Retirement planning is a challenging task, with many moving targets, details often unknown and government programs for which you may or may not be eligible. Wherever you are at with your retirement account accumulation, there are specific items that you need to be aware of and understand. This summary will give you an overview of what you need to focus on and be aware of as you chart your course towards retirement.
For more detailed insight and examples, consider signing up for our Mastering Retirement Seminar – in person or online.
TABLE OF CONTENTS
PLANNING YOUR RETIREMENT
When planning your retirement, the first thing to do is take stock of your current financial picture. You’ll need to know what kind of income you want during retirement. This is driven by how you envision your retirement – what do you see yourself doing in retirement? We often refer to leaving your present employment as entering your work-optional phase since many people continue to work part-time or for something to do to avoid boredom.
Once you’ve set your retirement income goals, the next thing is to compile all your financial information. The other important components of putting a plan together are to guestimate your longevity – how long you will need an income – as well as your average annualized return, I always recommend that you go more conservative. Better to underestimate than overestimate and be disappointed in not reaching goals. In this case, an advisor can assist in helping you to set realistic expectations.
THE IMPORTANCE OF PLANNING
Envisioning your retirement is important. If you can’t imagine where you want to go, you may not be focused enough on building your retirement strategy. Here are some springboard questions you’ll want to ask yourself:
- What would you love to do in retirement?
- Travel the world or just around North America
- Spend half the year in a warmer climate
- RV around North America
- Bike along the Rhine
- Visit the great wine regions of the world
- Paint in Europe
- Volunteer for charities
- Go fishing
- What is your passion?
- How much will this cost?
- Do you like to tent on your adventures?
- Or do you prefer 5 star accommodations?
- What are your projected funds?
- Work pension
- Government benefits
- RRSP/Spousal RRSP
- Individual pension plan (IPP)
- TFSA
- Proceeds of sale of business or property
While answering these questions can be stressful for even the wealthiest of people, this is the imagination part of the process. Planning and action can quickly reduce the stress knowing that you have a strategy to achieve your retirement dreams.
PREP WORK BEFORE YOU START CREATING YOUR RETIREMENT PLAN
Ensure you have a general idea of what you want to do in retirement. If this is still a mystery to you, then you should take the time to explore your interests and let your imagination soar. Your ideas don’t have to be specific, but sit down and think about or dream about what you want. How would you like your life in retirement to look and feel?
Allow yourself to think about what you really want, not just the first thing that comes to mind, as that might be a limited view of what’s possible for you. Come up with a vision for your retirement, and then begin your planning.
We all know that plans change, but with a plan in place, you are much more likely to achieve your goals. There will be surprises along the way and your plan should allow for contingencies and how you will handle them. Cash reserve is an essential part of any successful financial or retirement plan.
DETERMINING HOW MUCH MONEY YOU NEED FOR RETIREMENT
When determining how much you will need, a qualified financial planner (CFP) will always project that each spouse will live to the age of 90-95. If you live to 95, there is a 30-year window for those that retire at 65, and thirty years is a long time!
Once you’ve reached a certain income and investment value level, using a qualified planning team to construct your financial and investment plans is an excellent idea. Investment construction should be tailored to your goals; it should not be a cookie-cutter or one-size-fits-all process.
Financial planning and investment structuring are two very different tasks. If a consistent, conservative, low rate of return brings you safely to 95 with a steady income, then you have done an excellent job of saving. But, if you are short on saving and long on time, then you might need a stronger return and more equities in your portfolio. Meanwhile, the investment structure should be designed to allow for that long and happy retirement.
MULTIPLE SOURCES OF RETIREMENT INCOME strategy
Proper management of your investments in retirement is crucial, which is why we advise our clients to have multiple sources of income.
Our clients often hold dividends from company shares, interest from bonds or fixed-income investments, and cash flow from rents or property investments. A strong portfolio manager can assist in crafting a portfolio of strong diversified income managers to provide consistent and steady income flow. For more information on how to choose a financial advisor, see the information below.
THE 75% RULE OF RETIREMENT INCOME
The 75% rule of retirement income suggests that you may need about 75% of your pre-retirement income to fund your retirement. This is a starting point, if you are having a challenge determining your target retirement income needed.
