Determine your income and expenses, pay off your debts, and invest
If you want to successfully plan for retirement, you need to start strategizing and saving well before it’s scheduled, so you will be well prepared when you get there.
Here are seven tips to help you do that.
- Determine your time horizon: The younger you are, the more time you have to plan, save, and grow your assets for your retirement. Starting younger also allows you to take on more risk in your investment portfolio as you have more time to recover from any market adjustments and earn enough returns to stay ahead of inflation, now at a 30-year high. The older you are when you start to prepare, the more you have a balancing act. On the one hand, you may need to make more returns. On the other, you may need to be more cautious to preserve your capital as you’ll have less time to recover losses.
- Calculate your retirement expenses: People used to think that once you stopped working, you’d spend less because you wouldn’t have to pay for clothes, work travel, and office gifts. But you may want to travel, pursue hobbies, or take courses when retired, and you also have to consider how much a retirement residence or long-term care might eventually cost you. So, before you assume that you may only need 70% to 80% of your income today, calculate your costs – because you may find that you need as much income later as you have now. Ask your advisor for guidance to help crunch the numbers and then determine how much you can safely withdraw in the years ahead to still leave you safe for your lifespan.
- Pay off your debts: The last thing you want when you’re retired is to still be paying off your loans. So, work with your advisor to set up a strategy to pay them off, so those won’t be a drain as you proceed. See if you can consolidate or refinance them, so they’re wiped out, or less of a drain, before you stop working.
- Decide when to start taking the Canada Pension Plan (CPP) and Old Age Security (OAS): You can start taking CPP Benefits anytime between age 60 and 70, so ask your advisor about what age would be best for you. There are a number of tax and income factors that could impact you, whether you choose to start at 65 or earlier or later. That also goes for the OAS, which you can begin to receive anytime between age 65 and 70. Get your advisor to run the numbers because it may not pay to delay for either of those, even if the monthly stipend increases slightly each year that you do, especially when you keep working.
- Look for multiple income streams: You’ll need more than the CPP and OAS government income to retire, so figure out where your income will come from before you retire. Will you have a company pension plan? A guaranteed family inheritance? Rental property that gives you additional income? Or do you plan to consult or freelance – and how reliable is that? Take the time to calculate what you expect as this is a foundational step for your future plans.
- Save: You should start saving for retirement as early as possible so you can grow your money. One method is a Registered Retirement Savings Plan (RRSP), which defers your tax payments until you withdraw the money, but you can also add a tax-free savings plan (TFSA). The earlier you start, the more time your money has to compound. So, even if you invest little when you’re younger, it can grow to even more than someone investing more at middle-age. Then, check these accounts with your advisor during your annual review – especially if you’ve opted for automatic contributions, so may have forgotten about them. When you do that, ensure all names – yours and your beneficiaries – are up-to-date.
Once you retire, you may also want to start withdrawing from your RRSP early if converting it to a Registered Retirement Income Fund (RRIF) when you’re 71 could push you into a higher tax bracket with your income then. Check with your advisor to see how you can best preserve your capital, so you don’t have that claw back when you reach 71.
- Invest – assess your risk tolerance, establish your investment goals, and develop a diverse portfolio: When you start working with an advisor, you should do a risk tolerance assessment and spell out your investment goals. It’s important to look at how much risk you can tolerate and still meet your goals because your money needs to grow enough to outpace today’s high inflation and give you what you require to retire. Be honest with your advisor, especially if you’re risk adverse. But be realistic about what moderate risk you may have to take to achieve the goals you want. Once those are established, work with your advisor to develop a diverse portfolio that can meet your needs while providing the required market buffer.