes, is not to be paying more tax than you need to in retirement.
For instance, retirees often mistakenly want to defer taxes early on in retirement by avoiding withdrawals from RRSPs or RRIFs (registered retirement income funds).
During work years, RRSPs are an advantageous means to defer taxation because assets can grow within the account without the drag of taxes. The problem is withdrawals from these accounts are fully taxable in retirement, and many retirees believe it's better to hold off withdrawing this money until they absolutely have to at age 71, when RRSPs must be converted to RRIFs and yearly withdrawals of at least seven per cent are mandatory.
"In most cases, that's not an advantageous thing to do, because you could create a huge tax problem for yourself starting at 71," Diamond says.
Most people are better off figuring out how to draw income from RRSPs/RRIFs before that date for greater tax flexibility and efficiency.
Diamond provides an example of such a situation in the book. Bob, he writes, is 60, single and collects a work pension and CPP, earning $46,000 a year. He is in the second tax bracket and will be for the rest of his retirement. The next upper bracket starts at about $83,000. Any withdrawals now from his RRSP will be taxed, but they won't bump him up to a higher rate. If he waits until 65, however, future RRSP or RRIF withdrawals could reduce his OAS and age credit. So Bob may be better off withdrawing from his RRSPs over the next four years and reinvesting that money -- perhaps in a tax-free savings account (TFSA) -- or using it for major expenses.
Diamond also discusses how many retirees misunderstand risk.
"A lot of times, what people assume to be risk is investment risk, and there are several other ones to go with it, including longevity risk, inflation risk, taxation risk and health-cost risk, and people can't deal with those other risks at three per cent rates of return," he says.
Essentially, retirees can't rely on low-yielding GICs alone -- in most cases -- to produce returns that will preserve capital over what could be a 30-year period, especially when that money may not have to provide only for the fun stuff early on, such as travel, but also long-term costs such as assisted living or leaving behind an estate for children.
Diamond discusses alternatives to GICs in the book, including strategies involving corporate-class mutual funds, life annuities, prescribed life annuities, tax-deferred annuities and insured annuities.
He writes that none is a panacea for retirement income-planning challenges by themselves, but as part of a larger plan, they help deal with the three headwinds of retirement financial well-being: taxation, inflation and fees.
These are just a few points covered in what is a pretty comprehensive piece of work at 224 pages -- so much so, you might feel as though you're an expert on the subject after reading it.
"If people are do-it-yourselfers, they would find it an inordinately helpful book," he says.
Still, a little advice from a professional is recommended.
"We've always felt retirement planning is best done with someone who is skilled in the discipline," he says. "Just because you know the order of the hands in poker doesn't mean you're ready to go into a tournament."