Thursday, June 16, 2016

Not enough money in retirement--start planning now!

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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