Are there any drawbacks in investing in those funds that change based on your retirement age?

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Tags: Benefits Budgets Debt Financial Planning Investing Life Events Retirement Saving Taxes

Are there any drawbacks in investing in those funds that change based on your retirement age?

Tagged: Investing Retirement

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These funds, called target-based or target-date funds, are designed as a simple investment strategy where the asset mix becomes more conservative as the fund approaches the maturity or end date.  The focus of target-based portfolios is usually the preservation of capital. Often these types of funds are used by investors who feel overwhelmed by the vast choices of mutual funds in the market today. Target-based funds rebalance the portfolio on a regular basis.

These types of funds have been popular in the Unites States since the mid-1990s and are now more readily available in Canada.

As with any type of investing, you need to ensure that your selections meet your needs by evaluating your personal risk tolerance and the need for growth or income in your portfolio. Drawbacks of these types of investments are outlined below.

Fees:

Fees are often 1% or higher than other similar portfolios. When assessing the returns in the markets, the TSX has averaged 7% over the past 40 years.  Due to the lower rates on interest being paid on investments, the fees charged on investments become a very important factor when reviewing the type of investment. Saving 1% every year on your investment portfolio can significantly increase your retirement savings over the long term.

Lack of Flexibility:

The funds asset mix is set and cannot be altered by the individual investor. Your needs may change over your life, and this plan does not allow for changes such as income or job changes, divorce, death, or birth of a child. If these funds are held outside of your RRSP, there are tax implications that should be assessed to determine if this is the most tax effective strategy for your income level. In addition, these funds may only address one aspect of your retirement needs – either saving for retirement or post-retirement income.

Risk Tolerance:

With any investment, you need to assess your risk tolerance, goals and financial needs.  Target-based funds do not have an industry-standard asset mix and will vary from fund to fund.  Some may be more aggressive, and the fluctuation in the market may be more risky than your risk tolerance level. Others may be more conservative and may not grow enough to meet your needs.

Complacency:

Many investors feel overwhelmed by the choices in the market and select these funds to provide security and simplicity for their portfolios and retirement. It is important, no matter what type of investments you hold, to have an annual review of your accounts and assets in order to determine if changes are necessary. Without this annual process, investors are often caught unaware that their returns and savings may not meet their retirement needs.

Target-based funds are just one of the many types of mutual funds available to you.  Regardless of your investment knowledge or time frame for investing, you should always obtain advice to ensure the investment strategy is aligned with your needs and goals. - J.R.

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I'm retiring soon. How can I determine what is better for me, an annuity or a RRIF?

Tagged: Investing Life Events Retirement

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The money that you accumulate in your RRSP (Registered Retirement Savings Plan) or other retirement saving plans must be transferred into a RRIF (Registered Retirement Income Fund) and/or an annuity by December 31st of the year you turn 71.  Understanding the differences between them will help you decide which will work best for you.

Annuity

An annuity is a financial product sold by insurance companies that you purchase with a lump sum. An annuity provides steady, guaranteed income over the term of the annuity. Depending on the type of annuity, the income is usually guaranteed for your lifetime or a certain time period, and the income will stay the same throughout this period.

You can’t withdraw any additional money from your annuity.  Once you have purchased the annuity you are locked into it.   The insurance company makes all the investment decisions and you receive the regular payment without having to make any investment decisions.

It is important to understand the rates of returns when purchasing an annuity.  The value for the annuity is set when you purchase it, so in times of lower interest rates, your income will be lower than when interest rates are higher. The timing of when you purchase an annuity can also make a significant difference to your retirement cash flow. For example, an annuity of $100,000 at 2% would provide a yearly income of approximately $5,202 whereas if interest rates were at 5% that same $100,000 annuity would pay approximately $6,760 yearly. Annuities can be purchased at any time and not just when you are retiring.

RRIF

A RRIF is a tax deferred retirement plan that is registered with Canada Revenue Agency and is usually administered by a financial institution such as an insurance company or bank. Investment decisions with your RRIF are made by you and your investment advisor, which gives you control over your money and investment decisions.

