The Ultimate Guide to Canadian Retirement Planning

Planning for retirement in Canada is a journey that involves careful thought, consistent effort, and strategic decision-making. For most, creating a Canadian retirement plan that allows them to achieve financial independence and the option to retire early (FIRE) requires an understanding of the key factors that impact long-term wealth.

This guide serves as the ultimate resource to help you navigate your retirement planning journey. Whether your goal is traditional retirement at 65 or to pursue a Financial Independence, Retire Early (FIRE) lifestyle, we’ll break down the essential components, strategies, and considerations to set a Canadian Wealth Secret Seeker like yourself on the right path.

Why Retirement Planning Matters: The Foundation of Your Future

Retirement may seem distant, but time is one of the most critical assets when planning for your future. The earlier you begin saving and investing, the more your money will benefit from compound interest, one of the most powerful tools for building wealth.

When planning for retirement, three critical components dictate the outcomes of your investments:

1. Time: The number of years your money compounds and grows.
2. Interest Rate: The annual rate of return on your investments.
3. Contributions: How much you invest initially and on a regular basis.

By understanding how these three components interact, you can start building a Canadian retirement plan that maximizes your financial potential and secures your future.

Understanding the Power of Compound Interest

Compound interest is the cornerstone of wealth-building, particularly in Canadian retirement planning. Unlike simple interest, compound interest earns returns not only on your initial principal investment but also on the accumulated interest over time.

The Role of Time in Compound Interest

The longer your investments have to compound, the greater the growth potential.

Consider two scenarios:

• Scenario 1: You start investing at age 25, contributing $10,000 annually for 30 years with an average annual return of 10%.

• Scenario 2: You start investing at age 40, contributing the same $10,000 annually and at the same rate of interest (10%), but only for 15 years.

By the time both investors reach their target retirement age of 55, the early investor will have just over $1.8 million in their investment account while the late investor will have just under $350,000. While the early investor contributed an additional $150,000 to their retirement investment account over what the late investor contributed, the early investor ends up with just short of $1.5 million more than the late investor. The massive increase in wealth generated has much more to do with the amount of time the investment account had to grow moreso than the additional funds that were contributed. Even if the early investor stopped contributing after 15 years to keep the contribution amounts equal, but allowed the retirement account to grow for the additional 15 years they would still have more than $1.45 million in their account or about $1.1 million more than the late investor. 

The key takeaway: Start as early as possible.

Time in the market beats how much you put in the market.

Your Portfolio Asset Allocation Mix Matters

Knowing Your Growth/Equities vs. Fixed Income/Bonds Allocation

In the episode shared above, we explored the critical role of asset mix in shaping the outcomes of your Canadian retirement plan and highlighted some of the easy retirement planning “misses” that we can make along the way. A key takeaway was that relying on a consistent 10% annual compounded return—especially if your portfolio isn’t entirely invested in the S&P 500—is overly optimistic. Instead, the weighted average return of your portfolio depends heavily on your chosen mix of equities and fixed income, with each allocation offering unique trade-offs between growth potential and risk.

Understanding Asset Mix Portfolios

In the examples shared during the podcast episode, we focused on six different asset allocations to illustrate the varying returns and risks associated with each retirement portfolio composition based on an average rate of return in the S&P 500 of 10% per year and a bond/fixed income average rate of return of 3% per year:

• 100% Equities: Offers the highest growth potential with a historical average return of around 10% annually. However, it comes with significant volatility, which can create challenges, particularly during downturn years when withdrawals are needed. The weighted average annual rate of return is 10%.
• 90% Equities, 10% Fixed Income: Slightly reduces risk compared to an all-equity portfolio while maintaining a strong growth profile. The average return might decrease marginally down from 10% to 9.3%, but may provide a small cushion during market turbulence.
• 80% Equities, 20% Fixed Income: Balances growth with a more noticeable reduction in volatility. This mix is better suited for those who can tolerate some risk but also want increased stability. The weighted average rate of return for this asset allocation mix would be 8.6%.
• 70% Equities, 30% Fixed Income: Further lowers volatility and smooths out returns, making it more appropriate for investors nearing retirement or with a lower risk tolerance. Weighted avergage rate of return decreases further down 2.1% to 7.9% compounded annually.
• 60% Equities, 40% Fixed Income: The classic “balanced portfolio” first introduced by Harry Markowitz in 1952 prioritizes stability while still offering growth opportunities. The average return here begins to diverge more significantly from the 10% benchmark we started with down to a weighted average annual rate of return of 7.2%.
• 50% Equities, 50% Fixed Income: Offers what many might consider “maximum stability” at the expense of growth potential. This allocation is often chosen by retirees who prioritize predictable income over high returns bringing the weighted average annual rate of return down to 6.5%.

