By: Robert Catalano
I believe the question we are asked most as financial planners is “Do I have enough money to retire?” In reality there is no perfect answer to this question as everyone’s individual situation is different and people have different visions of their retirement. However, the key to having a successful retirement is to develop a plan to achieve your desired retirement.
How much money will you need?
The starting point for determining how much income you’ll need in retirement is knowing how much you spend now—something few people know with any accuracy. To find out, it’s necessary to track your monthly spending. Not all of your expenses will carry through to your retirement (for example-a mortgage). Of those expenses that will continue, total your expenditures then divide your spending into three categories: Needs, Wants and Dreams. Calculating what you spend now will help you estimate what you’ll be spending in retirement. By dividing the expenses into categories, you’ll also know which items are priorities and which are less important.
Where will your money come from?
Your sources of income will change when you retire. Instead of employment earnings, you’ll be drawing income from a number of different sources, some of it guaranteed and some of it variable.
Guaranteed income. Company pensions and government benefits such as the Quebec Pension Plan (QPP) and Old Age Security (OAS) are secure sources of income, not affected by market movements or fluctuating interest rates.
Cash reserves. Can provide steady income and these investments are not volatile, and can provide a “rainy day fund” you can draw on for unexpected expenses’ or use when markets go down and you want to avoid selling your equity assets at lower values.
Investment assets. Your investment income is likely to include a mix of interest, dividends and capital gains generated by the stocks, bonds and mutual funds you hold in your registered and non-registered
portfolios. These can be significantly affected by market fluctuations, and may dwindle as you draw down your capital during retirement.
The order in which you draw on this income is important, as it will be taxed differently depending on its source. You have little control over company pension and government benefits, but with the other categories you can choose what to take and when. In most cases, it’s advisable to draw on your non-registered assets before taking money from your registered Retirement Savings Plan (RSP) or registered Retirement Income Fund (RIF). The reason is that RSP and RIF withdrawals will be fully taxable, and if left within the plan, could qualify for rollover into a spousal plan after your death. On the other hand, withdrawals from your non-registered investments may trigger capital gains or reduce your capacity to earn tax-preferred dividends. You should also take into account new opportunities to split eligible pension income, such as RIF payments, with your spouse, and how the timing of RSP or RIF withdrawals may affect your OAS clawback, or your marginal tax rate in the year of death.
Bridging the gap
If you find that your expected income isn’t sufficient to support the retirement lifestyle you’ve planned, you need an action plan to correct the shortfall. You might consider these strategies:
Accelerate your savings. The last few years before retirement provide a unique opportunity to maximize your savings, since you are more likely to have a high-paying job and fewer expenses than in earlier years.
Continue to work. Many Canadians are choosing to move gradually into retirement by working part time or on a consulting basis for a few years.
Pay down debt. Carrying a low debt load is especially important when you are entering retirement and may have less income to make monthly payments.
To learn more about how I can help you with your retirement planning needs, please contact me at 514-874-7450 or Robert.email@example.com to schedule a personalized financial review.