You must withdraw money from your RRIF each year and the minimum amount will change depending upon your age. The government provides a table of the minimum percentage you are required to withdraw each year after age 71. Unlike an annuity, there is not a guaranteed amount and the level of income is dependent upon how well your investments are growing.  However, a RRIF provides flexibility because you can withdraw additional money.

A RRIF is set to decline yearly so that at age 95 it will expire.  You can have multiple RRIFs at various financial institutions.

Which one to choose?

If you’re more comfortable with a steady flow of income, you may want to purchase an annuity. If you want to ensure you have access to additional income for future needs, then a RRIF would be best.  Either way, you should consider the tax implications of both a RRIF and annuity. Both are taxable when received.  A RRIF will continue to grow free of income taxes until you withdraw the funds.  The annuity will be taxable in the same amount each year, unless it is indexed.

There is no one right answer and the important thing to consider are your cash flow needs and how to best fund them with the resources you have.  Working with a qualified advisor will help you determine the best mix for your needs.  You can use both an annuity and a RRIF to provide the security of a steady income stream and the flexibility of having cash available if you require it. -J.R.

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How do I manage my investments and assets during retirement? I want to make sure I keep my capital at a reasonable level while still managing to enjoy the money I set aside.  

Tagged: Investing Retirement

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In managing your investments and assets during your retirement, you first need to determine the amount of cash you need for your desired lifestyle.  Once you have determined the amount of cash you need, then you can review your various sources of income to determine the best course of action for your retirement. You can plan the mix of income and use of cash to fund your retirement and minimize taxes to ensure you get the most out of your money.

When you retire, you may have a few different sources of income to report on your tax return, such as Canada Pension Plan, Old Age Security, income from an employee pension plan, and investment income on any assets not invested in a TFSA, RRSP or RRIF.  Understanding the type of income you are reporting on your tax return each year and the related tax implications allows you to manage your taxable income and the amount of income tax you have to pay each year.  The less money spent on taxes allows you to keep more money for your retirement.

Withdrawals from your RRSP are included in your taxable income. It is important to review the amount you are taking out each year and assess the tax bracket to ensure you are paying the lowest income taxes possible. 

You are required to convert your RRSPs into a RRIF by December 31st of the year you turn 71.  A mandatory minimum withdrawal is required every year from your RRIF once you are 72.  This minimum increases every year, and will increase your taxable income. If the value of your RRIF continues to grow, then the income will continue to increase as you age.

It is important to review the value of your RRSP and the minimum RRIF withdrawal that you will be required to take each year once you turn 72.  This upfront planning will allow you to manage your withdrawals before you turn 72 and control your level of taxable income to minimize taxes during your retirement.  You may need to consider withdrawing more than minimum  each year to control the amount of income taxes owing.

If you have excess cash from withdrawals from your RRSP or RRIF, investing in your TFSA is a good strategy as the investment income earned is tax free. Withdrawals from your TFSA are not included as income for income tax purposes.  A TFSA is not a bank account;you cannot withdraw and then put money back in the same year. If you withdraw money from a TFSA – you have to wait until January 1 of the following year to put the same amount withdrawn back into your TFSA.

I recommend working with a qualified advisor to review these areas to ensure you are able to have your desired retirement lifestyle.  A review of your plan should be done at least once per year. -JR

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What are the differences in income tax considerations between when I am working and when I am retired?

Tagged: Financial Planning Retirement Taxes

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The biggest difference between working and retirement is often the sources of your income, which have different tax withholding requirements.

Most often, midwives are self-employed, and income comes from billable courses of care.  Self-employed midwives usually make installment payments each quarter, settling with the government each year when they finalize their personal tax returns. When you are working,  you may be living on 100% of your income – paying for expenses such as taxes, your children’s education, mortgage payments and other discretionary spending.  Hopefully, you are also saving for retirement as well.