The Myth of a Fixed Annual Rate of Return

While the S&P 500’s historical average is around 10% for a portfolio fully invested equally across the 500 companies in the S&P 500, this figure assumes:

• Continuous compounding with no interruptions.
• No sequence-of-returns risk (i.e., never having a “down” year in the markets).
• A portfolio that is 100% invested equally across equities (in this case, the S&P 500).

While we might be able to reduce some volatility that is more likely when invested in equities over bonds and other fixed income assets, the reality is that Modern Portfolio Theory introduced by Harry Markowitz in 1952 is proving to be less helpful as the volatility in global equity markets rise in tandem with ever lowering fixed income returns. According to Morningstar’s article Time for a New Modern Portfolio Model, Belle Kaura, Chair of AIMA Canada and VP Legal and CCO at Third Eye Capital states: “Investors can no longer rely on the traditional 60/40 public markets model.

Impact on Your Canadian Retirement Plan

The episode emphasized how these realistic rates of return influence key financial decisions:

• Retirement Timing: Higher-risk portfolios may enable early retirement but require a greater tolerance for volatility.
• Withdrawal Strategies: During downturn years, portfolios with a higher fixed income allocation are less likely to experience devastating drawdowns when withdrawals are made, but traditional bonds/fixed income assets are not as helpful as they used to be in accomplishing this task.
• Risk Mitigation: Including the right fixed income assets can provide a buffer, but it also lowers the compounding power of higher risk equity assets over time.

Tailoring the Right Equity/Fixed Income Mix

Ultimately, the choice of asset mix should align with your goals, risk tolerance, and time horizon. A 100% equities portfolio is aggressive but if you have a long time horizon to retirement (i.e.: 10 or more years until you’re ready to retire), then you have an opportunity to use time as a tool for outsized returns and growth.

For those who are planning to retire in 10 years or less, shifting from an overweighted equities portfolio to include fixed income assets would likely reduce volatility and begin introducing more stability to your overall retirement portfolio.

Important to note is that as the performance of the “classic 60/40 balanced portfolio” proves to be more risky in modern day turbulant times than it was over 70 years ago when the concept was first introduced, more financial freedom, retire early (FIRE) seekers begin to replace traditional bonds in their portfolios with alternative investments such as private funds (i.e.: REITs, investment funds, or high early cash value whole life insurance).

Sequence of Returns: Why Timing Matters

While time is essential, the timing of investment returns also plays a significant role. The sequence of returns risk refers to the order in which positive and negative investment returns occur. For retirees, particularly those withdrawing income from their portfolios, this can have a major impact on what they can actually plan to withdraw each year during their Canadian retirement.

Sequence of Returns Risk

• Early Drawdowns: If negative market returns occur during the first few years of retirement when you begin retirement withdrawals, it can severely deplete your retirement portfolio.
• Early Growth: If positive returns occur early, your retirement investments have a better chance to grow and recover from any future downturns during your retirement years.

Example Scenarios

Imagine you retire with your goal amount of $1,000,000 in your retirement account and you’ve been using a conservative average rate of return of 6% or $60,000 to live on each year. 

If the first few years include market downturns of -10% in the first year, then -20% in the second year, and finally a -5%  return in the third year, the balance of your portfolio after taking your three (3) years of Canadian retirement income  of $60,000 has left your portfolio pretty beat up at $540,360.

Even if your portfolio achieves a great 20% bounce-back year during year 4, the additional $60,000 withdrawal amount leaves the account growing by only about $36,000 by the end of that year to a total of $576,432.

