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.
You’ve undoubtedly thought a lot about the shape of your retirement but whether your plans include traveling, volunteering, starting a new career, or a myriad of other retirement dreams, the most important thing is having sufficient finances to ensure all of them become reality. If you are a member of an employer-provided pension plan, now is the time to make some important decisions that will have a strong impact on the amount and length of your pension.
Decide when your pension payments will begin
If you have a defined benefit pension (DB) plan, your annual benefit may be reduced if you retire before reaching a certain age or before completing a minimum service requirement. However, your plan may have a bridging benefit to offset an early retirement pension reduction that is paid from the date of early retirement up to age 65 when it will stop.
Decide whether or not your pension benefit transfers to your spouse when you die
You can usually: Elect to receive a life-only pension that ends when you die. It will deliver a higher monthly benefit to you than a joint and last survivorship pension but will not provide a continuing benefit for your spouse after you die. The plan member’s spouse will need to sign a waiver to take this option.
Select the joint and last survivorship option. While your monthly benefit will be lower, the “joint and last survivor” option is usually better unless your spouse has his or her own pension, Registered Retirement Savings Plan, non-registered assets and/or adequate insurance coverage. Factor in the expected life expectancy for you and your spouse.
Choosing the survivor benefit
Not all plans allow you to do this: check the details of your plan. In most jurisdictions, the “standard” survivor benefit is 60% of the pension that was being paid to you prior to death; however, some plans will include other options such as 66 2/3%, 75% and 100% survivor benefits. If your goal is to leave an estate to your beneficiaries, commuting your pension could make sense.
Do you have the option of receiving your pension benefit for a guaranteed minimum number of payments? Continue Reading…
Annuities continue to get short shrift from those nearing or in Retirement, but if you describe them with a different label — like a Guaranteed Lifetime Income — they are viewed much more favourably, according to a study released Tuesday. I summarize the main results of the Canadian Guaranteed Lifetime Income Study in my latest MoneySense Retired Money column, which you can access by clicking on the highlighted headline: Guaranteed Income is a No Brainer: Just Don’t Call it an Annuity.
The study was conducted by Greenwald & Associates and CANNEX for two Canadian insurance companies, Great West Life and Sun Life in February with 1,003 Canadians aged 55 to 75 with financial assets of at least $100,000 (not counting a home. It found only 45% are highly confident they will be able to maintain their standard of living in retirement, assuming a life expectancy of 85.
I’d argue that the majority who ARE confident are probably the beneficiaries of employer-sponsored Defined Benefit pension plans, ideally the kind of inflation-indexed ones that many public servants enjoy. They are of course becoming much less common in the private sector.
This site and my various columns have long argued that, to paraphrase Pensionize Your Nest Egg co-author Moshe Milevsky, DB pensions and Government-provided equivalents like CPP and OAS can be regarded as REAL pensions, because they provide a guaranteed stream of income for as long as you live.
By contrast, investment portfolios comprising RRSPs, TFSAs, group RRSPs and Defined Contribution plans do not in themselves constitute the kind of “real” pension that Milevsky says should be one part of a diversified retirement income strategy. It’s up to retirees to convert their retirement nest eggs into real pensions and one of the most common ways to do this is to buy annuities.
Consider that investors hoping to live on RRSP/RRIF interest, dividends and capital gains have no guarantee their money will last as long as they will. With still-low interest rates and the possibility of stock-market losses, and the constant spectre of rising inflation, longevity risk and the possibility of outliving your money is a real concern.
The study lists several perceived positives and negatives of annuities and segregated funds. And it found the percentage of Canadians who rate GLI as a “highly valuable” supplement to government retirement sources like CPP and OAS has jumped from 60% in 2015 to 80% today.
Note too that Longevity and outliving savings is a particular concern for women, along with not being able to afford long-term care expenses. It’s a fact that women have longer life expectancies, and the study shows their retirement worries are greater as a result.
Women more concerned about running out of money in old age
The study conducted by CANNEX and Greenwald & Associates found 34% of women are highly concerned about not being able to maintain their standard of living once they retire, compared to only 17% of men. Continue Reading…
There is a Mother’s Day gift I wish I had the power to give to all the women I love and even to women I’ve never met. I would give them the gift of a title and all the qualifications and knowledge to go with it – “mistress of financial affairs”. Now I must admit the English language gives the term “master” a much more powerful and commanding sound of authority than “mistress” but I want my gift infused with feminine, not masculine power.
What did you learn about money from your Mother? I’m so grateful to my Mom, a fiscally prudent depression era Scot. She lived to her late 90s and raised four daughters to take an active interest in managing their own financial lives. Mom was always a believer a woman should have money to call her own and she regularly squirreled away a few dollars from the household allowance provided by my Father. Yes, he was a man of his times.
The White Knight
In my years as a financial advisor I saw women too often abdicate responsibility for their financial life. They told themselves creative stories such as “I just don’t have a mind for that stuff and my husband, boyfriend, or father just does a better job”. Some singletons believed there was a white knight out there, just around the corner, who would arrive to change or improve their financial situation. Many were understandably exhausted with all the other work and household responsibilities they carried or they felt that if they managed the day to day bill paying they could leave the big-picture financial decisions to their partner. Please don’t do it – off-load laundry or cooking or toilet bowls – never money management. A “right relationship” with money is too important – and it’s never to late to acquire it
Pick a label
We women hold many titles or labels throughout our lifetime – this month, of course, the first to come to mind is mother but we may also be a daughter, sister, wife, friend, teacher, student, employee – the list goes on and on. Continue Reading…
Canadians are notoriously nice consensus seekers. The old joke might be that they tend to never cross the road because they consistently prefer to be in the middle. If that’s the case, I’d like to propose a “Canadian” solution to the ongoing debate about how much should be allowed to contribute to their TFSAs annually.