On retirement, your income will come from different sources:

  • Canada Pension Plan: you have to apply for benefits, and can do so as early as age 60 (with a reduction) or as late as age 70 (with increased benefits).
  • Old Age Security: you have to apply for benefits at age 65.  Be aware of potential clawbacks; if your total income is too high, you have to repay OAS benefits.
  • Registered Retirement Savings Plans (RRSP) withdrawals: the RRSP money that you have saved for retirement can be withdrawn to supplement your income. 
  • Registered Retirement Income Funds (RRIFs): At age 71, your RRSP must be transferred to a RRIF (which can be an annuity, a stock portfolio, or a variation of both), and a minimum amount must be paid to you each year.
  • Income from non-registered investments like interest, dividends, and/or possibly capital gains.
  • Pensions or other income from your spouse (they may still be employed).

Pension splitting is also available to those who are retired.  This means that you are able to split your pension (and RRSP withdrawals if you are over 65) with your spouse, to minimize the amount of tax that you pay as a couple.

The issue that people in retirement often face is that each source of income assumes that they are your only source of income, and therefore they withhold tax on that basis.  The result is that minimum amounts of tax are withheld, causing large balances of tax owing at the end of the year when taxes are filed.  This may result in requiring to pay tax installments. 

The good news is paying installments is not new for many midwives. Therefore, the main goal is to estimate what your income will be.  A financial planner can work with you to plan and save accordingly.

To learn more about planning for retirement and how your GRSP can help, click here to access a video and presentation from Desjardins. -RMI

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I'm approaching retirement. What steps do I need to take to prepare and when?

Tagged: Financial Planning Retirement

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Retirement planning should be done at all stages of your career.  However, as it draws closer, you need to plan with accurate information to determine if your resources will support the retirement lifestyle that’s right for you.

The first step is to calculate your expenses. Start by keeping a record of your spending for at least six months.  Write down everything you spend, including groceries, utilities, mortgage payments, bank fees, clothing, entertainment, eating out, gifts, etc. A general rule is that your expenses in retirement will be about 70% of your pre-retirement spending. However, there may be other expenses to consider such as:

Debt - a mortgage, credit cards or other debt that has not yet been paid off before retirement.
Health care - extra costs not covered by the government health plan (starts when you are 65).
Income taxes - rate of income tax on your investment income

The second step is to assess your income and investments.  Many Canadians plan on receiving the 2 basic sources of Government support: Canada Pension Plan (CPP) and Old Age Security (OAS). Go to the Service Canada website (servicecanada.gc.ca) to determine what you will be eligible to receive and what options you have. You can also review our library of past Ask the Expert answers about retirement, including information on how to calculate your potential Government benefits and the impact the age at which you retire will have on your benefits here

Where will the rest of your retirement income come from? Do you have a work pension plan? What about your assets, such as your registered retirement savings plan (RRSP), tax free savings accounts (TFSA) and/or other investments? It is important to have current statements to determine your yearly income will be.  Many Canadians consider their home as a retirement asset; however, you still need a place to live and your home does not provide a source of regular retirement income.

A third and equally import step in retirement planning is how you’ll manage your resources during your retirement. You should not only plan for how your assets are invested but also how you’ll be withdrawing them.  Withdrawals will impact the amount of taxes you pay so it’s important to review the various tax treatments and ensure you are minimizing the amount of tax you pay while maximizing the income in your pocket. There also may be income splitting opportunities with your partner.

A few other areas you may want to consider before retirement are:

Do you have family members to support, such as an aging parent or children that are completing their education and/or are not able to fully support themselves?
Have you fully investigated what time and resources your dream vacation or hobby will require?
Have you prepared yourself for what your retirement lifestyle will look like and how you will stay active and engaged in life?

Planning ahead for retirement by calculating your expenses, assessing your income and investments, and knowing how to manage your retirement are important first steps. Working with a comprehensive financial planner will help to ensure that you have covered all areas so you can have the retirement you’ve always dreamed of.  

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I’m at least 20 years away from retirement. Although I know my goal is long-term growth, I can’t help but panic when I see any dips in my investments. How often should I be reviewing my investments?