As you can imagine, hoping that the sequence of returns coming over the next handful of years during your retirement is more favourable than the first few is not a fun nor safe plan.

Clearly, sequence-of-returns risk introduces a large amount of risk and uncertainty when it comes for planning your Canadian retirement with a specific financial freedom number in mind. In the examples shared in the podcast episode above we see that using different seqence of returns from history can produce as little as $70,000 of income if we assume the same sequence of returns beginning from 1965 onward to a maximum annual income of $287,000 if that same investor had repeated the same contributions and timelines, but started 5 years later.

If you were planning for $70,000 of income per year in retirement, then having a sequence of returns that produces an extra 410% more per year would feel like winning the lottery.

However, if you were planning for that favourable sequence of returns, but it works against you, your annual income could be less than one quarter of what you had been investing (and praying) for.

If you aren’t yet convinced that the sequence-of-returns risk is a huge monster hiding out in your Canadian retirement closet, then you should see what Forbes has to say about sequence-of-returns risk and how you can plan ahead to combat the unpredictibly random sequence of returns your retirement investment account will be working with in the future.

Building These Retirement Planning Tips Into Your Financial Independence, Retire Early (FIRE) Strategy

The Financial Independence, Retire Early (FIRE) movement emphasizes saving aggressively, investing strategically, and reducing living expenses to achieve retirement decades earlier than traditional norms. While the appeal of FIRE is undeniable, achieving this ambitious goal requires careful planning, especially when pursuing a shorter retirement investment horizon.

The Role of Time in FIRE Success

From the first episode shared earlier in the article, we recognize that time is the most powerful factor in compound interest yet it is also something we can’t actually add or subtract more of like we might with the investment contribution amount or even the annual rate of return based on the asset we invest in. The longer your money is invested, the more compounding can magnify your returns and grow your Canadian retirement income. For example, a 30-year investment horizon allows even modest contributions to grow much more significantly than trying to compound double the amount of principal over half the amount of time. A longer time horizon allows for the investment to leverage the later and most impactful portion of the exponential growth curve, while a shorter time horizon limits the exposure of principal to the least helpful part of the compound interest curve.

Therefore, when pursuing a financial freedom, retire early (FIRE) lifestyle with a shorter timeline, such as retiring at 50, this natural advantage that compound interest provides is drastically diminished. A 15-year investment window means there’s less time for compounding to work its magic, and market fluctuations during this period have an even greater impact than we experienced over a 30 year time horizon. This dynamic was further explored in episode 3, where we analyzed the necessity of increasing contributions significantly to compensate for the lack of time.

• Example: A traditional investor might contribute $10,000 annually over 30 years to build a retirement fund. In contrast, someone pursuing FIRE with a 15-year timeline might need to contribute $30,000 to $40,000 annually to achieve a similar retirement fund size.
• Starting with a Lump Sum: If you have access to an initial lump sum of $200,000 or more, this can provide a significant boost and offset the shorter time frame, allowing compounding to begin at a higher base.

This approach recognizes the need to “front-load” investments to make up for the loss of compounding power over a longer horizon. By aggressively increasing savings and contributions, you reduce your dependence on time and rely more on your investment strategy and risk management.

Sequence of Returns Risk: Happy Retirement Surprises or Massive Retirement Disasters

The sequence of returns risk that your Canadian retirement investments take on may be one of the most impactful variables on how much money you will have to retire on for the remainder of your life. As we explored earlier in this guide, the longer your retirement investment time horizon of contributions before your first withdrawal, the more helpful the random sequence of returns will be for your growing investment accounts. However, the shorter the time horizon during the accumulation phase of your retirement investments, the greater the impact will be on your safe retirement withdrawal amounts for the remainder of your life.

During the second episode of our Math Behind Canadian Retirement Planning podcast series, we explored various retirement contribution amounts, time horizons and safe withdrawal amounts based on different historical sequences of returns based on the S&P 500. While it is almost impossible for us to expect the same exact sequence of returns for any significant amount of time moving forward, the exercise was to highlight how dramatic different historical sequences of returns would have impacted safe retirement withdrawal rates for a specific individual.