As with most “catch-all” rules, this does not work for everyone. It is best to look at your projected retirement budget to fine tune your retirement income needs. Your income needs will vary in the four stages of retirement: the pre-retirement stage (ages 50-60), the early stage (ages 60-70) the middle retirement stage (ages 70-80) and the late retirement stage (+80).
THE 4 STAGES OF RETIREMENT
In the pre-retirement stage, you are likely aggressively paying off debt, getting the house updated, and making the most of your savings. You are also in your peak earning years and this is the time to focus and ensure you maximize your last working years – and last paychecks. Having your plan in place these years is imperative so that you can focus your savings decisions and have the best chance of meeting your retirement income goals.
In the early retirement state, you often travel, play sports, enjoy more time with friends and family, or participate in hobbies. This ‘go-go’ stage is generally more expensive. If you travel or love to play golf, you could spend more in your first few years of retirement than you did in your working years. We want to ensure that you have enough that you can fully enjoy these years.
The middle retirement stage is generally much lower cost because you aren’t travelling as much or doing as many expensive activities. In the ‘go slow’ stage you’ve settled into a new relaxed pattern and have already crossed off many items on your bucket list.
In the late retirement stage, we must account for medical spending, needs such as private assistance and possibly long-term care. Your home equity can often be a source of funds to finance this later stage of your retirement.
At every stage, you will want to review your income needs and make adjustments as required. Retirement planning is not once and done. It is adjusting and reviewing every few years to ensure you are on track to achieving your retirement goals.
CONSIDERING TAX DEDUCTIONS AND CREDITS
Many entitlements and tax breaks are available to retirees in Canada. The first opportunity is to shelter your investments within RRSP and TFSA accounts. If you have the majority of your investments in non-registered holdings, an excellent way to increase your take-home income is to invest in Canadian dividend-paying companies. These holdings provide you with a substantial tax credit. When you have Canadian dividend-paying companies in your portfolio, the already generous bonuses that our banks, utilities and resource companies pay are further enhanced by a tax break.
As a senior, here are some of the most common things that you may be able to claim as a deduction in Canada:
Here is a list of deductions from the CRA website:
CANADIAN PENSION PLAN BASICS
Any Canadian citizen who has lived and worked in Canada for several years should be able to collect the Canada Pension Plan starting at 60 (at a 36% reduced rate). The full pension plan comes into effect at age 65, and you can defer it until age 70. This deferral increases the amount collected by 36%, so if you feel you will live a long life and you are still working with a higher income, it may make sense to defer your CPP benefit.
Before you make a hasty decision to begin CPP benefits when you are still working at age 60, consider contacting a CFP to help you review your options and tax consequences. In addition, if your spouse is dependent on your income, this may be another reason to delay payments until you are no longer working.
As of 2022, the maximum amount you can receive monthly should you start to take your pension at age 65 is $1,253.59. The average payout for new benefits retirement pension at age 65 was $779.32 as of January 2022.
As you can see, it’s important to have investments of your own. You don’t want to rely on CPP for your retirement income; instead, consider it a bonus, not your primary source of income during retirement.
You can find out what your monthly CPP pension might look like by going into your My Service Canada Account and checking your personal account.
OLD AGE SECURITY BASICS
Old age security (OAS) is an entitlement program available to all Canadian citizens. There is a clawback of the amount paid as income creeps up. Eventually, you’ll reach an income level where no more OAS is paid; instead, it is clawed back. Proper tax efficient retirement income planning can help alleviate the clawback of your OAS benefits, as there are many strategies you can use to prevent this – when you are aware of them.
For 2022 clawback parameters, the threshold is $81,761 and full clawback is on income over $134,253 (age 65 to 74) and $136,920 (age 75 and over).
CONTRIBUTING TO AN RRSP
A registered retirement savings plan (RRSP) is a tax deferral strategy that can be very advantageous. It is still the best retirement savings option for most Canadians. If you are in a higher marginal tax bracket while working, the idea is to structure your income so that you are in a lower tax bracket once you retire. The RRSP enables each of us to put a certain amount of our income into the plan and receive a tax deduction at our present higher tax rate.