Tagged: Investing Retirement Saving

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This is a great question!  Reviewing your investments too often can cause stress and anxiety depending on what is happening in the market place. Your focus should not be just the returns your investments are making, but also your net worth and cash flow. These 3 key areas should be reviewed annually.

What is net worth?  Net worth is calculated by taking all the assets you own (e.g. house, cars, RRSPs, investments, etc.) and subtracting your liabilities (e.g. mortgages, student or car loans, credit card debts, etc.). The goal is to have your overall net worth grow each year. Net worth is a good indicator of your overall financial position.   You could have a great return on your investments of 10% or higher but if your overall net worth is declining, then it’s an indication that you may be living outside of your means.    

What is cash flow? Cash flow looks at all of your income and expenses on a monthly basis to ensure that inflows are greater than the outflows. In other words, is your total income higher than your total expenses? If not, then it doesn’t matter how good the return on your investment is because your overall net worth will be declining. This will impact your lifestyle now and at retirement.  There are lots of free cash flow products available, even mobile apps for your smartphone, to help you review and monitor your cash flow as well as set up a budget.

Having a well-balanced portfolio is key to reducing anxiety due to market fluctuations.  Reviewing your investments along with your net worth and cash flow should be done at least annually.  You may also want to review them before making any major changes in your life (such as starting a new job or moving). When reviewing these 3 areas of focus, it is also important to define what you consider a balanced lifestyle to be.  Is it being able to have an annual vacation with the family or having a larger home?  It is important to enjoy your journey through life and not just focus on how your investments are doing!

Setting a goal helps you to review your net worth, cash flow and investment objectively and, if done annually, allows you adjust your goals based on the overall performance and not what is happening in the markets.  Here are some retirement strategies that can help you achieve your goals over the long term and still have a great night sleep.

  • Pay yourself first:  take the top 10% of your earnings and invest those funds annually. 
  • Set a budget:  determine how you can live comfortably on 90% of your income and still enjoy the fruits of your hard work. 
  • Enjoy the journey:  plan an annual vacation, make a special visit to family or friends or a monthly dinner out or spa treatment – choose something important to you.
  • Review your net worth, cash flow and investments annually:  make it a comprehensive financial review, not just a review of your investments.
  • Be real: set realistic goals every year but live passionately and dream big!
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I have RRSPs invested with more than one company. Is it better to consolidate these investments with one company or does it matter?

Tagged: Investing Retirement Saving

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There are no rules to limit how many investment accounts you manage; you are allowed to have as many different RRSP accounts as you wish.  However, it is not advantageous to have multiple accounts. Remember that your RRSP contribution limit is set by Canada Revenue Agency based on your earned income from the prior year, regardless of how the contributions are divided among different accounts.

The benefits of consolidating RRSP accounts are as follows;

  1. Simplification: The primary benefit to consolidating is the ability to track total performance and returns in one place with one set of reports to read, understand and follow.
  2. Economies of Scale: In general, the more money you have in one place, the less you will pay as a percentage of the trade.For example, a stock trade of $50,000 costs less as a % than a stock trade of $5,000.Also, mutual funds tend to have preferred pricing if a client holds a large amount of one product.
  3. Annual Fees: Administrative account fees can be waived for clients with larger portfolios.  If you have 3 different RRSPs at three different institutions, it is likely you are paying an annual administration charge at all of them (i.e. $150 x 3 = $450 vs having one RRSP fee at $150).
  4. Diversification: It is commonly understood that your total portfolio of RRSP investments needs to be balanced to your risk tolerance, time frame and economic expectations.A financial advisor can assist you with achieving this balance.“Diversification” is not achieved by having RRSPs with more than one company.“Diversification” in investing refers to holding a range of asset classes in a portfolio (stocks, bonds, mutual funds).This needs to be evaluated across your entire holdings.You could have significant exposure to market fluctuation if multiple RRSPs with different companies are invested in similar stocks.It’s extremely difficult for a financial advisor to manage a diversified portfolio if they aren’t managing all of the RRSP assets.
  5. Planning: It is more difficult for a financial advisor to project expected retirement income if they only have regular access to parts of the portfolio. Also, account beneficiaries named on RRSP documents need to be consistent with will details and legacy wishes for effective estate planning.Multiple holdings simply multiply the chance of errors.