Sequence of Returns Risk Scenario #1: 24-Year Time Horizon

When exploring the sequnce of returns from various historical time periods for the S&P 500, the safe retirement withdrawal rates swing dramatically depending on where strong return years land and where negative return years land. Let’s explore a scenario shared in the episode with various starting points along the history of the S&P 500:

Initial Principal Amount: $100,000

Annual Retirement Contribution Amount: $10,000

Contribution Timeline / Time Before First Withdrawal: 24 years

When using a standard 10% average rate of return for the S&P 500 would provide this 40 year old individual with the opportunity to safely begin withdrawing $183,000 per year starting at age 65 for 35 years until the age of 100 without running out of money, our sequence of returns experiment suggests that your safe retirement withdrawal amount would be drastically different depending on how the next 24 years of returns play out.

Here are the safe Canadian retirement withdrawal amounts you would have after 24 years if your sequence of returns played out the same as starting investing in the S&P 500 in year:

• 1926: $173,000
• 1929: $182,000
• 1937: $262,000
• 1964: $230,000
• 1965: $69,500*
• 1970: $287,000*

*Once the historical sequence of returns reached the end of 2023, we restarted the sequence from 1926.

In our experiment, we leveraged only six (6) different historical sequences of returns from the S&P 500 from almost 100 different historical sequence of returns possibilities and found that your “safe” retirement withdrawal amount would vary by over $217,000 per year!

The difference between the highest safe retirement withdrawal amount and the lowest safe retirement withdrawal amount is more than 3 times the lowest safe retirement withdrawal amount.

Said another way:

If you’re going to plan your safe retirement withdrawal rate on an average annual rate of return, then you must also be ready to plan for the resulting safe retirement withdrawal rate to be an average expected withdrawal rate – meaning your real safe withdrawal rate may be significantly lower or significantly higher, depending on how lucky (or unlucky) the real sequence of returns play out.

While many would be willing to take the lower average rate of return as a trade-off for a guaranteed pension payment amount each month, less and less employers are willing to take on the massive amount of risk posed by the random sequence of returns that they might experience when funding a defined benefit pension plan (DBPP) like the Ontario Teachers’ Pension Plan (OTPP). 

Sequence of Returns Risk Scenario #2: 14-Year Time Horizon

By this point in the Canadian Retirement Planning Guide you already understand that time horizon has a significant impact on compound interest. By increasing the number of compounding periods – in this case, each year – we can dramatically impact the growth of our retirement savings. While our last scenario had 24 compounding periods for the investments to grow, the infinitely many various rates of return for each of those years created a very wide range of safe retirement withdrawal amounts.

Let’s explore the scenario shared in part 3 of this podcast series where we shortened the number of compounding periods down from 24 years to 14 years so this individual could start pulling retirement income at age 55:

Initial Principal Amount: $100,000

Annual Retirement Contribution Amount: $10,000

Contribution Timeline / Time Before First Withdrawal: 14 years

What you’ll immediately notice is that even when we use an average rate of return like most investors do when planning what their future nest egg may grow into, you’ll quickly see that cutting off 10 years of compounding and contributing drops the $183,000 per year withdrawal amount down to $63,000 if we use a 10% average annual rate of return.

However, things get scarier when we start applying the same six (6) historical sequence of returns from the S&P 500 as we did in the previous example. Here are the various “safe” retirement withdrawal amounts you would have after 14 years if your sequence of returns played out the same as starting investing in the S&P 500 beginning in year:

• 1926: $37,500
• 1929: $37,500
• 1937: $81,750
• 1964: $51,000
• 1965: $81,000*
• 1970: $42,000*

*Once the historical sequence of returns reached the end of 2023, we restarted the sequence from 1926.

Again, these are only six (6) different historical sequences of returns from the S&P 500 from almost 100 different historical sequence of returns possibilities giving you a safe retirement withdrawal amount between $37,500 and $81,750 which stretches what was predicted using an average rate of return down by about 60% or up by amost 30%.

That amount of uncertainty is exactly what most planning for their Canadian retirement are trying to avoid.

