Are You Ready to Retire?
Here’s a detailed look at things you need to consider when planning your finances to ensure you have enough to retire well and enjoy your golden years
You want to retire soon, but will you have enough to retire on? You are not alone in this question. Millions of Canadians approaching their retirement years are wondering and worrying about the answer.
- 47 percent of Canadians are afraid of outliving their savings.
- 70 percent are worried that they are not saving enough for retirement.
Let’s explore some of the factors that need to be considered before making that big decision to retire and whether you are financially ready to retire.
The first factor to consider is what type of expenses are projected for your retirement and for how long. The for-how-long question is difficult to answer as none of us know the day of our departure from this earth.
Financial advisers suggest using an age of 90. If you are planning to retire at age 65, this means you have to figure on an adequate cash flow for around 25 years. Note: At age 65, a healthy Canadian male has a 33 percent chance of living to 90 while a female has a 44 percent chance.
Twenty-five years is a very long time in the world of financial planning. It takes a fair bit of financial astuteness to craft a financial plan covering a quarter century or more.
I am reminded of a saying I came across recently: There are those who make things happen, those who watch things happen, and those who say what happened.
If you are seriously contemplating retirement, it’s important to be someone who makes things happen. Developing a solid financial retirement plan is the key to determining when you can actually retire, yet over 50 percent of working Canadians do not have one.
The first step in developing a financial retirement plan is to project your anticipated expenses during retirement and create an expense forecast that reflects changing conditions throughout retirement.
Here are some things that you should take into consideration:
- Healthcare costs
- Vehicle replacement and upkeep
- Home maintenance/renovations
- Debt at retirement
- Other costs unique to your situation
Above all, be realistic. Some costs will increase and some may decrease. Typically, commuting and mortgage costs go down while vacation and healthcare costs go up. Plus, don’t forget that you will likely no longer be putting money into your RRSP once you enter retirement.
Some financial advisers advocate using 70 to 80 percent of your preretirement income as a starting point to determine a minimum income base to cover projected expenses. It is important to remember that the value of money today is worth more than money in the future in terms of purchasing power.
The second step is to list all potential income sources available to you once you begin your retirement. Government sources may include the following:
- Canada Pension Plan (CPP)
- Old Age Security (OAS)
- Guaranteed Income Supplement (GIS)
- Provincial benefit programs
- HST/PST credits
- Allowances and allowances for survivors
You’ll need to determine how much you qualify for, which of these benefits apply to you, and when to apply. For details, call Service Canada at 1-800-277-9914 or visit servicecanada.gc.ca.
Have you considered delaying receiving your CPP until an age past 65? Did you know that you could receive an additional 8.4 percent per year in CPP payments for every delayed year? A five-year delay would mean an additional 42 percent every year!
Have you considered what your immediate cash flow needs might be at retirement? If you were able to delay OAS by five years as well, you could add an extra 36 percent to your OAS payment.
For GIS qualification, your income would need to be at a minimum threshold. It’s designed to assist those with lower incomes.
Now, let's take a look at nongovernment income streams. Here is a list of income plans under your control:
- Pension plan (taxable)
- RRSP (taxable)
- TFSA (nontaxable)
- Rental income (taxable)
- Savings (some are taxable and some are not)
- Investment income, e.g., shares, dividends (taxable)
- Postretirement income, e.g., part-time job, consulting (taxable)
- CHIP/HELOC program – income from equity in home (nontaxable)
- Property tax deferral (some cities allow this)
- Possible inheritance (be cautious about depending on this)
- Other sources of income
Once you have looked at all your expenses and projected income streams, you need to evaluate if your income will cover these expenses on a cash-flow basis for the next 20 to 25 years. One thing to consider is that you will be faced with decumulating assets—in other words, you will be spending your hard-earned savings.
Keep in mind that governments will take their share of your savings through taxes, depending on how your funds are invested and withdrawn. When you retire, you will also be faced with a number of decisions that will directly affect how your nest egg will continue to earn money.
By law, once you reach age 71, RRSP and pension funds need to be transferred to either a registered retirement income fund (RRIF) or a life income fund (LIF), although you can delay this if your spouse/partner is younger. There is also the option to purchase annuities, which pay you a fixed amount of money on a monthly basis over the course of your lifetime.
No matter what your individual financial situation, it is important to create a retirement strategy that
- minimizes taxes (e.g., income splitting, the timing of fund withdrawals),
- projects future expenses throughout your retirement (which can change dramatically over time),
- projects future income from all sources, and
- includes a contingency plan should any of your assumptions change.
