Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

6 ways to ensure you won’t outlive your money

“Retirement: World’s longest coffee break.” —Author Unknown

Over the years you’ve taken plenty of advice, saved and invested diligently. Now you and your family are knocking on retirement’s door or, perhaps, in its midst.

The good news is the family members will likely live longer than before. The flip side is that more money may be required to fully fund retirement lifestyle.

Let’s assume that retirement spans from age 60 to 90, often longer. Many worry that the money won’t last and runs out during retirement.

Analyze life expectancy of the immediate family members for both spouses or partners. Specifically, review the current ages of grandparents, parents, uncles, aunts and cousins.

Some are petrified at the mere thought of such a prospect becoming reality. The question becomes what you can do to at least contain this situation.

I summarize six essential ideas designed to ballpark your lifestyle needs and help your retirement money last:

1. Family life expectancy

Analyze life expectancy of the immediate family members for both spouses or partners. Specifically, review the current ages of grandparents, parents, uncles, aunts and cousins. Get familiar with the ages attained by family members that have passed away. Pay attention to patterns of critical illness and longevity.

Today, it is commonplace for many to live well into their 80s. It is wise planning for a family to expect that at least one spouse could easily live past age 90. Another expectation is that family longevity continues to increase. Updating the retirement projection refreshes the family’s capital needs for the desired lifestyle.

2. Becoming too conservative
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TFSA Estate Planning options

The TFSA (Tax Free Savings Account) has become a popular saving and investment vehicle for many Canadians. It has also potentially become a significant portion of retirement savings.

When TFSAs were first introduced I thought they were pretty straightforward. However, we still get lots of questions, and Gordon Pape wrote an entire book about them (The Ultimate TFSA Guide), so there’s still some confusion.

A lot has been written about how to invest within a TFSA, but what happens to these funds when the planholder dies? The amount in the account at the date of death is tax free: then it depends on who the funds are given to.

Estate Planning For Your TFSA

There are three different estate planning options for your TFSA:

  1. Appoint a successor holder
  2. Designate a beneficiary
  3. Assign the funds to the estate

Successor holder

Only a spouse or common-law partner can be appointed successor holder.

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How to make realistic retirement calculations for your future

When you’re investing and planning for retirement, make realistic calculations rather than indulging in wishful thinking.

If you plan to retire at 65, and you’re 50, you won’t be dipping into your investments for 15 years. If you are in reasonably good health, you could live well into your 80s: possibly longer.

Let’s say you have $200,000 in your RRSP, and expect to add $15,000 in each of the next 15 years.

To determine if this is enough, you need to make some realistic retirement calculations about investment returns and income needs.

What you can expect

Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For the purposes of retirement planning, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.

*Be sure to check your math. There are many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site.

Income and outgo

If you continue to earn 6% a year, and you withdraw $50,964 a year (6% of the $849,400 in your RRSP), you can avoid dipping into capital until your mid-70s, when RRIF rules require a larger withdrawal.

However, if you start taking money out faster, or earn lower returns, you’ll run out of money.
If you withdraw $90,000 a year while earning 6%, the money you’ve accumulated will last just over 13 years. If you earn 5% but withdraw $90,000 a year, your money will be gone in just over 12 years.

Beware of getting caught in a vicious circle

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Time to stop following the Retirement herd

We are all social animals: we crave interaction and generally don’t like being alone. We crave that feeling of togetherness and being part of something bigger,  the added comfort and safety that comes with being part of a group or a  herd.

The herd protects individuals from being singled out, and in the animal kingdom provides safety from being killed by a predator.

Many people have developed a “herd” mentality in life deriving comfort by going with the flow and if everyone else is going in one direction they must know something that we don’t. It is easier not to complicate things by forging our own path based on what we learn or believe. What happens if we are wrong and the herd is right?

When it comes to retirement the “herd” has been doing this retirement thing for a long time. So they must be right, right?

I used to be a follower, part of the herd if you will. I was willing to put my fate in the hands of others and follow along blindly. Then I realized the retirement herd was heading in the wrong direction, and this wasn’t going to work for me. Let me explain.

Retirement worked when life expectancy was much lower

When the concept of retirement was created just over a hundred years ago, it worked.  The reason it worked was because life expectancy was much lower and if you were one of the lucky ones to reach the retirement finish line, you could expect to enjoy a couple of years in the proverbial “rocking chair,” watching the world go by.

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Blend income splitting with retirement strategies

My investing premise is straightforward: Splitting family income is very beneficial. Take full advantage of all provisions that apply.

Think of income splitting in the same breath as your retirement planning. In my view, the two camps ought to fit like a glove to deliver the best value. Families are keenly interested in paying the least income tax. There are a few low-cost activities left on the platter.

It’s never too early to get familiar with the menu. Let’s blend income splitting with your retirement strategies.

Ideally, a family pays less income tax where two spouses achieve similar income levels. Equalizing incomes allows each spouse use of the graduated tax scales from low to high.

Another beneficial goal is to equalize asset levels as much as possible. Retirees who reduce the “clawback” retain more of the OAS pension and, perhaps, the age credit.

A dozen tips for splitting income near retirement

Utilize these income splitting tips before and after retirement: Continue Reading…