I have talked about the hidden costs
of retirement with the biggest hidden cost being health related. Those who
retire, at some point, will face unanticipated health care costs. Yet a new
poll shows that we are not prepared for those costs. Retired Canadians aged 50
and over are finding that unanticipated costs, health issues and higher than
expected tax bills are their biggest surprises in retirement. Complicating the
situation for these retired Canadians is that many left the workforce before
they expected to, putting pressure on their retirement income and leaving many
wishing they had started planning sooner.
It's important to remember retirement
planning is much more than checking your annual RRSP contribution off the list.
The key to mitigating surprises or coping with the cost of health issues is
planning ahead for the life you want to live.
Canadians are not stupid we are among
the most educated people in the world, yet when it comes to retirement, many
Canadians underestimate their spending in retirement. We appear to have a blind
spot about this topic, or don't realize that we may have to retire earlier than
we expect. If we are forced to retire early we may be unprepared to manage
higher expenses than expected on a lower income than planned
Taxes can impact
retirement cash flow Before 2009,
when Tax Free-Savings Plans (TFSA) were introduced, Registered Retirement
Savings Plans (RRSP) were among the few tax-efficient retirement savings
vehicle. The poll indicates that some retirees bulked up on their RRSP savings,
and are now facing a surprising tax bill as they convert their RRSP income into
Registered Retirement Income Funds (RRIFs). As a result, some may also
experience claw-backs on income-tested government benefits, which could have
been avoided with earlier planning.
Tax tips for
fewer retirement surprises:
- Create your retirement plan - Getting a sense of your retirement goals
and what they will cost you is the first step to building a tax-efficient
retirement plan. Your retirement plan is personal to your
goals and income needs, so speak to an advisor to help you build the
plan that's right for you.
- Maximize tax-advantaged savings as you
near retirement – Now
is the time to accelerate your savings by maximizing your RRSP and
TFSA contributions. Not only will your savings grow without tax within
these plans, when you withdraw funds in retirement you'll likely do so at
a lower income so you'll pay fewer taxes (with an RRSP) or no tax at all
(with a TFSA).
- Withdraw RRSP funds strategically – and
re-invest in a TFSA – Although
funds can remain in your RRSP until age 71, consider how early withdrawals
may help to reduce your overall tax bill in retirement. Use the
Retirement Calculators to understand how all of your income sources (benefits,
pensions, savings) work together, and identify where you may be able to
top up income at lower marginal rates. For added savings, consider
re-contributing after-tax RRSP withdrawals to your TFSA, to continue
tax-sheltered growth.
- Retiring early? Time your withdrawals to
maximize your benefits: If
you're retiring early or entering semi-retirement, speak to an advisor
about the benefits of using your savings or delaying your CPP/QPP benefits
to fit your income needs for retirement.
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