This is where you might need some professional help. Considering all the complexities of trying to accurately calculate a range of scenarios, notwithstanding all the tax consequences with some retirement decisions, it is very prudent to employ a qualified, independent (advice-only), certified financial planner to create and update a comprehensive financial plan tailored to your specific needs. It is worth every penny to engage the services of a reputable planner who can help you make things happen and get you ready for retirement.
If you are a member of either one or both of CLAC’s two retirement plans (CLAC Pension Plan, CLAC Group RRSP), you have access to iAcquaint, an unbiased, comprehensive, online financial planning tool, available at no charge to you. You also have access to the Retirement Income Calculator (RIC), which allows you to estimate and project your retirement income from all sources, including government plans, personal savings, and CLAC retirement plan account(s).
To access iAcquaint, simply log in to myCLAC.ca, where iAcquaint can be accessed in two ways:
- Scroll down to My Life, select My Health and Wellness, and click Financial Wellness.
- CLAC retirement plan members can scroll down to My Life, select View Retirement, and click on Access iAcquaint.
To access the RIC tool, log on to myCLAC.ca, select My Retirement, and click on the link under the Retirement Income Calculator section.
That’s a lot of information to digest, and I have not really answered the question I opened with: Will you have enough to retire? My answer is . . . well, that depends. It depends on you.
Have Calculator, Will Retire
Investments are a great way to ensure you will have enough money to fund your retirement plans. However, earning enough can take some time—and it involves more than luck.
The Rule of 72
This can help you calculate how many years it will take to double your investment. Simply divide 72 by your assumed growth rate. For example, a six percent growth rate will double your investment in around 12 years (72/6 = 12).
The 4% Rule
To get an idea of how long your current investments will last during your retirement, apply the four percent rule. This percentage is the approximate amount you will be withdrawing every year.
Add up the number of investments you will draw from in retirement (see the list of nongovernment income streams on the next page to get you started), then calculate four percent of that total. To account for inflation, ensure that you add two percent to that amount each year.
For example, if you currently have $500,000 in investments, you will withdraw $20,000 in your first year of retirement. In the following year, the withdrawal amount would be $20,400 with inflation, and so on.
Using this logic, that $500,000 would last approximately 30 years. If you retire at 65, that should be enough to take you to 95.
What about Inflation?
Though setting the rate of inflation at two percent for your calculations is a safe average, Statistics Canada offers a handy online tool that will help you better anticipate fluctuations in inflation based on your personal spending habits and location. The Personal Inflation Calculator on statscan.gc.ca takes into account groceries, childcare, mortgage or rent, clothing, and other monthly and annual expenses to provide insight into your personal inflation rate.
Sources: schwab.com, statcan.gc.ca
Delaying the Dream
Planning on Working past 65? You Are not Alone
Canada ended mandatory retirement in 2009. This move has provided individuals the option of choosing when they want to retire as opposed to when they need to.
As such, many Canadians are now working past the once-standard retirement age of 65. Statistics Canada reports that the percentage of those retiring later in life doubled between 2015 and 2018 to over 20 percent.
7 Reasons Why Canadians Are Choosing to Work Longer
- To stay connected socially to a workplace
- To build retirement assets (RSP, pension, savings)
- To allow time to pay off existing debt
- To maximize government income benefits by delaying Canada Pension Plan and Old Age Security payments, which you may not need while you’re still working (Note that the OAS claw-back threshold, which is based on all your income for the year, whether from employment or otherwise [e.g., RRIF withdrawal), may apply if your income is too high.)
- To maximize employer-paid health benefits, life insurance, and RSP/pension contributions
- They enjoy working (full-time or part-time)
- Other personal reasons, such as helping children financially or home renovations
No matter the reason, the number of Canadians choosing to work longer is increasing. And there are many more who have chosen to return to the workplace, whether for financial reasons or for a sense of purpose and fulfillment.
Choosing when to retire is a big step in planning for your future. A trustworthy financial planner can help you factor in many lifestyle decisions to help you better prepare for a rewarding and enjoyable retirement.
There’s a reason why the lottery is not considered an income stream. National draws like Lotto Max can have jackpot odds of 1 in 33,000,000 or more—greater than your chance of being struck by lightning, which is less than one in a million, according to Environment Canada. Still, that doesn’t prevent Canadians from hoping.
A survey commissioned by the Bank of Montreal found that more than one-third of Canadians plan to retire on lotto winnings. The same survey also reported that a staggering 40 percent believe inheritance will be their ticket to comfortable golden years.
The moral of the story? When it comes to your financial future, don’t rely on anyone but yourself—and your financial planner.
Sources: canadianbusiness.com, lotto.bclc.com, Environment Canada