Sequence of Returns Risk Scenario #3: 9-Year Time Horizon

I know we wouldn’t be let off the hook without taking care of our Canadian Financial Freedom, Retire Early (FIRE) seekers and given that there are many individuals who seem to have some traction, but then wonder what it will really take to get themselves ready for FIRE in a shorter timespan, I’ve run some scenarios based on a 9-year time horizon utilizing the same starting principal of $100,000 and contributing only $10,000 per year. 

As you might expect, the various “safe” retirement withdrawal amounts you would have after only 9 years of contributing and compounding will be dramatically lower when we start the investment return sequences based on the historical S&P 500 rates of return. Here they are if we began in each of the following years:

• Average Rate of Return at 10%: $35,000
• 1926: $20,750
• 1929: $17,000
• 1937: $35,500
• 1964: $25,000
• 1965: $35,000*
• 1970: $20,000*

*Once the historical sequence of returns reached the end of 2023, we restarted the sequence from 1926.

Of course, we have two (2) variables hindering this retirement plan including a really short time horizon and much less being funded into this plan. As you decrease your time horizon, you should consider that you will need to increase your initial principal amount and annual contribution amount by a much larger multiple than what was applied to the time horizon decrease.

For example, if you cut your time horizon in half, you will need to expect to increase your principal and annual contribution amount by significantly more than a factor of 2.

When comparing a 14-year time horizon to the 24-year time horizon, we are decreasing the time horizon by about 42%, but the initial principal amount and annual contributions would need to be increased by about 482% in order to achieve similar results in terms of safe annual retirement withdrawal amounts.

When comparing a 9-year time horizon to the 24-year time horizon, we are decreasing the length of time we will contribute before withdrawal by about 63% and therefore, would require over 10 times as much initial retirement investment principal and annual contributions to achieve similar results to the 24-year time horizon.

Managing Sequence of Returns Risk and Market Volatility

As we’ve demonstrated in the scenarios above, shorter timelines mean that the sequence of returns risk plays a more critical role. A few bad years early or really, at any point in your investment period could drastically affect your retirement plans. To address this, FIRE enthusiasts whose timelines are shorter than a typical 30-year or longer Canadian retirement investment contribution schedule should:

• Diversify their portfolios to include growth-oriented assets while maintaining some stability.
• Consider planning and funding a cash wedge or alternative income sources that can be implemented during market downturns both during the contribution or asset accumulation stage and, more importantly during the decumulation or meavoid liquidating investments at a loss.
• Utilize tax-efficient accounts like TFSAs and RRSPs to maximize tax-free growth potential and potentially minimizing taxes during the decumulation phase of retirement in many cases.

Leveraging the 4% Rule to Find Your Retirement Financial Freedom Number

The 4% Rule is a widely recognized retirement strategy designed to help individuals determine a sustainable withdrawal rate from their retirement savings. Created by financial advisor William Bengen in 1994, the rule was based on historical market data from 1926 to 1976 and has become a cornerstone in retirement planning.

The rule suggests that retirees can withdraw 4% of their portfolio’s value in the first year of retirement, then adjust that amount annually for inflation. For example, with a $1,000,000 portfolio, the retiree would withdraw $40,000 in the first year. The goal is to maintain purchasing power over a 30-year retirement period without depleting savings.

Bengen’s research showed that withdrawing 4% annually from a portfolio composed of 50-75% equities and the rest in bonds/fixed income provided a high likelihood of success. Specifically, the rule gives retirees about a 95% chance of not running out of money over a 30-year horizon, even during the worst market conditions.

While the 4% Rule for retirement planning is a solid starting point, it isn’t foolproof. Factors like longer life expectancies, rising healthcare costs, and varying market conditions can impact its reliability. Additionally, the rule assumes a consistent asset allocation and doesn’t account for significant lifestyle changes or unexpected expenses as this article from RBC Wealth Management highlights.

Can Financial Independence, Retire Early (FIRE) Seekers Benefit from the 4% Rule?

The 4% Rule is best suited for traditional retirees planning to stop working around age 65 and aiming for a 30-year retirement. Those pursuing early retirement through the Financial Independence, Retire Early (FIRE) movement may need to adjust the withdrawal rate to account for longer retirement periods and increased sequence of returns risk.