Your RRSP contribution is calculated as 18% of your income to a maximum annual amount that increases with the cost of living. For 2022 this maximum contribution limit is set at $29,210.
Once we retire, we can withdraw the funds from the RRSP at our current (lower) tax rate. Proper planning generally means significant tax savings plus tax-free growth while the funds are in the plan.
CONTRIBUTING TO A TFSA
The tax-free savings plan is one of the best ways to save. There is no tax break for putting the funds in the plan and there are also no tax consequences when taking funds out. You can withdraw funds from the plan and return the full amount at a future date, after January of the following year. The TFSA is an important way to save, that you can access over your lifetime. The TFSA provides an option when faced with unexpected large purchases or if you are working to create a tax efficient income.
Note - a TFSA is not considered to be tax free by the IRS – if you are a US citizen.
WORK RETIREMENT PLANS IN CANADA
Work pension plans are disappearing. If you are fortunate enough to have a work plan, you will want to spend a bit of time learning about it, so that you don’t miss any opportunities to maximize it to your benefit. There are two main types of work plans that employers offer and they each have different aspects to them:
Defined Benefit Plan – this plan is guaranteed by the employer and you just have to opt in to participate. Your employer will hire a firm to manage the plan and your benefit will just be dependent on a few factors – length of service, age you retire and final average earnings. These factors are then put into a calculation to determine your fixed income for life.
Defined Contribution Plan – this plan is set up by the employer, but the onus for investment selection and how much you contribute is to be managed by you. Since it is your responsibility, you want to ensure that you fully understand how best to manage or ensure that you work with a financial advisor to assist you with those dec
Does your plan offer inflation protection, such as a cost-of-living allowance (COLA), is one factor to consider. With the defined benefit plans you will know what you could receive. With defined contribution plans you know what you put in but do not know what you will eventually receive. There are also RRSP plans, but the best plan is the one that helps you meet your goals. There are no one-size-fits-all approaches and you will likely want to create several retirement income streams for maximum income security.
REAL ESTATE VS. THE MARKET FOR RETIREMENT
Many Canadians have a large portion of their wealth tied up in real estate. We use the phrase “tied up” since the issue with real estate investing is that your wealth can be difficult to access. While real estate has done well in recent years, you may still need to diversify into other areas to ensure you have the cash flow to fund your retirement needs. In addition, real estate can be a drag on retirement income since you’ll have additional costs such as repairs and taxes on your properties. If you have rental properties, you just want to ensure that you build up a capital account to cover maintenance and repair costs.
HOW TO RETIRE AT 55 IN CANADA
The concept of ‘freedom 55’, has been around for many years, but is this achievable? Absolutely, but it depends on your focus – living well below your income needs and ramping up your savings. The key component is looking at your lifestyle goals and comparing them to the finances needed to make them happen. If you have enough funds saved so you can conservatively produce enough income to cover your expenses to 95, you are in a great position.
But first, you need to know your goals and how much you’ll need to have saved to live comfortably. Remember that if you retire at 55, you’ll need enough retirement savings to produce income for about 40 years.
While I have supported several clients that have set this as a goal, by the time they reach age 55, they are enjoying their positions and decide to work more. But often this goal allows them to be much further ahead and they often end up enjoying a much more comfortable active retirement in the early years.
Use this Retirement Calculator from Raymond James to see how much you’ll need to have invested to achieve your retirement goals.
START EARLY SAVING FOR RETIREMENT
If two people save $100 a month for retirement, but one starts at 25 and the other starts at 35, the early saver will have nearly twice as much in their bank account by age 65. That alone should convince you that starting to save early is the key to an easy and early retirement. The power of compounding interest means that the more you save early, the better off you’ll be in the future. Of course, you can’t just save the money and stuff it under a rug. You’ll need to invest what you save wisely using some good counsel from your financial advisor over the years.
SNOWBIRDS – MIGRATING SOUTH FOR THE WINTER MONTHS
There is a large population of Canadian retirees that migrate south to warmer climates for a few months each winter. If you are one of them, there are a few details you need to be aware of so that you do not inadvertently become a US resident and therefore subject to US taxation.