Sometimes there are limitations to what can be transferred from one company to another.  Before giving transfer instructions, it is always advisable to consult a financial advisor.  If you have an advisor who is fully licensed for insurance, stock and mutual funds, then they can usually transfer the products “in kind”, which means you are just changing the name on the statement; the product remains intact. 

Keep in mind that the benefits of consolidating increase as the dollar size of your portfolio increases. - SM

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I am now 65 and I am not claiming CPP yet, am I paying more into CPP than the return I will receive when I do start claiming CPP?

Tagged: Benefits Retirement

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Working Canadians between the ages of 18 and 70 are required to contribute to the Canada Pension Plan (CPP) whether they are employees or self-employed. 

 

Some basic facts about CPP:

  • You can apply for and receive the full CPP retirement pension at age 65. Alternatively, you can receive it as early as age 60 with a reduction, or as late as age 70 with an increase.
  • If you become disabled and cannot perform the essential duties of any occupation, you and your children may receive a monthly benefit.
  • When you die, survivor benefits are paid to your estate, surviving spouse/partner and children.
  • Married or common-law spouses/partners may voluntarily share their CPP retirement pensions.
  • The CPP contributions you and your spouse/partner made while living together can be equally divided after divorce or separation.
  • If you continue to work while receiving the CPP pension, your contributions will go toward post-retirement benefits (see below), which will increase your retirement income.

Determining how much you will receive depends on the details of your situation. You can access the Service Canada calculator here: http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml

To understand the basic calculation, consider;

  • The maximum CPP received is 25% of the annual maximum pensionable earnings averaged over the past 5 years (for 2014 that is 25% of $49,840 = $12,460/year)
  • To calculate your rate of collection, it must be determined what % of the maximum you paid on average since you were 18
  • The average calculation allows for some ‘dropout’ periods (between 15-17% of the months you worked) to allow for under-employment or illness, for example.  A dropout of 7 years per child born is also allowed.

The most accurate method to find out your entitlement is to simply request a copy of your CPP Statement of Contributions that states your retirement pension estimate based on your past contributions. You can obtain this by:

  • Checking your online ‘My Service Canada Account’ OR
  • Mailing a request to Contributor Client Services, Canada Pension Plan, Service Canada, PO Box 9750 Postal Stn T, Ottawa, On K1G 3Z4  OR
  • Calling 1-800-277-9914.

When you are between the ages of 65 and 70, you can choose to opt out of paying CPP by completing form CPT30 with respect to employment income and by completing schedule 8 with respect to self-employed income.

If you continue to pay into CPP while a recipient, you are entitled to receive the ‘post-retirement benefit’  (PRB), which can help you estimate how much PRB is available the year following the year you make contributions..  Service Canada has an explanation of the PRB calculator at http://www.servicecanada.gc.ca/eng/services/pensions/cpp/prb/index.shtml.

For example, if you are an employee, with pensionable earnings greater than the annual maximum ($51,100 for 2013) for a deduction of $2,356.20, your increase in CPP received begins in 2014 and would break even at age 74.  That means that if you live to collect beyond the age of 74, you are better off to have continued to pay into CPP.  If you are self-employed and paying both sides of CPP, the break-even point goes up to over age 80 before you receive more than the extra you had paid in. - SM

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What happens to my RRSP after I retire?

Tagged: Retirement Taxes

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The short answer to this question is that it depends on when you retire.

If you retire at an early age (and by early, I mean anything before age 71), then you have some options.  You can:

  • Do nothing.  Leave the money in the RRSP and let it continue to grow until age 71 when you have to start drawing down the funds
  • Start drawing down the funds to supplement your retirement income, based on your needs
  • Withdraw all the funds out (not recommended!).

