Monday, February 27, 2017

Hidden costs in retirement

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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