You are limited to 182 days in the US over a three (3) year period. How this 182-day period is calculated is unusual. Here is how the US government calculates this:
- Total number of days in US, in the current year
- Add 1/3 of the days in the US in the previous year
- Add 1/6 of the days in the US in the year before that.
So let us take a look at a Canadian that usually goes for 4 months – about 180 days – per year:
- 4 months in this year = 120 days
- 4 months last year = 120 days X 1/3 = 40 days
- 4 months the year before that = 120 days X 1/6 = 20 days
- So in total, this equals about 180 days. But you can see how extending your stay can quickly impact this calculation and cause the US to now see you as a US resident.
FOREIGN PENSIONS
For many of us we may have immigrated to Canada and have qualified pensions in other countries. Use the internet to do initial homework to determine how to apply for pension benefits from former work plans or government benefits. If you still need assistance, work with your financial advisor to assist you in this process.
COMMON RETIREMENT QUESTIONS
How does a spousal RRSP withdrawal work?
A spousal RRSP withdrawal works similarly to a regular RRSP withdrawal. You can withdraw from spousal RRSP anytime, but any withdrawal will be considered taxable income. However, keep in mind that the annuitant of the spousal RRSP is the one entitled to make withdrawals, not the contributor. With a spousal RRSP, one spouse is the contributor while the other is the annuitant, i.e. the one who receives the annuity and can withdraw. You will want to keep in mind that from the last contribution into the SPRRSP it will be three (3) years before the withdrawals will be taxed in the hands of the spouse.
A spousal RRSP allows married or common-law couples to save for retirement and lower their taxes. The primary purpose of this tool is to even out retirement savings between two partners to lower their taxes. Since pension income splitting was introduced, this has lessened the importance of these plans as a retirement tax-planning tool.
How do the RRSP contribution carry forward rules work?
Your RRSP room carries forward, meaning the amount is cumulative. If you take 18% of the income, you earned in the previous year up to the current year’s maximum contribution limit, that’s your RRSP room for the year. “Room” means the amount you’re allowed to contribute based on government rules. For 2022, the max contribution limit is $29,210 for taxpayers who have earned at least $162,278 in 2021.
How is a RRIF taxed in retirement?
A registered retirement income fund is taxed as regular income. At age 71, or earlier if you choose, a RRIF begins to send you income, and a minimum amount must be paid out to you each year. The first $2,000 attracts a 15% tax credit as a pension deduction. Good retirement and tax planning can give you a good idea as to your tax bracket and how much tax you should set aside to cover the tax on your retirement income.
What is the average Canadian retirement income?
According to Stats Canada, the median Canadian household retirement income is $65,300. This number refers to pre-tax income for households where the top income earners are 65 or older. Most Canadians have trouble making ends meet with just income entitlements such as CPP or OAS. Most Canadians will want to draw from other sources, such as their work pension plans, RRSP, TFSA or non-registered investments. Some retirees will take part-time jobs to earn enough to cover their costs or just to fill their time.
How do I prepare for retirement?
The best way to prepare for retirement is to do some serious thinking about what you want your future to be. Include your spouse and family in this discussion. Often spouses have very different retirement goals, and each goal needs funding. Once you’ve set your goals, examine your finances and establish an investment plan. While this might sound daunting, there is a lot of help available. Seek out a financial advisor to partner with you in this endeavour. Excellent planning will enable you to sleep well at night.
What are the best retirement plans?
Many people feel that defined-benefit plans (DBP) are the best plans, and DBPs may be the best retirement plans when the cost-of-living allowances and investment markets are not performing well. The benefit is that you know what you are getting. However, a defined contribution plan (DCP) can give you much more in retirement. You have control of the investments in a DCP, and you are responsible for the outcome. A seasoned portfolio manager can help you make the best choice for your situation by laying out your options when you have to make decisions around your work retirement plans.
SUMMARY OF KEY POINTS:
- Determine how you want your “early retirement” life to look.
- Pull together your financial information.
- Look at which government entitlements you are eligible for (CPP, OAS etc.).