Funding a Cash Wedge to Minimize Sequence of Returns Risk

A cash wedge is a strategic financial buffer designed to reduce the risk of depleting retirement savings during market downturns, particularly in early retirement. By relying on alternative funds during negative market years, retirees can avoid selling equities at a loss, preserving the long-term growth potential of their investment portfolios. For Canadians planning their retirement, this approach is especially valuable in mitigating sequence of returns risk, which can significantly impact financial independence goals.

How a Cash Wedge Works

A cash wedge is essentially a reserve of funds set aside for use during market downturns. Instead of withdrawing from investments that may have declined in value, retirees draw from the cash wedge, allowing their portfolio to recover. This strategy is especially critical for those pursuing early retirement under the FIRE (Financial Independence, Retire Early) framework, as shorter time horizons increase exposure to market volatility.

Three Types of Cash Wedges

1. Cash Savings, Guaranteed Investment Certificates (GICs), Money Market Funds and Cash Equivalents:
   • Description: Cash savings accounts or short-term GICs provide a highly liquid, low-risk option for a cash wedge.
   • Advantages: Easy access to funds and protection from market fluctuations. GICs offer slightly better returns than regular savings accounts.
   • Drawbacks: Limited growth potential due to low interest rates. Over time, inflation may erode purchasing power.
   • Best Use Case: Suitable for retirees prioritizing safety and simplicity in managing their cash wedge.
2. Home Equity Line of Credit (HELOC):
   • Description: A HELOC allows retirees to borrow against their home’s equity as a temporary funding source during market downturns.
   • Advantages: Provides a flexible line of credit with relatively low interest rates (if secured). No upfront cash reserve is required.
   • Drawbacks: Using a HELOC may create emotional discomfort for retirees as it involves leveraging the family home. If the real estate market declines alongside equity markets, the perceived security of home equity may also be affected.
   • Best Use Case: Ideal for those with significant home equity and a willingness to manage debt strategically.
3. Permanent Life Insurance Policies:
   • Description: High cash-value life insurance policies offer the ability to borrow against their cash value, creating a dual-purpose cash wedge.
   • Advantages: The policy’s cash value continues to grow, unaffected by market volatility, while the loan is secured against the policy. Additionally, the death benefit will always exceed the loan amount up until age 100, allowing for a net-positive legacy even if you never choose to repay the loan that you’ve used as a cash wedge for any given number of “down” years.
   • Drawbacks: Policies must be properly structured to produce high early cash value and funded over at least a 5 to 10 year timeframe to adequately act as your cash wedge tool.
   • Best Use Case: Suitable for those seeking a non-market-correlated asset to enhance their overall financial plan while building a cash wedge to mitigate sequence of return risk.

If you are considering the use of a high early cash value participating whole life insurance policy for a cash wedge or to add as a fixed income portion of your retirement portfolio, be sure to book a discovery call with us here.

Choosing the Right Cash Wedge

The choice of cash wedge depends on individual risk tolerance, financial resources, and goals. Cash savings are straightforward but lack growth. HELOCs provide flexibility but may introduce emotional stress. Permanent life insurance offers stability, long-term growth and massive legacy benefits, but does require proactive planning.

By incorporating a cash wedge into a Canadian retirement plan, retirees can safeguard their financial independence, ensuring resilience against market volatility while preserving their portfolio’s long-term potential.

How Do Our Scenarios Improve With a Cash Wedge?

Earlier in our Canadian Retirement Guide we shared and compared retirement plans over 9-, 14- and 24-year contribution periods and shared the massive impact sequence of returns risk can have on the safe retirement withdrawal amount for each of those plans. 

When we implement the use of a cash wedge during any negative return year in the S&P 500, the downside risk is decreased greatly. 

