Ready, set, retire?
Embarking on this new, hopefully long phase of life requires a different set of financial know-how
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So you have saved enough for retirement — good job!
Of course, you might be asking, ‘Now what?’
In all likelihood, Canadians are retiring with a stockpile of cash and investments that doesn’t look much like their grandparents’ retirement.
“In the past, people relied really heavily on employer pension plans,” says Julie Petrera, senior retirement strategist at Edward Jones and certified financial planner (CFP).
Along with Canada Pension Plan (CPP) and Old Age Security (OAS), “they would largely be set for retirement.”
Today’s retirement is generally more complex.
Fewer individuals have defined benefit plans paying them a set income for life. More workplace pensions are group RRSPs or defined-contribution plans that must be supplemented by personal savings in tax-free savings accounts (TFSAs) and RRSPs.
Even CPP and OAS are no longer slam-dunk decisions.
Today you can delay their receipt anywhere between ages 65 and 70. You can also start CPP at age 60 while continuing to pay into the program to increase its payment over time until age 70 if you choose to continue to work.
Indeed more aging Canadians are working longer, a recent Edward Jones survey shows.
“Less than 10 per cent are anchoring retirement to age 65 — or any age at all,” Petrera says, citing the study on Canadians’ retirement perceptions.
It revealed few Canadians today see retirement as merely rest and relaxation with six in 10 planning to continue working in some way.
As well, worries abound: 53 per cent are anxious about their health; nearly one in three surveyed fears unexpected expenses; and nearly three in 10 are concerned about the cost of long-term care. Similarly, roughly 30 per cent note being concerned about outliving their savings, while about one in five worries they will become a burden to their family.
All told, new retirees have a lot to unpack.
The trouble is many wait until the last minute for help, says Ian Wood, a CFP with Cardinal Capital Management Inc. in Winnipeg.
“It’s really that year or two before retirement where they want a retirement income plan,” he says.
“Most people say, ‘Here’s all my stuff; what kind of income can I get?’”
Wood says the answer is by no means easy, but it starts with new retirees building an accurate budget of expenses at least for the first two years of their retirement.
Then comes an arguably more challenging endeavour.
That is building a tax-efficient, sustainable retirement income from all their assets, says Daryl Diamond, a CFP at Diamond Retirement Planning Ltd.
“It’s like trying to put a jigsaw puzzle together where you don’t have the picture on the box to work from,” says the author of Retirement for the Record: Planning for Reliable Income for Your Lifetime.
Planning ahead with a financial adviser certainly helps develop over time a cash-flow blueprint to meet your needs while ensuring you do not pay more tax than necessary.
What people can’t do is look at any of their financial assets in isolation — as in, ‘What should I do with this LIRA (locked-in retirement account)?’
Decisions like those regarding workplace=defined contribution plans only become clear in the context of how other sources of savings and income will be used, Diamond says.
Still, retirement income planning does involve some basic concepts.
One strategy is creating a cash wedge of savings, Diamond says. This is simply determining how much cash must be set aside to pay for expenses for one to three years.
The reason being you want this money available “so you are not drawing too much from investments which could be down in value” as they likely are today, he explains.
Another basic concept is the distribution strategy. This involves building sustainable cash flow from income-producing assets while ideally only selling shares of companies and units of funds that are up in value.
Those with significant wealth may have “enough passive income generated to satisfy their after-tax cash flow needs without touching their capital,” Diamond says. “That is what we call a ‘perfect world.’”
Of course, the world is often far from perfect.
Most people need a combination of a cash wedge and distribution strategy to build their retirement income needs for a year or two.
All the while, they must pay attention to taxation and ensure they are slowly grinding down registered accounts. Otherwise, those taxable registered accounts — LIRAs and RRSPs — can turn into inflexible registered retirement income funds (RRIFs) and life income funds (LIFs) that cause tax headaches later in retirement.
A sustainable withdrawal rate rule of thumb “is somewhere in the 5.25 to 5.5 per cent of the initial assets” per year, Diamond says.
“We have not run into any issues with people seeing the value of their accounts restored after a market downturn at this level, but if you just increase that withdrawal rate seven per cent, it can lead to problems.”
Of course, some retirees may find five per cent withdrawals don’t meet their income needs. In turn, they must scale back their retirement goals, or work longer.
Like saving for retirement, income planning once retired is all about striking a balance between the needs of today and tomorrow, Wood says.
“You want to be able to take those trips early on and ensure you still have enough if you live to 100,” he adds.
“The other side is that you don’t want to live to 100 and wish you had done more and not just saved every penny.”