- Look closely at any work pension plans you have.
- Look at what type of planning help or financial guidance you might need.
- Make sure you start saving early.
- Work with a professional financial advisor if you’ve already built a foundation of savings and need help structuring a plan that will assure a work-optional lifestyle in the future.
NEXT STEPS
Create your ‘To Do’ list.
Attend a Mastering Retirement seminar or webinar to learn more about the details of this process.
Draft your retirement plan and identify the actions you need to take.
Take that action.
Monitor your plan at a minimum of annually and quarterly as you get closer to retirement.
Make adjustments as needed.
ATTEND A COURSE
Attend a live or webinar 2 hours course for a more in-depth introduction to the broad facets of retirement planning. Click here to register for a course.
HOW TO CHOOSE A FINANCIAL ADVISOR?
For most, working with a financial advisor may seem out of reach or too expensive. In some ways, not working with a financial advisor could be even more expensive in costing you expensive mistakes. Despite the myth, working with a financial advisor can cost you very little and provide you with better advice and direction. The best place to start in looking for a financial advisor is with your friends and family – ask for a referral. There are pros and cons for working with the different advisors – bank teller, mutual fund representative, insurance representative, full-service bank brokerage or an independent broker, and ultimately a portfolio manager.
Do designations matter? If you want to work with a professional that takes their work seriously, then you may want to screen for designations. Here are just a few of the main financial designations that you may find:
CFP – Chartered Financial Planner
RFP – Registered Financial Planner
EPC – Elder Planning Counselor
FMA – Financial Management Advisor
RIA – Responsible Investment Advisor
CIM – Chartered Investment Manager
FCSI – Fellow of the Canadian Securities Institute
Ultimately, you want to find a financial advisor that has the expertise that you and your family need. If you are just starting out, the bank might be a good place to start. If you are a seasoned investor and have grown your portfolio to a sizable level, it may be time to ‘graduate’ to a more specialized advisor that has the expertise that your situation needs. Ideally, you will want to find an advisor that is serious about their work and has invested in their education so that they are more knowledgeable and can give you the insight and expertise that you need.
WHAT IS THE DIFFERENCE BETWEEN A FIDUCIARY AND A NON-FIDUCIARY ADVISOR?
The majority of financial advisors in Canada are non-fiduciary licensed financial advisors. They are not able to manage your investments without your approval and consent to every financial decision. In contrast a fiduciary portfolio manager has attained designations and experience as well as the vetting by corporate management to be designated as qualified to make investment management decisions on behalf of their clients. Portfolio managers are about 1% of all of the advisors in North America.
ABOUT THE AUTHOR
Jackie Ramler is an independent advisor with the following education and designations:
Dual Bachelor of Arts in Environmental Sciences and Political Sciences
Masters in Business Administration (MBA)
Financial Management Advisor (FMA)
Chartered Investment Manager (CIM)
Certified Financial Planner (CFP)
Responsible Investment Advisor (RIA)
In 2015 was inducted as a fellow of the Canadian Securities Institute (FCSI).
As a qualified fiduciary and portfolio manager she works with clients across Canada and internationally. Jackie works with families, individuals and business owners who appreciate the importance of a comprehensive wealth and investment plan driven by the lifestyle they want to lead.
As a dual citizen of both Canada and the US, Jackie is also dually securities licensed in Canada and the US and is a cross border financial specialist for Canadians living in the US and US citizens living in Canada.
REFERENCES & RESOURCES:
Retirement Planning - Canadian Government Websites https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning.html
https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning/money-to-retire.html
Forget 70: How to Calculate Your Actual Retirement Income https://financialpost.com/personal-finance/family-finance/forget-70-how-to-calculate-your-actual-retirement-income-target
Retirement Savings Start at 25 vs 35 https://www.businessinsider.com/personal-finance/retirement-savings-start-at-25-vs-35-2019-4
Canada Benefits Calendar https://www.canada.ca/en/services/benefits/calendar.html
Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Jackie Ramler, and not necessarily those of Mastering Money/Mastering Retirement. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Mastering Money/Mastering Retirement is a public education organization.