So You Want to Retire, eh?

by Jeffery A. Keill, CFP, CIM, FMA, FCSI, Portfolio Manager and Wealth Advisor Keill & Associates- Advisory Team

A lot of things have changed over the years, but some things remain the same. Most Canadians want to buy a home, educate their children, pay off debt, and retire comfortably. Retirement is one of the most significant financial and lifestyle traditions for Canadians. The concept of changing not only your income from ‘man at work’ to ‘money at work’, but also changing their identity from a member of the workforce to a retiree can be unsettling. For 30 years one would go to work and be familiar at a substantial degree by their profession. Now, at some date either by their own decision or by a magical factor number, they will change forever. This can be very daunting and scary, but there are resources available to make the transition less intimidating. Let’s explore the financial aspects of retirement using our Keill & Associates ELE Retirement process.

What is the ELE process of Retirement Planning?

The ability to retire is simply finding the equation where your expenses must be equalized to at least the level of your available income. In other words, what is going out must be paid for by what is coming in, and must be able to provide this for your lifetime. The ELE process is simply a way to think of retirement cash flow planning from a simplistic perspective as well as a very descriptive method. The acronym ELE stands for Essentials, Lifestyle, and Estate. These three items are the expense side of financial retirement. What you need to survive, what you need to thrive, and what you will pass along to the next generation. On the income side of the equation, - what you will have coming in- we have the pensions: Government Pensions, Private Pensions, and Personal Pensions.

Here is a simple list:

• Personal Savings

• Private Pensions Government Pensions

• Estate

• Lifestyle Costs

• Essential Costs

The Expensive Side:

The Essential Costs

Starting from the bottom, or the “base”, we have the basic ‘essential costs’ of survival through retirement. These include the basic hierarchy of financial needs: food, clothing, shelter, transportation, and communication. As an example, we like to think of the experience we went through during the global pandemic shutdown period. This period was marked by getting the essentials we needed and removed most of the lifestyle expenses. Think in terms of what your monthly costs are to run the house, provide food, monthly car payments, cell phone, internet, and so on. The list is not completely defined as you can determine what you believe to be absolute essential to your survival. Most people can simply do the math from their current spending pattern for this. Let’s say for the purpose of this discussion, we’ve determined the cost of essentials per year to be $35,000 after tax.

Lifestyle Costs

This second step on the Expense Side of the financial retirement equation is where people tend to start getting into the weeds.

Lifestyle costs are those costs that will not allow you to survive in retirement, but to also thrive. These are the things that provide what you feel are your personal enjoyments and pastimes. What will you do with your time? What passions, hobbies, or ventures will you engage in? We need to determine and monetize the cost of these activities. Perhaps you will travel a few times a year. Maybe you will take up golf, pickleball, or fishing. Maybe you will take part in charity. Whatever your personal passion or desire is, it will need to be accounted for in the financial equation of retirement. Let’s say we determine the cost for this is $15,000 per year.

Estate Planning Costs

This last Expense Side item is very subjective and dynamic, as it looks at what the desired amount is to be passed on to the next generation or charity. Very few people we have met have determined a fixed amount they would like to leave their family or charity. Generally, the concept of passing on a legacy is based upon passing on what has not been used during retirement. Fore the sake of this discussion, we will maintain the general view that the cost per year is $0.

The total Expense Side of the equation is $50,000 after-tax when we add the annual Essentials expenses and Lifestyle expenses. This after- tax amount is what we have determined to be the amount that must be met with an appropriate level of income.

Considerations of Expense Side

There are some simple realities every one should also consider with regards to planning retirement income: Lifestyle Phases and Tax- Flation. Although both of these are discussed at length in other Brief Discussion Papers, we feel it is extremely important to a least mention them.

The Three Phases of Retirement

This is not a hard and a fast rule, nor do actual ages determine when one phase starts and the next phase begins, as it is specific to each individual or couple. The phases I am talking about deal with levels of activity and abilities over time. We feel there are three basic phases every retiree will go through: Go-Go Phase, Slo-Go Phase, and the No-Go Phase. In the early years of retirement, most people find energy and stamina for travel, sports, and other more rigorous activities. This typically increases a persons Lifestyle expenses in the early part of retirement as they spend more on various activities. A retirees head into Slo-Go years, things become harder and the desire and energy to participate Begins to decline. During this period spending slows on lifestyle as people begin to moderate their activities. Lastly, in the final years of retirement we have our No- Go years. These are the years when we are no longer active in physical activities like we once were. Retirees in this age group can experience physical limitation or mental impairments that limit their active lifestyle dramatically. Unfortunately, even though the Lifestyle Expenses have reduced from the Go- Go Phase, newer unexpected costs can come up with regards to health and personal care. When planning retirement income, it is important to think of your phases and the best use of your capital and income at your discretion.

Tax- Faltion

Yes, we know this is not a word (yet). The truth of long-term income planning is to take into account the effects of things that can erode your spending power.

Not every dollar of income is created equal, and over time that same dollar will fluctuate in its value. It is important to keep in mind the effects of income tax on your retirement income. Taking advantage of opportunities to limit the amount of tax will help provide a robust retirement cash flow with longevity. Taking advantage of deductions and credits available are simply ways to defer taxes that can be very impactful. We highly recommend you read our Brief Discussion Paper on the ‘4 D’s of Tax Planning’ to learn more.

In the past two decades, inflation has not been the hot topic that is has been in the last two or three years. Over a retiree’s lifetime it is expected the cost of any particular item, be it food, clothing, shelter, or travel, will double in price. The value of the experience will not go up, but the price of it will double. Making sure cash-flow can rise at the same level as the cost of living increases is very important. We highly recommend you read our Brief Discussion paper on ‘ Going Broke Safely” to learn more about retaining purchasing power.

Summary

The Expensive Side of ELE planning process is only the first step in preparing for retirement. We must now look at the second Step: the Income Side. This paper talked about where the money will go during retirement, now we will discuss where the money is going to come from. Please take a few minutes to read Part 2 of this Brief Discussion Paper series called “ So You Want to Retire Part 2”

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Feb 5, 2025