Last week we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement: Understanding New Spending Patterns

Preparing for retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60 percent of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which…

Investing in retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GIC’s and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or a balanced mutual fund. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or equity mutual funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2018 is $1,134.17, but the average monthly amount for new beneficiaries is actually $666.56. You can take your CPP benefits as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70.

OAS pays a monthly maximum of $586.66. Unlike CPP, which is tied to your employment history, you can receive OAS even if you have never worked or are still working.

While you can’t take your OAS pension early, you can delay receiving it for up to 60 months in exchange for a higher monthly amount – up to a maximum of 36% at age 70.

As you can see, there are advantages to delaying your government benefits. Namely, if you expect to live a long and healthy life, and have sufficient income to meet your needs through to age 70, it makes sense to delay taking CPP and OAS.

New retirement reality check

It used to be rare to retire with a mortgage, and unheard of to have your adult children still living at home. But today, with four in 10 Canadians aged 55-64 still carrying debt, and 15 percent still supporting their adult children, there’s a new retirement reality setting in.

It brings a level of uncertainty to retirement as lifestyles get adjusted on the fly and new spending patterns emerge. It means working diligently, on your own or with a financial planner, to ensure retirement expenses don’t exceed your income target.

The goal is to feel comfortable with your finances during retirement, and you can do so by either by working with a financial planner or having a good enough knowledge of personal finance to go it alone.

Final thoughts

More than ever, preparing for retirement today involves careful financial planning and an open mind. You need to understand how to keep investing effectively while in retirement, determine when to take CPP and OAS, and understand how those government benefits fit in to your retirement income plan.

As your mortgage is nearing its end, you need to decide how comfortable you are carrying debt into retirement. Then, to add another wrinkle to your retirement plans, there is your adult children (or grandchildren) to consider, and how much (if any) financial support you wish to provide for them.

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  1. Michael on July 12, 2018 at 9:35 am

    Setting an annual budget for retirement is a good place to start to assess the adequacy of retirement savings, but it really shouldn’t stop there. Were expenses really the same last year as this year? Will the mirror that pattern again next year?

    Some expenses do recur repeatedly with minimal variation, while others only occur intermittently and often carry high price tags (a new roof, replacement vehicle, bucket list vacation). It is important to consider these items over and above the recurring expenses and build a plan that accounts for variability.

    Take a generic withdrawal strategy, make your plan work, then on your own or with an advisor develop a short term withdrawal strategy that considers taxes over the long term.

  2. Bob Lin on July 14, 2018 at 12:33 am

    My calculations suggest that I’ll be just as well off, or even better off, into my 80s if I start my CPP at 60 and use that first five years’ money instead of drawing from my investments the equivalent of the CPP amount.

    My calculations assume a rate of return on my investments of 6% p.a. and a CPI of 2%.

    Drawing CPP early does provide the assurance that I will get something from CPP should I die in my mid 60s, and if I don’t, I’ll be ahead into my 80s. Also, my long-term taxable income will be lower or I’ll at least have more control over it.

    I think that drawing CPP early is more than for the “bird in the hand” people, as I’ve seen stated in other blogs and newspaper articles. It looks to me like it makes sound financial sense even if you do expect to still be breathing in your eighties.

    Having said all that, I’m good to hear arguments for holding off until 65, perhaps my math is wrong.

    • Brian on July 14, 2018 at 6:58 am

      The problem with assuming a rate of return of 6% return is what happens if you get say -20%?

      In 2008 even with a balanced portfolio returns were poor.

      Google sequence of returns or even the 4% rule. The 6% rate in retirement may not work the way you think it might.

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