This article was reviewed by Jay Brecknell, CFP®.
Ah, retirement! That magic milestone you’ve planned for all your life. From the moment you clocked in at your first job, you were dreaming of this day. And now, it’s just around the corner.
How are you feeling?
While approaching retirement, most people experience what experts call “mild to medium anxiety.”
And that’s perfectly normal. We only get to retire once and we want to get it right. In order to do that, there are a few ducks to get in a row.
- Do I have everything in place?
- Did I plan properly?
- Will I outlive my money?
- When should I take CPP?
- What about inflation?
- What do I do with my home?
These are some common questions people have as they’re preparing to retire.
The complete list would fill an entire encyclopedia (you know those books we used to buy that our children now stack and use as hipster side tables).
So as you approach your retirement, here are the big questions you’ll want to answer early on.
In this post
- Planning your lifestyle
- Retirement income planning
- Retirement tax planning
- Financial planning
- Investment planning
- Estate planning
- Business succession planning
These will enable you to enjoy that transition with complete peace of mind knowing you’ve taken care of everything.
“Planning is bringing the future into the present so that you can do something about it now.” – Alain Lakein
What’s the average age of retirement in Canada?
According to Stats Canada, the majority of Canadians retire at age 64 (source). Employees in the public sectors tend to retire sooner and those that are self-employed hang up their hats closer to 68. Stats Can also reports that the average lifespan in Canada is 84 years old for men and 87 for women. (Source)
We’re seeing not just an increase in lifespan but also in the quality of life. Fewer of us will spend the majority of our retirement years with disabilities.
The very first questions we ask our clients are:
- when do you want to retire, and
- what are you going to do when you retire?
Most people have some kind of a bucket list. But not everybody actually puts it down in writing.
The first step to retirement planning is retirement dreaming. Remember all those things you wanted to do when you first started working? The plans you made and deferred? Now’s the time to take them out of storage and dust them off.
Starting a new hobby from scratch is not easy.
It’s not like you’re going to retire and suddenly start spending time with people you’ve not really spent a lot of time with. Or start playing pickleball three times a week when you haven’t been particularly active in the last fifteen years.
As you think about all the activities you want to do in the coming years, now’s a good time to start dipping your toes into trying them.
Not everybody wants to spend their retirement sipping Mai Tai’s on a beach or traipsing the greens at the local golf club. A lot of people simply want to be able to spend time with their friends and family, or volunteer at local organizations whose cause they’re passionate about.
Whether you’re dreaming big or you’re dreaming small, it doesn’t matter. As long as you’re dreaming. They’re called your golden years, not your bronze years. What do you want your retirement to look like?
The complete answer to this question always depends on the very first question we ask, which is, “What do you want your retirement to look like?” But in general, we give our clients a ballpark of 50-70% of their current annual income.
That’s a good place to start when they’re figuring out how much they’ll need to live on when they’re planning for their retirement.
Unless you’ve been self-employed, you’re probably not used to having to piece together your income from a variety of different sources. Welcome to retirement.
In Canada, you can draw your retirement income from a combination of public pensions, retirement savings, investments and, depending on your employer, private pensions (and corporate savings for business owners).
These are government pensions. There are two primary ones available to Canadians: the Canada Pension Plan (CPP) and the Old Age Security (OAS) benefit:
- CPP: The CPP is a federally administered plan that provides retirees with a monthly retirement pension, which you can start taking at the age of 60. To be eligible, you have to have worked in Canada and made at least one valid CPP contribution. (¹) The longer you’re able to hold off taking CPP, the larger your monthly payments will be.
- OAS: OAS is a taxable monthly benefit available to anyone aged 65 or older. If your income is above a certain amount ($79,054 for the year 2020), you’ll have to repay part or even your entire OAS pension. This is known as the OAS pension recovery tax or the OAS clawback. You can choose to delay receiving your first OAS payment for up to 5 years. The longer you delay, the larger your pension payment will be each month. After you turn 70, there’s generally no advantage to delaying your first payment; in fact you may risk losing some benefits.
There are other government pensions available, like an Allowance or the Guaranteed Income Supplement (GIS). These are meant for retirees who are low-income and definitely worth checking out if that’s the case for you or someone you know.
In addition to CPP and OAS, you might have a pension plan either sponsored through one of your past employers or an individual pension plan (IPP) that you’ve contributed to yourself.
- Defined contribution plan: establishes a set amount that you, your company or both will contribute to your plan on a regular basis. A defined contribution pension plan is similar to a Group RRSP except the former is dictated by pension law while the latter is under income law.
- Defined benefit plan: establishes a set amount that you will get paid when you retire, based on your income and the number of years you have worked.
- Locked-in Retirement Account (LIRA): if you had a pension at a former company then you can transfer that pension into a LIRA. It will be locked and completely inaccessible until after age 55. At the point you can convert the account to an LRIF and start withdrawing income.
These are those precious contributions you’ve been putting aside all these years. Along with any investments or cash you might have set aside, there are two primary savings vehicles you’ve likely been using to save for retirement: your registered retirement savings plan (RRSP) and your tax-free savings account (TFSA):
- RRSP: a kind of financial account where your contributions are tax deductible (and grow tax-free) but your withdrawals are taxed as income. There is an annual RRSP limit you can contribute (18% of your earned income from the previous year), you can carry forward unused space indefinitely. You can make contributions into your RRSP until December 31 of the year you turn 71, at which point, you’ll need to convert your RRSP into a RRIF or use the funds to buy an annuity. Check out some tips on using your RRSP to save for retirement.
