Hoping for the best isn’t a plan; you need to know where you stand— and where you’re going
By Olev Edur
When you’re in your mid-50s, retirement may seem a long way off—no need to think about it right now. Or is there?
Actually, a decade or more before retirement is a good time to take stock of your prospects and make any necessary adjustments to your planning while there’s still time. You should, for example, have already begun saving, but even so, will you have sufficient funds to see you comfortably through what may be a period that lasts 20 years or more? According to Statistics Canada data, a male aged 65 today can expect to live another 19.5 years (to age 84.5) on average, while a woman of 65 will average another 22.2 years (to age 87.2). And, of course, those are the averages— many of us will live even longer.
“Rather than calling it retirement, which makes it sound like everything is supposed to be done and dusted and you can sit back and step aside from life, I prefer to refer to it as a period of financial independence,” says Janet Gray, an advice-only financial planner with Money Coaches Canada. (Advice-only planners don’t sell products or manage investments.) “That has a more proactive con- notation. Will you be financially secure when the time comes, and if not, what can you do about it now?”
Of course, to assess whether your savings will be sufficient, you need to have an idea of what retirement actually means for you. “How do you want to spend that time?” Gray asks. “Everyone is different, so a one-size-fits-all cookie-cutter approach isn’t appropriate. One good way of looking at it is to ask yourself what retirement would look like if money were no object—what would you do? For example, would you travel? Pay for the grandkids’ education? Spend time gardening? First you need to think about what you’d like to do, which leads to questions of money. Once you know your goals, you can judge more clearly whether there will be sufficient funds to get you there.”
If it seems that your savings won’t be sufficient, though, Gray cautions against simply taking a negative approach. “You don’t want to get stuck in ‘I can’t afford it’ mode and assume that nothing can be done.”
There are many strategies and options at your disposal that could improve your retirement prospects. For example, even a small increase in your savings now can still make quite a difference; the more you set aside, the longer that money has to compound and grow. Similarly, in extreme cases, planning to work for an extra year can have a compounded impact on your financial prospects, because you’ll be saving for that additional year, plus you won’t be needing to draw down your savings for another year.
Investment Allocation
Gray points out that Canada Pension Plan (CPP) and Old Age Security (OAS) benefits can provide a substantial bedrock for one’s retirement finances. “Take a couple who has worked full-time most of their lives in Canada,” she says. “They might be entitled to a guaranteed and inflation-indexed income of as much as $40,000 to $45,000 a year. That may be enough to cover all their fixed expenses—accommodations, food, etc….” In addition, many retirees can rely on their employer pensions as a steady source of income.
“First you need to determine what your fixed costs will be—if they’re covered by that guaranteed income, then you can rely on your savings for discretionary expenses,” Gray says. “You can afford to allocate more of your savings to equity as opposed to fixed-income investments. Investment allocation is very goal-oriented: fixed-income investments are for short-term needs—to cover the basics and pay for the unexpected or maybe buy a new car. You don’t want to have to sell some equities when they’re at a low point to pay these expenses, but equities do provide greater growth over the long term.”
Low Incomes and the GIS Penalty
Many people keep their savings in a variety of buckets: tax-sheltered accounts such as RRSPs and TFSAs, as well as non-registered accounts. If it looks like your retirement income is going to be low enough that you’ll qualify for the Guaranteed Income Supplement (GIS is an adjunct of OAS), then it would be worthwhile to stop contributing to your RRSP and perhaps even start drawing it down now, putting the money into a TFSA if you have contribution room. This is because after age 65, every dollar withdrawn from an RRSP or RRIF will reduce your GIS by 50 cents; TFSA withdrawals, on the other hand, have no effect on income-geared benefits. So, the tax you might pay now on RRSP withdrawals is going to be a lot less than what you’ll pay down the road, especially if you must pay tax on top of the 50 per cent GIS penalty.
Reverse Mortgages
Among homeowning seniors, another increasingly popular tool for augmenting retirement income is the reverse mortgage. These arrangements were discussed in detail in the May/June 2024 issue of Good Times (you can find the article “The Good and Bad Sides of Reverse Mortgages”), but in a nutshell, they enable homeowners to convert up to 55 per cent of their home equity into cash. While this amounts to a loan charging interest and eating up more and more of the home’s value, the home also continues to increase in value tax-free, usually leaving substantial equity in the homeowner’s hands over time.
In the past, these arrangements were relatively expensive, but that’s changed in recent years. “Reverse mortgages have been modified, and they’re now closely regulated,” Gray says. “In the majority of cases, homeowners retain some net worth in their homes, so these plans can make sense, although they’re not for everyone.”
Another option is to apply for a home-equity line of credit (HELOC); this can serve the same purpose as a reverse mortgage but at lower cost. However, HELOCs must be arranged before you leave work. “Almost without fail, I recommend that my clients get a HELOC,” Gray says. But, she adds, because your income will partly determine your eligibility, “you really have to put the HELOC in place before you retire.”
Expenses
All of the foregoing deals with the income side of the equation, but there are also some relatively painless ways to make adjustments on the expense side of the ledger. In making a budget, you’ll likely find many areas—typically the small, seemingly innocuous items—that really aren’t necessary.
In addition, taking some time to look for bargains can be quite rewarding. Bear in mind that you don’t need to pay tax on money you don’t have to spend, so there can be a double payback.
By the time you reach your 50s, you should have some idea of what your retirement prospects are. If the picture isn’t to your liking, you have time to make decisions to change that situation. “You should be considering where you want to go and how you can get there,” Gray says.
In this regard, the advice of a professional financial planner can be more valuable now than at any other time of life. “Retirement planning is like an onion—it has many layers to consider, so you need to drill down deep to look for solutions,” Gray says. “A financial planner can sort through the details and make sense of it all. They have the tools to create what-if scenarios and put all the pieces together in a cohesive plan.”
