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By Jordan Damiani, CFP, TEP, RRC
Special to the Financial Independence Hub
Like many Canadians with retirement on the short-to-midterm horizon, you may have spent more than one sleepness night worrying that you’re not prepared.
In fact, at least half of Canadians over the age of 50 think they’re not on track with their retirement planning and about the same number of non-retirees don’t have a financial plan.
Experience suggests that people may be afraid that they won’t have enough money to retire, but in reality, they may not even know the true answer. I take the view that not having a formal plan in place doesn’t necessarily equate to not being on track to retire. There are many steps you can take in the critical count-down years to retirement that will reframe your planning and investment approach and alleviate anxiety and stress.
Take inventory of present Financial Situation
I recommend assessing your last six months of credit, debit and cash spending: grouping your expenses into categories. To project for the future it’s important to understand where your money is being spent today. This activity will help to identify where better savings could be achieved. Completing a net-worth statement is also important to determine what you own vs what you owe.
Understanding your pension entitlements is also a key stress reliever. Pension plans will typically offer retirement projections. At 65, CPP has a maximum benefit of $1175.83 monthly and $613.53 for Old Age Security. It’s important to call Service Canada to get an accurate CPP projection to find out what you are eligible to receive. Similarly, OAS is tied to Canadian residency, with 40 years being a requirement for the maximum eligible payout.
Goal Setting and Strategic Planning
After taking inventory, the next step would be determining what income you actually need in order to retire. Completing a pre-and post-retirement budget is an exercise that will help determine the after-tax figure to target. Likely the targeted income would be tiered with a higher spend being projected for the first 10-15 years of retirement ($5000-$10,000 a year for travel) and lower lifestyle costs thereafter, with some planning as a buffer against long-term care costs.
The post-retirement budget is a great tool exercise to determine what expenses may start, decrease or stop all-together once you’ve retired. Budgeting in after-tax dollars to help determine your retirement income need is important. There are tax-saving opportunities available to retirees such as spousal pension plan / RRIF income splitting as well as various government tax incentives that often create much lower taxation in retirement.
Fearing a drop in your gross income today versus your future retirement income may also be anxiety inducing. I recommend a form of “top-down” budgeting wherein you determine what you need to save on a monthly or annual basis to achieve your targeted retirement income. If you’re consistently hitting that targeted savings using a reasonable rate of return for your investment mix, you’re on track. If you find you either omit saving, miss your target, or add to credit card, loan or mortgage debt you need to re-assess.
Practical steps to take prior to Retirement
After you’ve taken inventory, and set goals, it’s important to put in place a realistic strategy going forward for any remaining debt, as well as future savings. Keeping things simple and setting up pre-authorized withdrawal for both debt repayment and savings is a great way to stay on track.
Debt:
• Ensure you are consolidating all of your high-interest debt into a mortgage or loan to reduce interest costs.
• Amortize your mortgage to coincide with the remaining years left prior to retirement (eg. 10-year target to retirement = 10-year amortization).
Savings:
• Set up pre-authorized payments to ensure you are automating your savings goal in-line with the projection/financial plan.
• Savings should be treated like a mortgage payment, rent or utility bill: it’s a “payment” you can’t afford to miss, and you’re paying yourself for a change!
• Optimize usage of your RRSP/TFSA accounts.
• Ensure you are receiving the maximum employer match in a defined contribution pension plan: it’s “free” money!
Similar to eating healthy or exercising, we can create justifications to delay or defer doing what we know is important: prioritizing your retirement will ensure you don’t need to hit the panic button.
Jordan Damiani is an IIROC Licensed Senior Wealth Advisor with Meridian Credit Union. He specializes in working with Meridian Members to create peace of mind through holistic financial planning: covering retirement, tax, investment, trust and estate planning.
He is a University of Toronto graduate and holds the Certified Financial Planner® (CFP), Trust and Estate Practitioner (TEP) and Registered Retirement Consultant (RRC) designations.