- TFSA: like the RRSP, the TFSA is a kind of financial account where you can hold different kinds of investments and your savings grow tax-free. That’s where the similarities end. Contributions to your TFSA are made with your after-tax dollars (meaning no tax refund for your contributions) but withdrawals are entirely tax-free. There is a contribution limit every year ($6,000 for 2022), but that contribution room carries over every year and is reusable, meaning if you saved $6,000 in your TFSA but spent it on a trip to Greece, it’s still available to you. TFSAs also have a ton of benefits when it comes to transferring your wealth to your beneficiaries. Learn about some of the TFSA’s super powers.
If you’ve have additional investments outside of your RRSPs or TFSA, those will also come into play during retirement in the form of:
- Interest and foreign dividends
- Capital gains
- Deferred capital gains
What is your taxable income?
Your taxable income is all of your income sources combined minus any deductions. Our taxes in Canada are based on a tiered system. Your average tax rate is based on the various tax brackets that you have taxable income (capital gains, Canadian dividends, other income…).
When planning for retirement, you want to calculate your taxes each year of your financial plan (using current tables). This is important as income from various sources is taxed at different rates.
Once you’ve got a firm understanding of the retirement income sources you’re going to be using in the next couple of years, you come to a conclusion:
The order in which you take from each source matters because they each have different tax implications.
A good retirement plan is designed to make your income as tax efficient as possible. This is often the most overlooked item and it is one of the areas that can have the greatest positive or negative effect.
Depending on how you structure your assets and plan your income, you could end up having to pay a lot more tax and lose certain benefits, which means you’ll need to save more overall, even if you take out the exact same amount.
You should consider some of the following strategies to minimize your taxes in retirement:
- Income source order
- Spousal RRSP
- Income splitting
- Pension sharing
“A goal without a plan is just a wish.” Antoine de St. Exupéry
While you’re employed, when do you generally spend the most money?
If you’re like most of us, you’ll probably answer on the weekends or when you’re on vacation.
Well, guess what? Retirement is like a permanent weekend (yay!). That means it’s easy to spend more if you’re not careful (oooh!).
Being on a fixed budget can be a hard transition for some people, especially if you’re not used to doing a budget and sticking to it.
Managing your cash flow is pivotal to a stress-free retirement. And the best tool for managing you cash flow?
It’s your budget.
Your budget is still everyone’s best tool to tracking (and controlling) money going in and money coming out. A good budget will include the following:
- Health care
- Property taxes
Just because you’re retired doesn’t mean you can’t keep growing your investments.
When you retire, you rely on your investments a lot more for your income. So your risk acceptance tends to go down, but at the same time, you need them to work for you.
It’s very common to have your investments scattered across various institutions. The problem with this is that it becomes difficult to have complete visibility over your financial picture and to develop an effective overall strategy.
Even when they’re managed by a financial advisor or a bank, your investments will often lack a clear target and structure. So you might have GICs at a bank earning nothing and at the same time a high risk mutual fund with a financial advisor.
A lot of investment firms might put the same investment fund in each type of account without paying attention to the taxation.
When you’re looking at your investments, you want to start with the rate of return that you need to achieve your retirement plan, then identify the investments that will get you there at an acceptable risk level, then finally allocate them to the best possible account type.
Not everyone likes thinking long and hard about what’s going to happen to all their stuff after they pass away, but estate planning is something you shouldn’t overlook. Not only does it reduce disagreements or petty squabbles among your children or other ones when you’re no longer around, but a good estate plan will also continue your legacy.
Make sure you have an updated plan so even after you’re gone, you can clearly communicate your desires, meet your financial goals and reduce the burden on your loved ones.
Update your Will
Your Will, also referred to as your Last Will and Testament, is an important legal document and a fundamental element of your estate plan. It has two primary roles:
- It names your executor (person, institution or trust company) responsible for carrying out your wishes and distributing your assets and
- It ensures your property is distributed to your beneficiaries according to your wishes
Most people approaching retirement have a will in place, but not many have touched in the last several decades. By the time you retire, it’s a good idea to make sure your executors and beneficiaries are updated so your will can last the next 20 to 35 years.
Related article: Common Estate Planning Mistakes
Assign Power of attorney
Power of Attorney is another legal document where you give a single person or a group of people the legal authority to make financial, health and legal decisions on your behalf if you are incapacitated.
This is another important document to have in place so you can choose who will be entrusted to act on your behalf when you are at your most vulnerable.
If you’re a business owner, as you’re approaching retirement, it’s also important to set in motion your succession plan.
What is succession planning?
Succession planning is a formal process of transferring leadership responsibilities within a business. There are usually several steps involved, that look something like this:
- Reviewing organizational goals
- Auditing strengths and opportunities
- Identifying key roles and employees within the organization
- Training and hiring
- Executing the transition
- Mentorship and support
- Full transition completed
Your business is often like one of your children so it can be hard to let it go, even if you know it’s for its own good.
The goal of succession planning is to maintain the value of your business. You do that by implementing a smooth transition to new ownership or management.
Enjoying the ride
“To accomplish great things, we must not only act but also dream. Not only plan, but also believe.” Anatole France
There are some things you can enjoy more by embracing what you don’t know and can’t predict. Retirement isn’t one of those things.
Peace of mind comes from knowing that you’ve got a plan laid out that will allow you to respond to the unpredictable nature of life.
Once you’ve got your ducks lined up, then yes, you can let go and enjoy the ride. Because it’s an incredible journey that you should get to enjoy.
Looking for some help to get started on your retirement plan? We’ve put together a worksheet for you! Get it here and start your journey to a stress-free retirement today.