Retirement

In theory, this should be an ongoing process and the last 5 years before ‘pulling the pin’ should merely be refining your existing plan rather than starting from scratch.  Of course, life doesn’t always work that way and the adage “better late than never” is quite true. Accordingly, if you haven’t started it makes sense to make this a priority rather than putting it off any longer.  Some of the suggestions may be more applicable closer to retirement although some should be part of the process whenever you start planning.

• Do a retirement plan and update it every few years or upon significant changes. Although a lot of books suggest figures such as 70% or 80% of your pre-retirement income as what you’ll need during retirement, I believe this is too simplistic.  Some people want to travel more now that they have the time, while others want to embark on a series of expense hobbies.  As well, health care expenses are a major wildcard in retirement planning.  Accordingly, my suggestion is to cost out the retirement lifestyle you wish to live rather than relying on an arbitrary percentage and to get extended health and long term care insurance to minimize the impact of health issues.  As well, if you plan on retiring early in retirement, perhaps you will want to budget for different income needs through different phases of retirement.  You might also want to check out a website called “com” (see “useful links”) that has videos of different retirees talking about their varied retirement experiences to get an idea if a certain retirement lifestyle is actually what you want.
• Get an accurate estimate of your life expectancy.  People seem to dramatically underestimate how long the statistics suggest they’ll actually live.  Accordingly, I suggest completing the questionnaire at “livingto100.com” to get an idea of how much longer you might be around.  Of course, when planning, it is important to remember that estimates only point to the average lifespan of someone with your characteristics.  In other words, 50% of the people in your situation will actually live longer!  As a result, I suggest estimating a very generous lifespan when budgeting for retirement as I don’t want anyone to have to get by on Kraft Dinner and cat food during their golden years.
• Don’t assume your investments will do particularly well. When doing retirement estimate, it is also important to remember that the rate of return on your investments is a very arbitrary assumption in most cases.  Moreover, a lot also depends on the sequence of returns – whether you have your good investment years early (this is what you want to happen) rather than later.  As a result, I suggest using very low rates of return when estimating how your investments will perform and putting in extra money when possible (especially earlier rather than later) to increase your ‘wiggle room.’  I also like using a computer tool called a “Monte Carlo simulator” which randomizes how your investments perform each year within limits you supply, runs through the situation numerous times and then tells how often you achieved your retirement goals.
• After doing a retirement projection, review your investments to make sure you are comfortable with the amount of risk you’re taking and investigate alternatives. The closer you get to retirement, the less time your investments have to bounce back before you have to liquidate them.  A sudden significant drop in investment values shortly before retirement can be extremely stressful and can significantly disrupt your future plans.   In my view, this is particularly tragic when the people suffering the loss had already accumulated a significant nest egg and were taking risks that weren’t necessary to reach their retirement goals.  As I like to say, “Why pull your goalie when you’re up 3 goals in the 3^rd period?” On the other hand, investing exclusively in GICs exposes you to different types of risk (such as inflation or running out of money if you live to a ripe old age) and isn’t terribly tax efficient if done outside your registered funds.  One thing to consider are segregated funds that allow you to benefit from the stock market but also guarantee a minimum income for life no matter how long you live or how poorly your investments actually perform.
• Consider creating your own pension.  Most people are jealous of civil servants and their ability to enjoy their retirement on a comfortable pension without having to worry about stock market returns.  If you have enough saved, it is possible to create the same thing for yourself by using RRSP money or even non-registered cash to buy a life annuity from an insurance company.  Incorporated business owners can even set up an individual pension plan that may be an extremely attractive solution.  Although creating your own pension may lock in your money, you also guarantee yourself an income for life and don’t have to spend your mornings during retirement checking out investment returns.  Moreover, this might be something you could do with part but not all of your money so that you still get a cheque every month but have some of the benefits of not having all your money tied up, too.  Consider those segregated funds that promise an income for life but give you market exposure and the ability to access any remaining capital if you really want or need it that I mentioned in the previous bullet as well.
• Diversify your investments and think about retirement assets as being separate compartments – money you plan on using in the near future, money invested for the next few years and money put away for later on in your retirement. Depending on your circumstances, you might feel comfortable taking some investment risk on the portion of your investments that you don’t plan on using for the next decade, knowing that they have time to bounce back if the market dips, if your shorter term investments aren’t exposed to the same risk and can tide you over while your other investments hopefully recover and soar to new heights.   Although mutual funds and the like can be a solid part of investment portfolios, there are also other options to consider like ETFs, Segregated Funds, options, convertible shares, preferred shares, stock portfolios, hedge funds, MICs and REITs.  Don’t worry about the jargon for now – the important point is that you have more choices than you probably knew.  Even better, you can spread your risk around, especially as there are investments that might actually benefit if the stock market crashes!
