Getting ready for retirement

Assessing your retirement readiness

Retirement. It’s one of life’s most exciting, and sometimes most 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.

Realizing your retirement dreams and ambitions starts with preparation. Asking yourself six 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. And don’t forget to factor in inflation as that will play a factor over time.

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.

Drawing down your RRSP

If you're considering delaying your withdrawal from your RRSP until you hit the age 71 deadline, keep in mind that switching your RRSP to a RRIF or annuity can affect not only your income, but also have an impact on 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 OAS.

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.

A taxing dilemma

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.

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.

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. What should your portfolio look like?

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 portfolioᶲ of stocks, bonds and cash, even into retirement. What’s more, doing so allows you to 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.

Review your mix of assets to make sure there is sufficient exposure to growth. If you're very close to retirement, you may want to begin rebalancing – shifting the emphasis in your RRSP from long-term growth to more conservative investments. This could involve:

Consolidating

If you haven't already done so, consider consolidating any multiple RRSPs you may have into a single plan, which will simplify things when you are required to convert to an income-generating vehicle at age 71.

Topping up

If you're not quite where you want to be in relation to your savings target, a few timely adjustments will help you get your RRSP back on track. If you haven't been maximizing contributions, take action now to boost current and future contributions. Use the years remaining before retirement to catch up on unused contribution room.

Tapping in

Explore your savings options – if you can't find the extra income to add to your RRSP now, you may want to consider taking out an RRSP loan or line of credit to help beef up your portfolio and maximize on the tax savings provided by the RRSP while you are still earning regular income.

Boosting growth

Depending on your risk tolerance and time horizon (that is, the number of years left before retirement), you may also want to consider increasing the level of growth-oriented equities in your plan, to boost potential performance.

Spousal equalization

This is also the time to make sure you're taking full advantage of spousal RRSPs. If you and your spouse expect to have very different incomes in retirement, consider starting or adding to a spousal RRSP to help equalize your incomes and reduce taxes after you retire.

Your advisor can help you evaluate a full range of strategies so you can find the approach that suits you best.

5. What insurance coverage should I consider?

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.

In addition to life insurance, it's important to consider critical illness, long-term care, and extended health and dental insurance. If you're retiring soon, speak to 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.

Speak with an insurance specialist to understand the different types of coverage and what might be the best fit for you and your lifestyle.

6. 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.

It’s also a good time to make sure your important documents are prepared, including your will as well as an enduring power of attorney and representation agreement. This will allow someone you appoint to 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.

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.