When you’re ready to turn the page, will your finances be ready too?
Retirement. It’s one of life’s exciting, and sometimes tricky, transitions. Not only for your lifestyle, but your finances as well. Moving from accumulating savings during your working years to using that wealth to generate income or leave a legacy brings a new set of opportunities – and risks – to plan for.
Five questions to ask yourself
Realizing your retirement dreams and ambitions starts with preparation. Asking yourself five key questions is the first step to putting the pieces in place for a smooth transition.
1. What’s my vision of retirement?
A comfortable retirement depends a great deal on the depth of your financial resources. Just how deep they need to be is difficult to assess unless you set out a clear vision of what you want to accomplish.
Are you looking forward to spending most of your savings or is your priority to leave a generous legacy to family or a favourite cause? How active will your lifestyle be? Traveling the globe will require deeper pockets than spending your days playing with the grandkids. Do you plan to live abroad? If so, it can have implications for your tax picture and ability to tap government benefits. Does your spouse share your retirement vision?
More Canadians are choosing to phase-in retirement slowly, continuing to keep a hand in their careers for the challenge, social connection or a little extra income. Will you do the same? Clarifying your vision sooner rather than later helps you be ready to kick off retirement how, and when, you want.
2. What will my expenses look like?
It’s true that once you retire you’ll say goodbye to some key expenses. Your mortgage payments will be winding down, if they’re not gone already. You’ll save on commuting and clothing. That said, it can be a mistake to assume those savings mean you’ll be spending far less once you retire. Other costs can increase. Don’t be surprised if you spend more on hobbies, travel and other recreation. Expect health-related expenses to grow as you age, including the prospect of renovating your home to accommodate your changing needs.
You shouldn’t depend solely on general guidelines to estimate your future spending, for example, assuming replacing 70% of your working income will suffice. Retirement is different for everyone. Map out your projected expenses to reflect your unique circumstances.
No discussion around living in retirement is complete without factoring in inflation. Despite a global economy that appears to be tilting more towards deflation, the reality is the cost of living is still increasing. Even a slow rise in consumer prices can put a real dent in your purchasing power over time. Say you’re projected to spend $60,000 annually when you retire. At just 2% inflation, after ten years you’ll have to bump up your spending to over $73,000 a year to buy what you could before.
3. What income sources can I count on?
When you retire you’re likely to have income from multiple sources. That includes Canada Pension Plan benefits and Old Age Security every month to help fund your living costs. But unless you’re among the dwindling number of workers who can count on a gold-plated defined benefit plan from their employer, it’s a good bet pensions alone won’t be enough. Your own resources will need to fill the gap.
Where should you look for income? Consider your RRSP, TFSA and taxable accounts, proceeds from the sale of your business or home, rental income, even employment earnings if you don’t intend to retire all at once. For greater peace of mind, think about using some of your savings to secure more guaranteed income through annuities or guaranteed minimum withdrawal benefit plans; enough to at least cover your mandatory living expenses.
Here’s the tricky thing about retirement income: various streams will enter the picture at different times. That means if you’re planning to retire early you’ll need sufficient savings set aside to fund expenses until your pensions kick in.
If you retire before age 60, you won’t be able to count on CPP right away. With OAS, you can’t collect until 65. Do you expect your spouse to retire on a different schedule than you? If so, that can affect the timing of when you’ll see optimal income as a household.
Depending on your situation, it can be advantageous to delay taking retirement income. For example, if you can afford to hold off receiving CPP until age 70, you’ll see a 42% boost to your monthly payment versus collecting at 65. That means if you’re confident you’ll get well into old age, you can wind up with significantly more in CPP benefits over the course of your retirement by waiting to collect.
Remember that much of the income you receive from pensions and your portfolio will be taxable. That’s important for two reasons. First, you should factor in taxes when evaluating how much you’ll have available to meet expenses. It also means retirement income planning should go hand in hand with creating a tax-minimization strategy that enables you to take advantage of RRIFs, TFSAs, the pension income tax credit and income splitting options (like pension splitting with your spouse) so you can hold on to more of your earnings.
The bottom line? Figuring out your retirement cash flow can be more complex than you might think, so it pays to sit down with your advisor to carefully assess your options.
4. Does my portfolio have the right mix of growth and safety?
According to Statistics Canada, a Canadian aged 65 today can expect to live to 81 – longer if you’re female. And that’s only the average. Many seniors will go into their eighties, nineties and beyond.
The possibility of having decades of retirement to fund is a major challenge for your portfolio. You’ll need it to generate sustainable income to supplement your pension and other sources so you don’t outlive your money.
While security is a priority when designing a typical retirement portfolio, the constant presence of inflation means it can be a mistake to ignore the need for capital growth as you age. That’s why it makes sense to continue to maintain a diversified portfolio of stocks, bonds and cash, even into retirement. What’s more, doing so allows you take a total-return approach to generating the income you need. That way you don’t have to rely only on interest, but can take advantage of the potential tax benefits of earning dividends and capital gains as well.
Where you strike the balance between safety and growth with your investments will come down to your objectives, risk tolerance and how many years of retirement you expect to fund. But, deciding to hold growth assets into retirement means you’ll have a specific risk to manage: market volatility.
During your working years, market swings, though unsettling, can work in your favour. When asset prices fall, it lets you purchase investments on sale. But as you close in on retirement the opposite is true. Markets corrections can be a double-whammy. First, you’re left with a shorter time frame for your assets to recover before you need to use them. And, if you’re forced to sell at a market bottom to maintain your income, it can erode your savings more quickly, impacting your portfolio’s longevity.
Pairing the ownership of growth assets with a strategy to mitigate the effects of market volatility is essential. One way is to seek out investment vehicles with some level of principal guarantee, like segregated funds. Another is to maintain an appropriate weighting of cash and liquid investments to cover living expenses your pension and other guaranteed sources can’t adequately fund. Having a cash cushion means you won’t be forced to sell into a falling market for funds to pay your bills, giving your portfolio time to recover. These are just two options. Your advisor can help you evaluate a full range of strategies so you can find the approach that suits you best.
5. Am I on track?
As retirement draws near, your priority should be to make sure your financial house is in order.
Start by getting rid of any high rate consumer debt. Every dollar saved in interest is a dollar more to spend the way you want in retirement. Put away a little more each month, including catching up on any unused RRSP and TFSA contribution room. The combination of contributions and tax savings can bolster your nest egg. And, don’t forget to do some contingency planning. A properly designed insurance and savings strategy can help you deal with an unexpected event whether it’s a divorce, sudden illness or job loss which could knock your retirement plans off course.
Now’s the time to take steps to prepare for a smooth financial transition into retirement. Get the expert advice you need for a happy and secure landing. Speak with your BlueShore financial advisor today.