• Take tax considerations into account when looking at your investments. As I also love to say, “It doesn’t matter what you make, but what you keep.”   It pays to know how different investments are taxed and how they affect government benefits so that you make your money go further.  Sometimes, a few changes to your portfolio can make your money go a lot further, even if your investment returns don’t change!  If you have a lot of losses in your non-registered portfolio, you might want to look at a type of mutual fund that converts most types of income into capital gains that can usually be deferred or can be realized tax-free if your previous losses are more than the current gains.  If you are worried about losing income-related government benefits, it is important to know that only 50% of any capital gain is considered, 100% of interest and up 141% of dividends.  It is true that you get a big tax break on dividends, known as the dividend tax credit, but unfortunately, it is not taken into consideration when they are calculating benefits like OAS pensions, the Age Credit, and most especially, GIS payments.
• Bone up on your pension options. If you have a work pension, you may have several options on what type of pension you’ll receive.   The most common choice is between a pension based exclusively on your life (a “single life pension”) with a minimum payout period (a “guarantee period”) or a pension based on the lives of both spouses (a “joint life pension”), which may or may not reduce on the death of one or either spouse.  As you might expect, the size of your pension will vary, depending upon which options you select.  Unfortunately, a lot of the pension estimates you may receive while working will quote a pension based only on a single life pension with something like a 10 year guarantee period, which promises a higher payout than the joint life pension that many couples end up choosing.  Fortunately, most public service pensions have a website that lets you run through other pension options.  Even better, most pension estimate statements also assume you don’t get a raise between now and retirement.  As pensions are based on your best earning years and length of service, a few raises down the road can significantly improve your position.  You can factor in raises when using the pension calculator tools found online.  I have provided a link to the major B.C. public service pension plans in the useful links section.
• Carefully consider whether or not to “commute” your pension (convert it into a locked-in RRSP).When approaching retirement or leaving a company, you may also have the option of taking a pension on retirement or getting a cash payment into a locked-in RRSP, which later becomes a life income fund or “LIF”, which is like a RRIF but limits the maximum you can pull out each year.  A lot depends on the type of pension (particularly if it offers health benefits and is indexed to inflation), how long you’ve been there and how close you are to retirement.  If you have an indexed inflation and are at or near retirement, it is usually a good idea to keep it, depending on your and your spouse’s current health.  It is also important to know that if you convert a pension, you might have to take part of it in cash and pay tax on it immediately, which can make a significant difference.   You should be able to find this out in advance. Make this decision carefully.  I suggest talking to an independent financial advisor before proceeding, remembering that some advisors will want you to convert your pension so that you can invest the proceeds with them, which might not always be the best idea.
• When picking your pension option, make sure that you understand your spouse’s financial situation when you die shortly into your pension and your spouse lives to a ripe old age. Many couples seem to commonly pick single life pensions that pay more than both spouses need while they both survive but can potentially leave one or both spouses in financial peril down the road, particularly, if there is a long gap between deaths, when the deceased’s OAS pension also disappears and all or some of the CPP benefit also vanishes.     Moreover, the surviving spouse might end up paying taxes at a higher rate, as income-splitting between both spouses would no longer be possible.   As a result, even if it means less money up front and may ultimately not pay out as much as single life pension if the person with the pension lives longest, I strongly suggest looking closely at a joint life pension, particularly if it provides inflation protection and enough money to reach your retirement goals anyway.  If you are already on pensions and see potential problems, consider life insurance if possible and saving inside both of your TFSAs (especially for the spouse who owns the pension), as this grows and is withdrawn tax-free.  Setting up a trust for the surviving spouse can help minimize taxes, maximize government benefits and generally make non-registered money go further.
• Set up a systematic retirement plan, preferably one that calls for monthly contributions rather than lump sum contributions each year mere seconds before the RRSP deadline.  Most people find it easier to come up with a smaller cheque each month than a big one every February.  Moreover, by investing monthly rather than yearly, you reduce the scope of potential losses, although you do give up a bit of the upside as well.
• If married or living common-law, it usually makes sense to set things up in such a way that both spouses a have a similar amount of retirement assets and incomes by retirement, as a couple’s combined tax bill is usually lowest when they both have similar incomes and this is easier to achieve if their investments are about the same size. Even better, try to have RRSPs of similar amounts and similar amounts of non-registered investments, although there are some exceptions to the latter.  This is something that usually takes a lot of advance planning.  If one spouse has more RRSPs, then that spouse might consider making spousal RRSPs for the other’s benefit until things are evened up.  If one spouse has more non-registered assets, that spouse might agree to pay more of the monthly bills so that the other has more money to invest.  The spouse with more non-registered investments might also provide his or her spouse with the cash for that spouse’s TFSA contribution.  It is also possible to set up spousal loans where one spouse loans money to the other at a set rate determined by the government. This works particularly well if the receiving spouse is at a lower tax brackets.  If the higher income spouse is the one with fewer assets, then that spouse might need to choose non-registered investments such as corporate class mutual funds that don’t produce a  lot of yearly income so that the couple’s tax bill before retirement isn’t higher than it needs to be.
