A good portion of my financial planning clients are in what I’d call the retirement readiness zone, meaning they are 1-5 years away from retirement. They want a check-up on their financial situation and answers to big burning questions like, when can I retire, how much money can I spend, how long will my money last, and how to withdraw from my savings and investments to create the retirement income I need.
Here is a checklist of things to consider when you find yourself in the retirement readiness zone:
How much do I spend?
I get that many people are turned off by budgeting and tracking expenses, but it’s important to understand what it costs to live your life.
Instead of relying on rules of thumb, like you’ll spend 70% of your final salary in retirement, I find that most of my clients want to maintain their current standard of living, if not enhance it with additional spending on travel and hobbies.
Determine your true after-tax spending, including items like property taxes and home & auto insurance that will be with you for life. Add in your desired annual spending on travel and hobbies, and build in a buffer for small unplanned expenses such as replacing an appliance or doing modest home improvements or repairs.
This spending amount is what will drive the decisions around how much to withdraw from your investments, when to take CPP & OAS, and how long your money will last at that spending rate.
Plan your one-time expenses
Besides your regular after-tax spending, you should also factor one-time expenses into your plan. In my experience, the majority of these expenses will include vehicle replacement, travel beyond the ordinary (ex. bucket list trip to Europe), home renovations, and monetary gifts to adult children or grandchildren.
It’s not practical to assume your spending will stay static every single year. Build these one-time expenses into your plan over the next 10-20 years so you have a better and more realistic understanding of what you can afford and how to access these funds.
What you’ll find is that instead of static spending of, say, $65,000 per year, you’ll have several years of spending $75,000 to $85,000 (or more) to cover these one-time costs.
Estate planning
Make sure to update your will and estate planning documents, including the beneficiaries on your insurance and investment accounts.
Consider giving with a warm hand (otherwise known as give while you live) to your children or favourite charity. What I mean is rather than leaving hundreds of thousands, or even millions, in your estate at 90 years old, consider making smaller gifts to your beneficiaries throughout your lifetime.
Some examples include a gift towards a downpayment, help funding the grandkids’ RESPs, and footing the bill for a family vacation with adult kids and grandkids.
In case I die file
It’s common for one spouse to take the lead on financial matters for the household. But this can be problematic if something happens to the chief financial officer of the house – if they predecease their spouse or become cognitively impaired and can no longer manage the finances or investments.
The biggest risk is when the household CFO is an older, male spouse who self-manages the entire portfolio of investments. Men are statistically more likely to die earlier than women. If the surviving spouse has never been involved in the finances or investments, they could be left with an unwieldy mess.
Make an “in case I die” file that includes a checklist of items like notifying Service Canada of your death (for CPP and OAS), transferring registered accounts to the surviving spouse’s name, cancelling credit cards, removing your name from joint accounts and other bills, to name a few.
One recommendation for DIY investors to consider is if their non-financial spouse would be able to manage the investments on their own. Often there are several accounts to manage and certain “systems” in place that the DIY investor has managed for years but may not be easily picked up by the non-financial spouse. This is doubly true for retired clients who are drawing down their portfolios in a particular order.
If the non-financial spouse would just as soon take everything and hand it over to the friendly banker, then the years of careful investing and monitoring may be quickly undone.
In this case I strongly recommend using a robo advisor in your later retirement years. The robo advisor will assign you a risk appropriate, low cost, globally diversified portfolio. They’ll automatically rebalance the portfolio and set up automatic withdrawals linked directly to your bank account to meet your monthly income needs. Best of all, you do have access to human advice to make changes and ask questions about your investments. It’s really a hidden gem of an investment management service for retirees.
Psychologically switching from saving to spending
If you’ve been a diligent saver throughout your career you may find it difficult to turn off the savings taps and turn on the spending taps in retirement.
I’ve helped build retirement plans for clients with reasonable after-tax spending assumptions. Several years later and they’ve never come close to those spending projections, instead continuing to squirrel away money in their TFSA and non-registered savings.
More than just the numbers, retirement is about designing the lifestyle you want to live. It would be a shame not to use the resources you’ve saved over many years to build your ideal retirement. Yet many retirees who have more than enough resources will agonize over buying an RV or small vacation home, renovating their home, or travelling abroad.
What you’ll end up with is the Scrooge McDuck retirement plan, swimming in money in your 80s and 90s instead of spending a sensible amount to build your desired lifestyle.
When to take CPP and OAS
There’s good evidence that shows how deferring CPP to age 70 leads to more lifetime income. Yet the most common ages to take CPP are at 60 and at 65.
If you have sufficient access to other financial resources (pension, RRSP, non-registered savings) you should strongly consider deferring CPP to lock in a 42% increase in your benefits (more like 50% when you factor in inflation adjustments).
It’s at the very least worth understanding your options. I’d recommend using www.cppcalculator.com to get an accurate estimate of your CPP benefits at different ages, and reaching out to Doug Runchey at the same website if you have a more complicated CPP scenario to calculate.
There’s less of an incentive to delay your OAS benefits, so taking it at the earliest age of 65 is perfectly reasonable. However, this depends on when you plan to retire, how large of an RRSP/RRIF you have, whether you plan to sell a rental property or have large unrealized capital gains. It makes sense to defer OAS if your income will push you into OAS clawback territory.
Being tax aware
One comment I hear a lot from prospective clients is how they want to pay as little tax as possible in retirement. While we should all be tax aware and strive to be as tax efficient as possible, we shouldn’t let the tax tail wag all of our financial decisions.
For one, the vast majority of us will pay much less tax in retirement than we did during our working years. Retirees are able to split eligible pension income with their spouse (defined benefit pension income, or RRIF withdrawals starting at age 65). They’ll also qualify for the pension income tax credit.
We also spend from already taxed non-registered savings, and capital gains are taxed favourably. TFSA withdrawals are tax-free, which can be handy for larger one-time expenses throughout retirement. We also get that contribution room added back to our TFSAs the following calendar year.
It’s quite common for me to see average tax rates below 5% for early retirees (before 65), and around 10-12% once they start collecting government benefits and withdrawing more from their RRIFs. And that’s for clients who were paying average tax rates of between 18-25% during their working years.
Final Thoughts
As you can see, there’s a lot to think about when it comes to planning your retirement. When you are 1-5 years away from retiring, a checklist like this can be helpful to get yourself into the retirement readiness zone.
One important decision I didn’t address is how to decide on an actual retirement date. By going through a checklist like this early enough, and potentially getting help from a financial planner, you’ll find out how prepared you are both psychologically and financially for retirement.
You might find you need to delay your retirement by a year or two to shore up your finances. Or, you might find that you can meet all of your retirement goals and can retire much earlier.
The danger in not going through a retirement readiness checklist is falling into the “one-more-year” trap and continuing to work when you don’t have to, or being fixed on an early retirement date even though you won’t have enough resources to sustain your needs in retirement.
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on Jan. 16, 2022 and is republished here with his permission.
