In
Canada, we all have the same concerns when we retire; not having enough money
to maintain their lifestyle in retirement; whether their Canada Pension Plan
and Old Age Security may dwindle; and if we will ever be able to fully retire. I am sure
that in the US and other countries the concerns are the same, although the
programs we receive funding from have different names.
Two
challenges we all face are longevity and inflation. A 65 year old woman in good
health has a 44% chance to live to 90 (men 33%), or a 23% chance to live to 95
(men 16%). Seeing your buying power erode during this long retirement period is
a real concern as seniors expenses appreciate at a higher rate than the
masses’.
Over 25
years of retirement $1000 @ 4% inflation will buy only $375. Most of us focus
on what we are retiring from and not what we are retiring to. Consider how you
will spend your days over the early and later years, and how much you will need
to fund that life.
Once you
know how much you need, estimate your income from Employer pensions (i.e.
Superannuation), CPP, OAS, and Personal Savings (RRSPs, TFSAs, and other
investments). Deciding which employer pension option is best for you, or when
to start government pensions is complex. Get professional advice.
Investing
your personal savings is very important. While you cannot afford to lose this
money, you need growth to stay ahead of inflation and provide you with income
and some liquidity for planned or unexpected expenses.
With
interest rates so low, and the risk that rising interest rates will reduce the
value of your fixed income investments, work with a professional advisor to
establish, monitor and adjust how your money is invested.
Your
custom portfolio, specific to your time horizon, risk tolerance, and objectives
should include a widely diverse selection of investments (i.e. stocks, bonds,
cash, etc.), in companies of different sizes, industries, and geographic areas.
Understand
the difference between short-term risks (temporary market declines) and long-term
risks (low interest investments that do not keep up with inflation). Working
with a professional advisor can help you customize and maintain a portfolio
that’s right for you, and help you stick to your plan and enjoy a better
retirement.
Remember
tax. It’s not what you make; it’s what you get to keep that is important.
Interest income is low and 100% taxable, where capital gains on stock (and
dividends paid on eligible stock) are only 50% taxable.
Many
government entitlements are income tested so while dividends have favorable tax
treatment, how it is reported on your tax return can reduce OAS, age credits,
pharma care premiums and benefits, long-term care subsidies, etc.
Consider
income splitting with your spouse to reduce your overall family taxes (CPP
sharing, pension splitting, Registered Retirement Income Fund (RRIF) splitting
at age 65), and receiving income in the form of ‘Return of Capital’.
On
retirement, convert your Registered Retirement Savings Plans to RRIFs to
provide regular income, and/or consider the many different life annuity and
guaranteed lifetime income options to supplement your pensions. Invest your
TFSAs and personal investments for tax efficient income.
Lastly, do
not forget to review your life insurance, critical illness protection,
disability insurance, and long term care insurance before and after retirement
to make sure you have adequate protection.
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