One of the things that investors of all ages fear is that they won’t have a good financial plan in place so that they have enough retirement income to live on once they’ve stopped working.
Here are some ways to ease that anxiety:
In retirement, try to even out (equalize) your income with your spouse’s income, to lower overall taxes. Here’s how:
1.) Have the higher income spouse pay the household bills
The easiest way to even out income between two spouses is to have the higher-income spouse pay the mortgage, grocery bills, medical costs, insurance and other non-deductible costs of family life.
2.) Set up a spousal RRSP
Registered retirement savings plans, or RRSPs, are a form of tax-deferred savings plan designed to help investors save for retirement. RRSP contributions are tax deductible, and the investments grow tax-free.
3.) Pay interest on your spouse’s investment loans
If the lower-income spouse takes out an investment loan from a third party, such as a bank, the higher-income spouse can pay the interest on that loan.
RRIFs are a great long-term retirement income strategy
Converting your RRSP to a Registered Retirement Income Fund (RRIF) is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities (see the pros and cons of annuities on TSI Network) or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert: you just transfer them to your RRIF.
When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that starts at 5.28% of the RRIF’s year-end value when the account holder is aged 71. It reaches 6.82% at age 80, and levels off at 20% at age 95.
If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71.
What returns to expect from your retirement planning
As for the return you expect from your retirement investing, it’s best to aim low. If you choose to use bonds for retirement, assume you will earn the current yield; don’t assume you can make money trading in bonds.
Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. However, aim lower in your retirement planning — 5% a year, say — to allow for unforeseeable problems and setbacks.
Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.
One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.
Base your retirement planning on a sound financial plan
Here are the four key variables that your retirement income strategy should address to ensure you have sufficient retirement income:
- How much you expect to save prior to retirement;
- The return you expect on your savings;
- How much of that return you’ll have left after taxes;
- How much retirement income you’ll need once you’ve left the workforce.
Most accountants or tax preparers can do the math for you, based on numbers you provide. However, coming up with realistic numbers is the hard part. That’s because in part, it depends on your personal preferences.
What does your retirement income strategy entail? Has our advice helped in your process of building retirement income? Share your experience with us in the comments.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published in 2016 and has been republished on the Hub with permission.