An RRSP is a registered retirement savings plan that allows you to deposit funds into a registered account, which allows the funds in that plan to grow and be invested tax free, until such time as you withdraw the funds.

The Canadian Income Tax Act stipulates that you must begin making withdrawals from your RRSP by December 31st of the year in which you turn 71. This is true whether you are still working or not. Now, it is generally not recommended that you withdraw all the funds out at once, because you would be required to declare the full amount as income and would be taxed on the amount accordingly.

Generally speaking, the better option is to transfer your RRSP assets into a Registered Retirement Income Fund (RRIF), which essentially converts the investments into a regular monthly retirement income.  What does this mean? You don’t have to actually sell off all the investments within the registered account, but rather the name of the account changes. You can no longer add money to the account, and you must start withdrawing the funds. The financial institution that you have your money invested in will inform you of the minimum amount that you must withdraw each year. Generally, you have to withdraw 7% of the value of the RRIF each year, and that amount increases so that by the time you are 100 years old, the RRIF is totally de-registered.

Whether or not you retire early, you can always withdraw a greater amount from the RRSP or RRIF (depending on how old you are), with the consequence being that you are using your retiring funds sooner, and thus they may not last as long for as long as you need them. 

It is always recommended to work with a financial advisor who can prepare a financial plan for you, so you know how much money you will need in retirement.  My general rule is it doesn’t matter how much you save, it matters how much you spend.  It is often more important to know how much money you will need in retirement (what your spending habits are today and will be in the future), so you know how much money you have to save to ensure you can continue to live comfortably in retirement.  Once you have a handle on how much you need, then you can decide if you can retire earlier or later in life. - RMI

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How much will I need for retirement?

Tagged: Financial Planning Retirement Saving

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How much you need for retirement will vary for each individual.  The goals and objectives you set for your retirement will guide you in determining your retirement income needs.  Where you live, the lifestyle you choose, the activities you want to participate in, will all influence the amount of money you need. It’s important to take the time to consider what you want your retirement to look like.  Write down your dreams, desires, goals and bucket list. The closer you are to retirement age, the more important this planning stage becomes. 

Once you have determined your retirement lifestyle, you should look at what annual retirement income you’ll need to fund that lifestyle. Consider both day-to-day living costs as well as the cost of other expenses such as travel and entertainment. This exercise is more of an art than science as you are predicting future costs. Working with a financial advisor or accountant can help if you are not sure of how to put those numbers together.  You also have to consider how saving for your retirement will mesh with your current lifestyle. It is a balancing act of living for today and planning for tomorrow.  When working with your advisor make sure that the plans they are recommending fit both of those needs and that you are not being encouraged to save more in order to sacrifice your lifestyle today – remember advisors earn more if you save more.  You want financial freedom and a comfortable retirement however, you also want to live a balanced lifestyle now.

When you have your retirement income projections, you can then figure out if you have enough funds to retire.  You need to look at all sources of retirement income – your own savings and government pension. If you retired in 2014 and were 65, you’d receive approximately $19,000 a year from CPP and OAS. Research suggests a 4% withdrawal rate from your retirement savings in order to maintain your principal, as this withdrawal rate would equal the average annual income that your investments earn.  For example, if you have $500,000 retirement savings, this would provide an additional $20,000 income while preserving your capital of $500,000. Combined with your government pension, this would provide an income of approximately $40,000. 

If you are a midwife or have an employer RRSP plan, your benefits program helps to fund your retirement savings plan, which starts your savings for retirement sooner than most Canadians. Planning for retirement now gives you time to adjust your expectations and to balance your goals and dreams with current lifestyle choices. It may allow you to choose an earlier retirement date, or you may choose to work beyond 65 to save for the type of retirement lifestyle you want.

While dreaming about your ideal retirement lifestyle can be exciting, putting together a balanced financial plan for retirement is not easy. Working with qualified advisors to develop that plan can help you achieve your goals. Choose your advisor wisely to ensure you are getting the support that fits your needs. -JR

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