Questions To Prep You For Retirement

MNP's TAKE: After a lifetime of hard work, Canadians entering their 'golden years' deserve all of the freedom one would imagine retirement has to offer. Unfortunately, in today's economic climate, this is not always the case. There are many reasons for this trend, including reduced income from government pension plans and savings, an ever-increasing cost of living, relationship breakdowns and in some cases, early retirement due to ill health and / or the increased expenses often associated with health challenges. Other oft-cited reasons for the increase in insolvency filings by seniors are unplanned setbacks relating to helping out family or an adult child in need. 

Finally, there is the fact that more seniors are entering retirement age still carrying debt. In many cases, that debt can be quite significant. Increased debt paired with a difficulty to pay it down due to reduced retirement income can often lead to financial distress with seemingly few solutions. 

One important way to protect yourself from falling into financial difficulties in your later years would be to take the time now to do an in-depth review of all personal or household finances and develop a comprehensive long-term plan. Having a firm understanding of your income and expenses will be essential leading into retirement, especially if you find yourself in a position of considering large financial commitments such as taking out mortgages, purchasing new vehicles or giving / lending lump sums of money. A detailed budget, along with an estimate of income needs to meet your expenses will help you prioritize your savings and approach any further debt or financial obligations with a greater long-term perspective. 

If debt has already started to take hold and you feel trapped, you have options. Depending on your unique position, there may be several options available to help get you on track to achieving a fresh financial start so you can get back to planning for your future comfortably. Contact Grant Bazian, CIRP, LIT, President of MNP Ltd. at 778.374.2108 or [email protected] for information on what debt solutions are available to help you.

BY ROBB ENGEN FOR THE TORONTO STAR 

As we near retirement, most of our major financial burdens - paying down the mortgage and raising children - should be behind us, and the resulting savings can be parlayed into big contributions to our retirement nest egg. Indeed, our final working years can give a major boost to prepare us for retirement, whether through increased savings, aggressive debt pay down, or simply a more conscientious effort to get our finances in order.

Yet, despite years of planning and saving, the transition to retirement can be a financial challenge. Many Canadians are faced with financial uncertainty because they lack adequate savings and company pension plans have disappeared.

It used to be rare to retire with a mortgage, and it was unheard of for your adult children to still live at home. But a new retirement reality is setting in. A recent survey by Tangerine revealed four in 10 Canadians aged 55-64 still carry debts, and 15 per cent still support their adult children. Twenty per cent expect to face major lifestyle changes in retirement.

With that in mind, here are five questions to determine your retirement readiness.

1.Are your finances in good shape today?

Take stock of your current financial situation by listing your assets and liabilities and analyzing your current income and expenses. Identify any opportunities to ramp-up savings in your final working years.

Procrastinators still have a chance to break bad spending habits and set their finances straight.

Make it a top p riority to pay down any remaining debt and get spending under control. You should have a rough idea when debt-freedom is in sight, and from there be able to determine how long to continue working to meet your retirement savings goals.

2. How will your expenses change in retirement?

It's a good idea to track every penny in the years leading up to retirement to get a handle on your spending. What will change in retirement? Expenses related to your working years, such as retirement contributions, CPP and EI, not to mention the cost of gas and the vehicle wear and tear associated with your daily commute, will disappear.

Replace these with new expenses for travel and hobbies to get an idea of your monthly retirement budget.

3. What sources of income will you draw from?

Personal savings from your RRSP, TFSA, and non-registered investments could make up the bulk of your retirement income, but you might have also been fortunate enough to contribute to a workplace pension plan that you can draw from in retirement.

Don't forget government benefits such as CPP and OAS. Check out the Canadian Retirement Income Calculator, an online resource created by the federal government to help you estimate your CPP and OAS benefits.

4. When to take CPP and OAS benefits

Whether you think you'll rely on government benefits or not, it's important to understand how CPP and OAS benefits work and how they might impact your retirement income.

You can take CPP benefits as early as 60, but the amount is reduced by 0.6 per cent for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case, your pension amount will increase by 0.7 per cent for each month you delay receiving it up to age 70.

OAS pays a monthly maximum of $578.53. Unlike CPP, tied to your employment history, you can receive OAS even if you have never worked or are still working. While you can't take your OAS pension early, you can delay receiving it for up to 60 months in exchange for a higher monthly amount - up to a maximum of 36 per cent at age 70.

5. How to invest in retirement

One of the biggest worries for retirees is outliving their money. Canadians are living longer and our retirement portfolios need to be built to last.

Consider the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income.

The first bucket is for immediate needs and should contain one or two years' worth of living expenses in easy-to-access cash.

Bucket two is for medium-term needs and is filled with bonds or a balanced mutual fund.

Bucket three is meant for long-term needs and is typically filled with stocks, ETFs, or equity mutual funds. As bucket one gets depleted, refill it from bucket two, which then gets refilled by bucket three. Rinse and repeat.

Playing the long game

If the answers to these questions leave you feeling less than adequate, know you still have options.

1. Reduce your lifestyle. Maybe you were planning on a luxury retirement but in reality you might have to settle for something less. Decreasing your annual retirement income goal is one way to preserve your nest egg.

2. Retire later. Working longer not only gives you more time to save, but also fewer years of drawing down your portfolio. Those with pension plans, in particular, would benefit greatly from additional years of service in the plan.

3. Take more risk. As employees get closer to retirement, conventional wisdom has their portfolios shifting to less risky assets. But given that retirement can last 30 years or more, it can make sense to maintain a decent allocation of stocks well into retirement. Even a one per cent increase in your annual investment returns can have a big impact on the longevity of your portfolio.