Retirement Planning Basics

“Will I have enough savings for my retirement years?”

This question is asked a lot. There’s no one “retirement number.” It depends on multiple factors including age of retirement, where you’ll live, your health, lifestyle, whether you have a company pension plan and how much you will receive from government benefits.

Many people become concerned because we keep hearing that Canadians aren’t saving enough and will most likely have to delay retirement to past age 65. This seems like a bleak vision for our future.

Yes, some people probably could save more. When it comes to accumulating your retirement nest egg there is clearly a benefit to starting early and saving regularly.

Besides saving more, here are five retirement planning basics that you can follow to achieve your goals as you near your potential retirement date.

Retirement Planning Basics

Be debt free by your retirement age. Make a concerted effort to pay off your debts while you are still employed, especially expensive credit card debt. Obviously, being debt-free will free up money in your budget to save more and, later, to spend as you like.

Understand your spending. As you get closer to retirement you have started to establish a lifestyle that’s not going to suddenly change overnight. Instead of focusing on replacing a percentage of your employment income, look at your expenses. Some expenses associated with working will be replaced by others such as hobbies and travel, so don’t expect them to be drastically reduced, especially for the first 15 to 20 years. (After that, expenses tend to decrease.)

What will your income sources be? How much, exactly, will you receive from CPP/QPP and OAS. Income projections usually assume the maximum, but that might not be what you will receive. How much will your company pension (if you have one) pay? How much will you withdraw from your RRSP?

If your income falls short, first see where you can cut some expenses. But then again, you don’t want to be living a miserable, depressing lifestyle even if it is cheaper. If you can’t reasonably cut expenses look at generating more revenue. You could work part-time, downsize your home, buy a reverse mortgage, sell your antiques and collectibles or other real estate, or rent a room in your house. You goal is to provide additional income or capital to supplement your pension income.

Do some tax planning. Reducing the amount you pay in taxes could be just what you need to be able to pay for other retirement expenses. If you retire early, or your income is low, consider withdrawing from your RRSP before age 71.

If both you and your spouse withdrew an equal amount you would most likely pay less tax overall. If only one spouse has an RRSP, consider converting it to a RRIF at age 65 to do some pension income splitting. Consult your tax preparer or, if you do your own taxes, run some “what if” scenarios to see what will work best for you.

Look at your investment allocation. When you are in withdrawal mode you don’t want to be too aggressive unless you have other guaranteed sources of income. It’s better to lose some potential returns than have to withdraw from a portfolio that has had a considerable loss. See the sequence of returns impact here.

Final thoughts

Do some asset and cash flow projections. The industry norm is to project to age 90. A 30 year or so projection can show you the big picture but it’s not set in stone. Review it once a year to if you are still in line. It’s easier to tweak your budget a bit earlier on.