Comparing the 14-year retirement plan beginning with $100,000 and contributing $10,000 each year, you can see the impact of a cash wedge on the same six (6) historical sequence of returns from the S&P 500 as we did previously:

• 1926: $37,500 without cash wedge vs. $53,000 with cash wedge
• 1929: $37,500 without cash wedge vs. $43,500 with cash wedge
• 1937: $81,750 without cash wedge vs. $100,000 with cash wedge
• 1964: $51,000 without cash wedge vs. $57,500 with cash wedge
• 1965*: $81,000 without cash wedge vs. $90,000 with cash wedge
• 1970*: $42,000 without cash wedge vs. $78,000 with cash wedge

*Once the historical sequence of returns reached the end of 2023, we restarted the sequence from 1926.

Worth noting here is that the safe annual retirement income withdrawal amounts shared above were based on retiring at age 55 and living for 45 years until age 100. So while using a cash wedge during negative return years for the S&P 500 can yield you an additional $6,000 to $46,000 of annual income, let us not forget that this means you could spend an additional $270,000 to $2 million over this 45 year retirement timespan. 

Needless to say, incorporating a cash wedge into a Canadian retirement plan allows retirees to safeguard their financial independence, ensuring resilience against market volatility while preserving their portfolio’s long-term potential.

Putting It All Together:

Creating Your Canadian Retirement Plan

While there is no single “right way” to start crafting your Canadian retirement plan, ensuring that you spend enough time on the following steps will ensure that you aren’t forgetting anything and that the most important step is taken care of: getting started!

Step 1: Define Your Retirement Goals

What does Financial Freedom or Financial Independence or “FIRE” look like and sound like to you?

Which of the following might you be more inclined to be planning to achieve:

1. Traditional Retirement: Planning to retire at 65 with a steady income to sustain your lifestyle.
2. Early Retirement: Achieving financial independence and retiring as early as 50, 45, or even earlier.
3. Financial Independence, Retire Early (FIRE): Building enough wealth that your investments generate sufficient passive income to cover your expenses, freeing you from the need to work as soon as possible.

Ask yourself:

• At what age do I want to retire?
• How much annual income will I need in retirement?
• What kind of lifestyle do I envision?

Of course, knowing what you typically spend now and what you anticipate to continue having to spend in reitrement is a critical part in this step of the planning process. 

For some, they are happy to strip down many of the typical lifestyle expenses that most seem to hold on to as “necessities,” while others are actually seeking to live a better lifestyle in retirement than they do now. 

Deciding what your retirement looks like and sounds like is crucial in order to start constructing a realistic plan.

Step 2: Calculate Your Financial Freedom Number

Knowing the amount of income you will need to cover your basic expenses along with the amount you’ll require for your anticipated lifestyle needs will be important and then working backwards to determine the best way to build that Canadian retirement portfolio to support that lifestyle for the entirety of your retirement years is crucial for a stress free retirement.

Once you know your Canadian Financial Freedom Number or your retirement number, you’ll need to decide how you plan to approximate the retirement portfolio size required to help you achieve that annual number for the rest of your retired life. 

Will you utilize the 4% rule, run Monte Carlo simulations using handy retirement calculators like this one, or will you reach out to a Financial Planner or Wealth Advisor like we offer here?

However you decide to land on that number is fine as long as you understand the benefits and risks that are associated with it.

Step 3: Optimize Your Retirement Contributions

Throughout this Ultimate Canadian Retirement Planning Guide we have highlighted that some of the biggest factors for a successful financial freedom plan depends on your time horizon and contributions to your plan. The longer the time horizon, the less contributions are necessary however, consistency is key to maximize the impact of compound interest on the growth of your portfolio.

Some considerations worth exploring include:

• Maximize RRSPs: Registered Retirement Savings Plans (RRSPs) allow you to contribute pre-tax income, reducing your taxable income today and allowing investments to grow tax-deferred especially if you earn a significant T4 income. For those with Canadian incorporated businesses, RRSPs may be less desireable and other strategies for growing your retained earnings tax efficiently may be best.
• Leverage TFSAs: Tax-Free Savings Accounts (TFSAs) let your investments grow tax-free, and withdrawals are also tax-free. These accounts are certainly worth considering if you are a T4 earner or an incorporated business owner with a significant amount of personal cash available outside of your corporate structure.
• Employer Pensions: If you have a Defined Benefit pension plan (DBPP) or Defined Contribution pension plan (DCPP), maximize what you can contribute to take advantage of any company match program and of course, factor your pension into your overall strategy.