You may recall that the limit is currently set at $5,500 and is likely to go up to $6,000 in a year or two (TFSA contributions are indexed to cumulative inflation and go up in $500 increments when thresholds are passed). You may also recall that for one brief year, the limit was set at $10,000 in keeping with a political promise made by a party that is no longer in power in Ottawa. The debate, it seems has mostly revolved around the benefit of incremental tax relief for those who might not need it.
You may recall that I have argued that there is an unfair cap put on RRSP contributions because the 18% limit that applies to most people essentially penalizes the small percentage of Canadian income earners who make more than about $145,000 a year. Similarly, some people like CIBC’s Jamie Golombek have pointed out that many Canadians are opposed to using RRSPs because they will end up paying tax down the road when making RRIF withdrawals. The point made by Golombek* and others including yours truly is that people should be thinking about the concept of ‘tax bracket arbitrage’ when contributing to government plans. If you’re in a higher tax bracket now as compared to in retirement, contributing to your RRSP makes more sense. If you’re in a lower bracket, the TFSA makes more sense. If you think you’ll be in the same bracket, it makes no difference.
Others simply dismiss the notion outright even if they are curious. How do we live on less than $30,000 per year while traveling through Thailand, Vietnam, Mexico, Central America and other exotic locations? We don’t give up luxury, nor do we deprive ourselves.
So what is our secret?
Our approach is very simple: We have chosen not to dedicate our time and money to support a complicated infrastructure.
For almost three decades we have wandered the globe living in countless countries. We have purchased new computers and digital gadgets, refreshed our wardrobes many times over, received extensive medical care, and we have biked, hiked, scuba’d, taxi’d, bused, sailed and flown endless miles.
How is this possible?
Downsize the house, car, and Uncle Sam
Our housing expenses include our annual lifestyle fees, maintenance, repairs, and utilities for our home in the States, as well as hotel rooms or apartments we may rent while on the road. To ameliorate this cost, sometimes we house sit. We have been car free for years now, but our transportation costs include airline tickets, visas, passport renewals, taxis, Uber, boats, trains, and tuk-tuks.
If you look at your own expenses, you will see that housing and transportation take a good chunk of your income. Becoming mindful of what goes in to support these two areas of your life will be eye-opening. Take a close and honest evaluation of this state of affairs for yourself. Understand precisely where your money goes and why.
Another area that takes fiscal attention is taxes. Income taxes are something you can control by restructuring your portfolio. Interest from corporate bonds and short-term capital gains are taxed at income rates that are higher than qualified dividends and long-term capital gains [in the U.S.]. This restructuring is something to think about and can save you a significant amount of money yearly.
In most cases, housing, transportation, taxes and food/entertainment are the top areas of cash outlay in a person’s economic life. Modifying any or all of them — which is exactly what we did — will have a significant impact on your annual expenses.
Lunching in Guanajuato, Mexico
High living, low costs
All that being said, we have a great deal of fun living on less than $30,000 per year. Spending wisely, we get the most bang for our buck. For instance, living in a resort location in the States, we have access to a swimming pool, tennis courts, and a workout room without having to lay out cash for their purchase or maintenance. We eat high-quality meats, fish, fruits, and vegetables because we shop at farmer’s markets and watch for the rotating grocery sales to purchase when prices are attractive.
When we visit foreign countries, we live like the locals, eating fresh foods from the open markets, and we rent apartments, house sit or rent hotel rooms by the month. In this way we have maid service, gardeners, Wifi, and no utility expenses.
Walking instead of driving whenever possible, we also choose low-cost entertainment options such as tennis, hiking, biking, swimming, going to museums and art shows, and enjoying local festivals and celebrations. Volunteering for projects wherever we live, this provides us with new learning experiences and a sense of fulfillment. We share time with friends either cooking for them ourselves or going out to lunch instead of opting for higher-priced dinners. And when it’s time to hit the road, we take full advantage of current airline deals and travel packages.
Reaping the benefits of simplicity we place more emphasis on creating a life of meaning rather than a life of “‘stuff.”
Sunset at Naples Beach
What about you?
So you think you can’t make it on $30,000 yearly? How about $60,000 or $100,000 or more? All this means is that your net worth will need to be high enough to maintain these levels of spending.
No matter where you are in this continuum, you can profit from doing any of the following:
Simplify your personal infrastructure
Know where your money is going, and decide whether it’s worth it to you. Do you want to keep up the pace of your current spending? Make your funding priorities reflect your values.
Plan your retirement tax strategy now
Know there is a balance in the exchange of time and money
Do you want more money, or do you want more time? Your choice here will affect your future. Be clear about what you want.
Remember, the best things in life are free
Friendships and connection to society are based more on your attention and time, rather than on your money. Watching the sun set with a loved one — sharing life experiences together — creates memories that will far outlast anything you can purchase.
Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com,they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstoreor on Amazon.com.
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By Ermos Erotocritou, CFP, CPCA
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