Congratulations: You’re five short years away from retirement! For the last couple of decades you’ve been saving diligently, but now that you’re so close to the big day, does financial planning need to change? “In some ways it does,” says David Ablett, Investors Group Director of Tax and Retirement Planning. Here are five steps for plotting a financially smart retirement that you can start in advance of your last work day.
“Many of the financial decisions you make in the last five years before retirement will have far-reaching implications, quite literally, for the rest of your life,” he says.
Here are some of the things you should do now to live the retirement you've been planning for.
You want to enter retirement with your finances in top shape, so rerun the numbers to make sure you have enough to support your ideal lifestyle.
That may mean ensuring you have money for travel and hobbies in the first few years of retirement, but factor in your older senior years, too, when the high cost of care could come into play. “With people living longer these days, you’ll probably need enough pension income to last 25 years or more,” says Ablett. “So save as much as you can.”
Keep paying off debt on vacation homes and vehicles, too. The less leverged you are, the more money you’ll have to spend later on.
The timing of your retirement could impact some of your income sources and that should be looked into now, before you stop working. Add up your company pensions based on your retirement date and your RRSPs and TFSAs.
Then, understand the nuances of government programs. For the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP), you can receive benefits any time between the ages of 60 and 70, but they are reduced by 0.6 of 1 percent for each month prior to age 65. Old Age Security (OAS) is available as of age 65, but it is clawed back when your net income exceeds certain levels. Maybe you don’t feel you need these government income sources, but best to know what you qualify for, in advance, so you can choose.
You should also be thinking about how to minimize tax in retirement. By age 71, you have to convert RRSPs into Registered Retirement Income Funds (RRIF), and withdrawals are fully taxable. Start crunching the numbers so you’re ready to withdraw the ideal amount to keep taxes low while still funding your lifestyle.
Some things to consider: Income splitting with your spouse on your pensions and assets. You may want to use a spousal RRSP, so your money can get taxed in the lower income spouse’s hands come withdrawal time.
If you are likely to have a high income in retirement, but have more money to save now, think about putting as much as possible into a TFSA to avoid a tax burden later. Your financial advisor may have other smart tax strategies that can be set up now.
When it comes to investments, now is the time to make any changes based on your close-to-retirement horizon. “Consider the possibility of a market correction that could cause losses you won’t have time to recover from,” says Ablett. “You might move some of your equity investments into safer options like fixed-income securities such as bonds and GICs, or segregated funds.” But don’t play it too safe, he adds. Inflation over the next decades can erode the buying power of your savings, so be sure you are still growing your portfolio before retirement and even into your earlier retirement years.
Ablett adds one more step to a great retirement: “Plan to enjoy life. Your retirement should be years of the adventures you dreamed about – now’s the time to plan them.”