For those interested in growing assets in real estate, private lending or alternative asset classes, we encourage you to get your money working in two places at once by incorporating a high early cash value participating whole life insurance policy into the mix for leveraging against. Reach out for a discovery call with us if this sounds like you. 

Step 4: Choose Your Investment Strategy

Your portfolio allocation depends on your risk tolerance and time horizon. For most Canadians pursuing financial independence and an early retirement (FIRE), equities tend to offer the best long-term growth potential. 

If you plan to stick to a traditional stock market allocation for your Canadian retirement plan, then keep these ideas in mind:

• Equities for Growth: Stocks and index funds like the S&P 500 offer higher returns (~10% average per year) but come with volatility.
• Diversified Approach: Balance equities with fixed-income assets (bonds, GICs) assist with managing some risk and with that comes some reduced returns (~5% to 8% average per year).
• Cash Wedges for Stability: Set aside cash or stable assets uncorrelated to the market to cover 1-3 years of expenses during market downturns. Our favourite cash wedge is a high early cash value participating whole life insurance policy. 

Note that if you are or plan to invest in real estate, private lending, or other alternative asset classes, these would also be considered to have a higher risk associated with them and therefore, incorporating the funding of a cash wedge into your plan can be helpful.

Step 5: Account for Risk and Volatility

Market downturns are inevitable, so preparing for them is essential.

Strategies to Manage Risk

1. Cash Wedges: Maintain a reserve of liquid funds or short-term investments to cover expenses during down years. This prevents the need to sell equities at a loss. Options include:
   
   
   • Cash savings – easy to use because it is ready and available, but cash does lose purchasing power to inflation over time and once the cash is gone, the fund must be rebuilt over time. 
   • Home equity lines of credit (HELOCs) – easy to use, but does create a debt against your primary home (or a rental property) which will accrue interest that must be paid monthly to maintain over time. Having a debt against a primary residence can be stressful for some – specifically in retirement and during turbulent times in the market. 
   • High cash-value whole life insurance policies – easy to use and can act as a fixed income asset in your retirement portfolio with the intent to leverage against via a policy loan (or bank loan) specifically to mitigate against down years in the markets. While you are borrowing against the cash value of the policy, there are no loan repayment terms meaning you could choose never to pay the loan or interest back until the death benefit pays out to repay the loan and pay the net death benefit to the estate.
2. Risk Management Rules: Monitor market trends using indicators like moving averages and macro-economic data such as accelerating or decelerating GDP and inflation numbers to make informed decisions about your portfolio.

Canadian Retirement Planning Key Take-Aways:

Creating a Canadian retirement plan that allows you to retire early and achieve financial independence requires discipline, strategic planning, and an understanding of the risks involved. Whether you’re pursuing a traditional retirement or the FIRE lifestyle, the principles remain the same:

1. Start Early: Time is your greatest asset for compounding returns.
2. Understand Risk: Sequence of returns can make or break your portfolio. Prepare for market volatility.
3. Build a Cash Wedge: Create a buffer to weather downturns and protect your retirement income.
4. Diversify Your Strategy: Combine equities, cash reserves, and alternative assets like real estate, private equities and permanent insurance.
5. Have a Plan: Map out your goals, contributions, and risk management strategies.

Retirement planning is not a one-size-fits-all approach. By understanding the math, leveraging tax-advantaged accounts, and preparing for volatility, you can secure a retirement that meets your needs and dreams.

Start today, and take control of your financial future!

Design Your Wealth Management Plan

Crafting a robust corporate wealth management plan for your Canadian incorporated business is not just about today—it's about securing your financial future during the years that you are still excited to be working in the business as well as after you are ready to step away. The earlier you invest the time and energy into designing a corporate wealth management plan that begins by focusing on income tax planning to minimize income taxes and maximize the capital available for investment, the more time you have for your net worth to grow and compound over the years to create generational wealth and a legacy that lasts.

Don't wait until tomorrow—lay the foundation for a successful corporate wealth management plan with a focus on tax planning and including a robust estate plan today.