• Don’t forget about TFSAs!  Most people seem to use TFSAs in the same way they use their savings accounts at the bank and generally earn the minimal interest a savings account generates.   TFSAs can hold the same type of assets as RRSPs and, if used properly, can be a great source of retirement income or way of increasing your estate if you don’t need the money.  In Canada, our government has a ‘social safety net’ (as they like to say) that tries to provide a minimum retirement income for retirees by providing income-related benefits like GIS pensions to low-income seniors, the Age Credit, OAS pensions and Fair Pharmacare, to name a few.  On the other hand, once your taxable income increases, seniors not only lose these benefits but also have to pay taxes at higher rates!  Fortunately, money from your TFSA is generally not included when calculating either your tax bill or what benefits you are eligible to receive.   By regularly investing in TFSAs now, you can have a pool of investment money for retirement that you can use to fund the lifestyle you want while minimizing the tax consequences and the reduction in your government benefits.
• Look into the potential sale of businesses and investment properties several years prior to retirement. It could be the case that it makes sense not to sell these assets but if you do, either for a lifestyle or financial standpoint (such as if you are asset-rich and cash poor), it makes sense to plan out a gradual exit strategy well in advance in the hopes of getting top dollar by taking the time pressure off a sale and by minimizing the tax consequences.  If planning on selling or gifting to children, the same also holds true.  There are also ways of being paid out slowly over time and spreading out the tax or even retaining some of the assets while selling others.  Finally, selling before age 65 might also minimize the impact to your government benefits for the year of sale.
• Look at retirement in the same way as you’d look at learning a new skill or starting a new career and put some time into getting ready. It is one thing to have enough money to retire but entirely a different thing to actually enjoy it!  For some reason, the statistics suggest that women retire better than men.  One thing they generally do differently is gradually retiring over a number of years rather than stopping cold turkey, which probably means that it’s an easier transition when they reduce from part-time to  your time.  It also seems to help if you’ve already developed a wide variety (say 5 or 6 at least) of interests and activities to pursue that draw on different skills as well as a developed social network.  I particularly suggest developing a mix of interest that keep you physically active (as your doctor will tell you this makes a big difference) , engage your mind (which also needs to be exercised), keep you socially connected (as we all seem to need people to various degrees) and at least one activity that involves ‘giving back’ in some way (as it seems that helping others does a lot to pump up our own level of happiness).  I’ve also read that one of the potential problems of retiring (especially cold turkey) is a lack of structure, especially early in retirement if you’ve come from a pretty set schedule.  Accordingly, setting up a new schedule may help some people, especially if you plan on stopping work cold turkey.
• Do you really want (and have to) retire? Many of my older clients (particularly men, for some reason) choose to keep working even though they don’t need the money.  Some have never quit and while others did retire and then decided to return to the working world.  Many of these people seem to be doing quite well, especially when they still have the time to pursue their other interests as well.  When I do retirement planning work, I look at it more of a question of financial freedom planning – when you could retire rather than whether you should  Perhaps your ‘retirement’ plan still involves working at your same job or starting a new career (paid or on a volunteer basis) or returning to a former career as a contractor or employee rather than as the big cheese.  As a business owner, perhaps you merely delegate more responsibilities but still hold onto some or all of the reins.  In the end, it’s up to you to determine how your ‘retirement’ will look and, if you enjoy your current career or have always wanted to be a _________, then why not?
• Realize that retirement can be a series of phases rather than just a single stage.Some retirement planners prefer to use the term “refirement” rather than “retirement” because a) they hate the word ‘retire’ which means to withdraw and b) because many people merely change direction when they ‘retire’ and may actually be busier when they are retired than when they were working towards financial freedom.  Some of these same planners claim that retirement can be a series of revolving phases, which can include work, education and travel in series of revolving loops rather than a series of orderly and final steps.  I can help you develop a financial plan for retiring but it is up to you to figure out what ‘retirement’ will look like for you, to take the steps in advance to get ready and to make whatever adjustment are necessary along the way if things aren’t working.
• Don’t put off some of your big retirement adventures, as our health changes quickly. Some people break down retirement into the “go-go years, the slow-go years and the no-go years.”  You won’t likely won’t be able to do all the things you want to do throughout your entire retirement, so I suggest planning, budgeting and doing the things that depend on your good health when you get the chance.

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