Six-step Retirement Planning Process

The CIFP Retirement Institute endorses a six-step retirement planning process that a Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite should employ with his or her clients.

» Step 1: Establish the Client-RRC/CR Engagement

The purpose of a client-RRC/CR engagement is to ensure both the client and the retirement professional are aware of what to expect from the other party and to make each party aware of their responsibilities to contribute to the development of the relationship.

The Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite will work with the client to define and agree on the scope of the retirement planning engagement. The details of the engagement will be documented and it is strongly recommended that a letter of engagement be used and signed by both the RRC/CR and the client.

From the perspective of the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite, he or she will spell out exactly what the retirement planning process entails and what the benefits should be to the client. The RRC/CR will also detail what services they are able and willing to provide to the client based on their qualifications and/or licensing.

The RRC/CR must disclose what their responsibilities are to the client, their qualifications, how they are to be compensated for the services they provide and any referral fees to be received. In addition, any potential conflicts of interest must also be disclosed to the client. Finally, the RRC/CR should identify their expectations of the client and provide a clear explanation as to why these expectations are important to the client-RRC/CR relationship.

It is imperative that the RRC/CR get clear written confirmation from the client that they understand the process, the respective responsibilities and that the client agrees to be a willing participant in the relationship.

Together, the client and the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite should then discuss the scope of the client-RRC/CR engagement and come to an agreement as to how decisions will be made going forward. For example, some clients prefer a hands-off approach essentially leaving it to the RRC/CR to provide them with advice and recommendations as the RRC/CR sees fit (in such cases, the RRC/CR must be mindful of the rules prohibiting discretionary trading). Other clients, to varying degrees, prefer to have some involvement in the management of their money and the decisions that are being made.

Following the establishment of the engagement, the client will be able to distinguish between what expectations concerning the engagement are realistic and what expectations are not.

» Step 2: Establish Objectives and Gather Data

Establishing objectives is a fundamental step of any planning process.

The Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite should help the client be as specific as possible in stating their retirement objectives and their desired lifestyle that they anticipate will result. These objectives must be gathered and recorded and should be both quantitative and qualitative in nature.

Retirement objectives should also be realistic and objective rather than idealistic or hypothetical. Frequently, a client will state their objectives vaguely, such as ‘I want to retire comfortably, at an age when I can still enjoy it.’ The RRC/CR should encourage and assist the client to be more specific and reflect anticipated lifestyles, as in the following examples:

  • I want to retire at age 60, with an equivalent income of $40,000 per year and travel at least once per year to Florida.
  • If possible, I would like to retire before age 65, while being able to maintain my current lifestyle and to take at least one major vacation per year.

As a Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite you are helping the client paint a picture of their future life, and you are offering solutions to make their preferred lifestyle achievable. Including a lifestyle perspective to planning will add a dimension to the client-RRC/CR relationship that enhances the RRC/CR role.

When aiding the client in setting their objectives, the RRC/CR should encourage the clients to ask themselves questions about their expected lifestyle, as in the following examples:

  • Where do I want to live when I am retired?
  • Do I want to take on a second career?
  • Will I keep busy with volunteer work?
  • Do I want to travel, engage in any hobbies or go back to school?

In addition to helping identify their objectives, these types of questions will help the client to prepare psychologically for retirement. In addition, the objectives themselves can become powerful motivators, giving the clients the resolve to make the current lifestyle changes that may be required to achieve their retirement objectives so that they can live their expected retirement lifestyle.

There is a distinct possibility that the client may not be able to achieve all of their retirement objectives, and that in fact, some of the objectives may conflict with each other. For example, many clients want both financial security and early retirement, but it may not be possible. Therefore, the RRC/CR should encourage and assist clients to assign priorities to each objective.

» Step 3: Clarify Present Status and Identify Problem Areas and Opportunities

It is important for the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite to fully understand the client’s current and future financial and lifestyle expectations. The RRC/CR should also be aware or enlist assistance of qualified individuals to determine any other obligations or objectives that might interfere or conflict with the client’s retirement objectives.

For a financial assessment, the client’s current financial net worth and income potential can be estimated by having them fill out data-gathering worksheets. The completed worksheets can help the RRC/CR determine the client’s net worth and income that are currently available to the client, how the client disposes of their current income and what resources may be available to the client to aid in funding expected retirement needs.

Depending upon the scope of the client-RRC/CR engagement, a quantitative analysis will generally include some financial projections to assess whether the client can reasonably expect to be able to fund their expected retirement lifestyle based on their current financial position. Not all retirement objectives can be resolved with quantitative analysis. Qualitative data (for example: personality style, personal values, family dynamics and so forth) should also be gathered and assessed to determine its impact on financial projections and retirement objectives and to aid the RRC/CR in providing appropriate solutions over the long-term.

For a financial assessment, a client’s need for retirement funding will be affected by the following:

  • estimated financial needs during retirement
  • anticipated income from employer-sponsored pension plans, Canada Pension Plan, Old Age Security program and part-time employment after retirement
  • current value of their retirement plan assets and other investment assets that might be used to provide retirement funds
  • remaining time until their retirement
  • amount they are currently saving towards retirement
  • life expectancy of the client and their spouse
  • anticipated inflation rate for the remainder of their life expectancy
  • anticipated rate of return on investments
  • anticipated income tax rates

While many of these factors are difficult to predict with any accuracy in the short-term (for example, interest rates and inflation), if the retirement planning horizon is sufficiently long, history may provide a basis for a reasonable approximation of the future.

