Seven Questions to Ask When Preparing for Retirement
Knowing the facts is the key to a successful transition.
Retirement can be an exciting, yet tricky, transition, full of new opportunities – and risks.
What’s your vision of retirement? It’s never too early to start the conversation with your financial advisor. Here are seven questions worth asking.
1. Is it best to wait for the age 71 deadline to start drawing down my RRSP?
Not only can switching your RRSP to a RRIF or annuity affect your income, it could also impact your tax rate and government benefits.
It’s often assumed that when you retire, you’ll have less income and therefore pay less tax. But that’s not always the case. For example, if your RRSP savings are large enough, your eventual RRIF income might push you into a higher tax bracket or reduce certain entitlements such as Old Age Security. For example, for 2019, you’ll lose 15% of OAS for every dollar of net income above $77,580.
One possible solution is to start drawing down your RRSP early to level out your income over time. If you have a younger spouse or common-law partner, you have more options. Base your RRIF withdrawals on their age to lower your minimum payment, or, if you have the contribution room, contribute to a spousal RRSP until the end of the year they turn 71.
Don’t need all the dollars mandatory RRIF withdrawals produce? Consider transferring the excess to your TFSA for additional tax-free growth.
2. Should I take CPP as soon as I can?
Delaying CPP collection past age 65 adds as much as 8.4% to your benefit for each year you wait – that’s 42% more if you postpone payments until age 70. It means if you don’t have a corporate pension or annuity income to count on, it can be smart to hold off taking CPP and instead turn to your RRSP, RRIF and non-registered accounts to fund your retirement’s early years.
Canada Pension Plan payouts have important advantages over your own savings: they’re guaranteed, plus, they’re indexed to inflation which helps protect purchasing power. When you delay CPP, you’re setting up a larger, guaranteed, indexed benefit to collect later.
Conversely, collecting prior to your 65th birthday shrinks your payout as much as 7.2% annually. So, starting benefits at age 60 cuts your entitlement by 36%. That said, there can be good reasons to take the money as soon as you can. Your health or family history might suggest a shorter life expectancy.
You may need the money. Or, having a richer pension could wind up raising your marginal tax rate or lead to a clawback of OAS and other government benefits. Your advisor can help you weigh the pros and cons.
3. My spouse and I are already maximizing our RRSP and TFSA room. How else can we reduce tax once we’re retired?
Proper tax planning can keep more of your retirement income out of the government’s hands. Fortunately, taking full advantage of RRSPs and TFSAs isn’t all you can do.
Recognize that investments each have their own tax treatment, so how you organize your assets between registered and taxable accounts can make a big difference to your tax bill, now, and when you retire. For example, consider holding interest-bearing instruments like bonds and GICs, which are fully taxed, in your RRSP, RRIF or TFSA. At the same time, dividends from eligible Canadian corporations benefit from the dividend tax credit when earned in a regular account.
Another option? Share pension income with a lower-earning spouse. Tax laws permit you to transfer up to 50% of qualifying pension income to your partner each year. If you’re under age 65, sharing an employer pension is a common strategy. At 65 you can also share payments from a RRIF or annuity. The first $2,000 of income eligible for pension sharing also qualifies for the pension income tax credit. You can even divvy up CPP under its own set of rules.
4. How should I adjust my asset mix as I approach retirement?
For most people, preserving capital is a priority in retirement, necessitating a shift from growth vehicles like stocks* to more stable fixed income investments. However, it’s important not to go too far in dialing back risk. Why? One key reason is inflation. Even a mere 2% annual inflation rate will whittle away nearly half the real value of your savings over a typical retirement. So, it makes sense to maintain a diversified portfolio of stocks, bonds and cash, even into your later years.
Still, sticking with growth assets means you’ll have to deal with market volatility.
When you’re younger, market corrections, while unnerving, can work in your favour by putting investments on sale. But, later, volatility is more menacing. After a drop, your assets have less time to recover their value before they’re needed. Once you’re retired, repeated selling through a bear market to free up cash to meet obligations can rapidly erode your savings and curtail your portfolio’s longevity.
To prolong the life of your nest egg, consider investments with built-in principal guarantees like segregated funds. It’s also smart to have cash and liquid assets on hand to cover living expenses your pension and other guaranteed sources can’t adequately fund. Another route is to tap your home equity either by downsizing, using a home equity line of credit or setting up a reverse mortgage.
5. I’m over 50 – do I still need life insurance?
Even after your kids leave the nest and your mortgage is paid off, there are good reasons to hold onto your life insurance policy.
While you’re busy accumulating wealth, chances are you’re slowly racking up future tax liabilities. After your death (or the death of your surviving spouse), accrued capital gains on assets such as your investment portfolio or rental home could leave your estate with a significant tax burden. If your heirs don’t have resources to meet your obligations, they might have to sell property – including sentimental assets like a family cottage – to raise cash.
A life insurance policy’s proceeds can supply immediate and tax-free liquidity for your estate to settle taxes, as well as pay debts and other expenses, helping preserve your legacy. Unlike property handed down through a will, life insurance benefits can pass directly to named beneficiaries.
Life insurance also has a role as an investment tool. In general, premiums paid on permanent life insurance (whole or universal life) beyond what’s needed to keep insurance in force can grow tax-sheltered. If you’re a high earner who routinely maximizes your RRSP and TFSA contributions, permanent life insurance offers another way to potentially shield your income and capital from taxation.
6. I recently updated my will. Are there other documents I should prepare as I get older?
It’s true your will is the cornerstone of your estate plan, but there’s more you should look after.
A serious risk as you age is incapacity, either due to illness like dementia, or injury. If you don’t take proper steps in advance, you could put your loved ones through a stressful, costly and time-consuming court process to take over your affairs. Consider drawing up an enduring power of attorney and representation agreement so someone you appoint can make financial, legal, health and personal care decisions for you if you can’t, ensuring your wishes are carried out.
Updating your will is an opportunity to review your broader estate plan, particularly if your family situation has changed (marriage, divorce, new child), you’ve experienced a financial windfall (inheritance), or are planning a move to another province or abroad (different tax and property rules). Also, re-examine your executor and other representative appointments to confirm their skills still meet your requirements.
7. I’m going to lose my health benefits when I retire. How can I stay protected?
Evaluating critical illness and long-term care insurance should be high on the list of health care priorities as you approach retirement, but don’t overlook the negative impact out-of-pocket medical expenses like dental work or prescriptions can have once you lose your employer coverage. Don’t assume the public health care system will cover these costs which can add up to thousands of dollars a year.
Retiring soon? Now’s the time to ask your employer about continuing the extended health and dental coverage you enjoyed as an employee. Your employer may offer a retiree health benefit package you can opt into. Alternatively, there could be a "roll over" privilege, where for a limited time post-retirement you can convert your coverage from your employer’s group insurance into a new personal policy without submitting medical data. That’s valuable if your health status might complicate an insurance application.
Another route is to apply for individual health and dental insurance. Premiums depend on your age, medical condition and the level of coverage you choose. Your advisor can help you select the right policy to fit your budget and lifestyle.
Get smart advice
Retirement planning can be complex. That’s why it pays to have an expert in your corner. Your BlueShore Financial advisor is here with the answers you need so you can live the life you want, today and tomorrow. Contact us for a professional review.