Despite the best efforts of the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite to develop reasonable assumptions, it is important that the client understands that no one can precisely predict the future. The best that the RRC/CR can do is provide reasonable assumptions for the purpose(s) of providing direction to the client. The RRC/CR should discuss, review and document the applicable assumptions with the client. Some clients may prefer to use more aggressive or conservative assumptions, without regard to historical norms.

» Step 4: Identify Appropriate Strategies and Present Retirement Plan

After a thorough quantitative and qualitative analysis has been completed, the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite will need to identify strategies and solutions that are appropriate for the client to achieve their stated retirement objectives and achieve their anticipated retirement lifestyle.

Once the RRC/CR has determined the funding that will be needed at retirement (for example, the client may need to accumulate $400,000 by age 65, in addition to their employer's pension, CPP, and OAS benefits), the RRC/CR can then develop strategies for accumulating those funds. These strategies could be relatively simple, such as contributing $6,000 to their RRSP each year, or they could be tied into inflation or salary increases, such as beginning to contribute $6,000 to their RRSP this year and increasing this amount by 5% each year.

The RRC/CR may determine that the savings required for retirement are more than the amount currently available for savings. In this case, the RRC/CR should encourage and assist the client to re-examine their retirement objectives to determine if their need for retirement funds can be reduced (perhaps by postponing their retirement or downgrading their retirement lifestyle). The client may also have to re-examine their current lifestyle to determine if additional funds can be allocated to retirement savings. The client can also re-evaluate their investment choices to determine if they can increase their investment returns, without exceeding their financial and psychological tolerance for risk, with the RRC/CR’s investment advice if qualified to do so or with the advice of an investment specialist.

Recommended strategies should also consider qualitative lifestyle considerations. For example, retirees should be made aware of how changes in a person's personal situation can have an impact on their lifestyle when they stop working, such as, someone who retires from a physically active job should consider thinking of ways to remain active to avoid health issues. The RRC/CR may encourage and assist the client to prepare for the emotional transition the client may experience.

The recommendations of the RRC/CR should also include options and supporting rationale in a documented plan. The plan should be understandable to the client and allow the client to make informed long-term decisions about their retirement.

» Step 5: Implement the Retirement Plan

Once the client has agreed to the RRC/CR’s recommended strategies and solutions, time frames for implementation of the action items should be agreed to and should be documented either through notes in a client file or provided to the client in writing. It is imperative that the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite disclose any conflicts of interest that may result from the implementation of the recommended strategies and solutions.

Many people are procrastinators by nature and put off making complex decisions. The RRC/CR should encourage clients to implement strategies and solutions as soon as possible. For example, the RRC/CR can encourage their clients to make their contributions early in the taxation year to take advantage of the additional tax-deferred growth during the year.

The RRC/CR may provide the client with investment advice if they are qualified to do so or the RRC/CR may suggest that the client seek the advice of an investment specialist. However, the RRC/CR, could, if qualified still have a role to play by reviewing the client’s investment choices to ensure that they are consistent with the recommended strategies and solutions.

If the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite is not appropriately qualified or licensed to implement the action items, they should provide the clients with introductions to qualified professionals when necessary. This may include estate planning specialists for blended families, tax planning and/or succession planning specialists for business owners, lifestyle or transition coaches and so on.

If there are action items that have been assigned to the client or outside professionals (e.g. healthcare professionals etc.), the RRC/CR should help with the implementation of those items by providing the client with objective advice and guidance where he/she is appropriately qualified to do so.

» Step 6: Monitor and Update

The Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite should discuss and determine with the client the terms of the review and monitor the client’s situation accordingly.

Monitoring is an essential component of any planning process but, is particularly important in retirement planning because assumptions will not remain valid over the long planning horizon. Periodic reviews and updates are needed to evaluate progress towards the client’s retirement objectives. If the client’s personal situation changes, the investments are not performing as expected or if inflation or income levels have deviated significantly from the assumptions in the original plan, the strategies may have to be modified to ensure that the retirement objectives can still be achieved.

The frequency of monitoring depends on the client. Many are satisfied with an annual review, while those close to retirement might appreciate more frequent updates. For younger clients, updates every three-to-five years might be sufficient, unless there is a significant change in the client’s situation, such as divorce, inheritance, career change or birth of a child.

The actual implementation of a retirement plan is the first step—ongoing review is crucial to ensure the original objectives and assumptions remain valid. The retirement plan should be reviewed to identify: material changes in the life of the client (for example, change in marital status), changes in the client’s financial objectives (for example, a client wants to retire earlier than anticipated) and economic changes (for example, lower than projected rate of return on investments).

» Documentation

The Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite cannot prepare a retirement plan without a clear understanding of the client’s resources or without making assumptions (rate of inflation, income growth rates, return on investments, tax rates). Any retirement planning exercise must include full documentation of the data gathered and assumptions used to develop the retirement plan. A statement regarding the uncertainty of these assumptions should also be included.

The strategies developed in Step 3 are critical to the implementation of a successful retirement plan and should be delivered in writing by the Registered Retirement Consultant/Conseiller en Retraite and Conseillère en Retraite.