by Thomas Johnson
When it comes to making financial decisions for retirement, there are dozens of levers you can pull to change the eventual outcome. You can adjust your savings rate, spending rate, investment selection, your withdrawal strategies, your tax strategies, your start date, etc… the list of choices is nearly endless! How does a person even pick where to start with so many decisions ahead?
I, personally, tend to begin with the biggest, most impactful decisions first. The kind of decisions where the smallest changes can lead to monumental differences. Decisions like:
Your Retirement Start Date: I’ve seen start dates for retirement plans influence the success rate by as much as 10% for every year you wait! This is truly a “big lever” decision point. If you’re planning for the next 25-30 years of your life, delaying by a year saves as much as 4% of your overall planned expenses. It also gives an additional year for your retirement savings to grow and an additional year to stock savings away. Of course the downside is you’ve now had to work for longer; but if you’re concerned about the longevity of your assets, this extra year can have a tremendous impact.
Your Spending Rate: This is a particularly difficult lever to adjust but it is easily one of the most impactful. Nobody enjoys budgeting and nobody likes to restrict their spending (especially when you’ve been waiting decades to retire!). However, making even modest reductions in spending can have dramatic long-term impacts on your retirement success. Cutting your long-term spending by even 5% or 10% can do wonders in ensuring you don’t outlive your resources. If you have a few bills that can be slashed before your retire, now is the time to do so!
Your Tax Plans: Just because you’re no longer working doesn’t mean CRA is done collecting income tax from you. Your pension payments, registered account withdrawals, and government benefits will all attract taxation. Strategically keeping your income below certain thresholds, like big jumps in provincial tax brackets or the OAS Clawback limit, can do wonders for limiting your annual tax bill. If you don’t have a solid tax plan for the coming years, you’re doing your retirement a disservice.
When you start, how much you spend, and how you minimize your tax obligations are easily the three most impactful decision points in a retirement plan. There are several other levers that are often thought of as being very impactful, but truly have little effect on your actual outcome. The most common misconceptions are:
Your Savings Rate: I’ll caveat this by saying that your savings rate is VERY important if you have many years until retirement. However, if you’re only a year or two away from handing in your notice, the damage has already been done. What you save in the last two years is likely a drop in the bucket compared to what you’ve already amassed or what you would’ve needed to live the retirement you want. An extra $100 or $200 saved per month at 64 doesn’t move the needle compared to doing the same thing 30 years ago.
Your Investment Selection: Another caveat here: if you don’t already have a well-diversified, risk-appropriate, tax-efficient portfolio, you have bigger problems. But if you think you can make magic happen by selecting better securities in retirement the odds are, unfortunately, not in your favour. The average investor just so happens to be, well… average. Attempting to time the market, outsmart the professionals, or hire a miracle worker with your assets is far more likely to set you back than it is to deliver the retirement of your dreams.
When building your own retirement plans, start with the biggest levers you can control. Get an understanding for how these decisions ripple through the rest of your plans and fine-tune from there. If the idea of working a single day longer is a deal-breaker for you, identify what you need to do to make it up elsewhere. If your budget can be flexible, perhaps you can afford other changes that suit your lifestyle better, like spending a little more now or starting your retirement sooner. Each person’s goals, desires, and financial scenario are different, so there is no single “right way” to retire. But having a plan, where you can visualize the impact of your decisions, can put you on the right path for your own retirement success.
by Thomas Johnson
If you or someone you know has ever lost a spouse, it is absolutely devastating in every aspect of life. When it comes to personal finances as a widow or widower, there is a seemingly endless “to do” list. Figuring out where to start can be truly daunting. To help get your affairs in order, here are a few tips to keep in mind:
Don’t Make Big Decisions Too Soon. The first few months after the loss of a spouse are beyond emotionally challenging. Now is not the time to make dramatic financial changes (downsizing your home, selling your cottage, quitting your job, etc…) as you may easily encounter regret or significant stress. There are NO financial emergencies and it is perfectly OK to wait six months-to-a-year before you act.
Look Through Bank Records for Who to Contact Next. Everyone has subscriptions or bills that get paid on a routine basis. Whether it be Netflix, a cell phone, life insurance or RRSPs, your spouse almost certainly had transactions where changes need to be made. You may need to swap some services to your name, cancel others, or reach out regarding insurance or investment claims. Bank records will provide numerous clues for active accounts and services to handle.
Apply For CPP Benefits. In Canada, CPP offers two benefits to qualifying surviving spouses: the CPP Survivor Pension and the CPP Death Benefit. Most funeral homes will provide copies of the applications to be submitted to Service Canada. You’ll likely need to provide a copy of your marriage certificate and a death certificate, plus your bank account information for direct deposit.
Keep Liquid Funds Available. When your spouse passes away, you’re going to face several expenses, expected or not. Whether it’s funeral & burial costs, legal fees, or just time off work, having access to cash will keep financial stress at bay. Talk with your Financial Planner to make certain you won’t run into any liquidity problems in the coming months.
Update Your Own Beneficiaries. If you have any personal investment accounts (TFSA, RRSP/RRIF, LIRA, etc…) or life insurance policies of your own, update your beneficiaries if you had previously named your spouse. You can always edit again later if you change your mind; but leaving assets without beneficiaries will introduce risk that your own affairs won’t be handled the way you intend.
This is by no means an exhaustive list but do not fret. Funeral Directors, your Accountant, your Lawyer, your bank and your Financial Planner will all assist in the process. The coming weeks and months will certainly be challenging, just know that you’re not alone and there are resources to help. Take care of matters at your own pace so your finances can take care of you.
by Thomas Johnson
One of the most stressful aspects when retiring, for anyone, is making the transition. One day you’re working, the next you’re not. One week you’re getting a paycheque from your employer, the next you’re not. Lining up your finances to make that transition a smooth one can be challenging. Here are some helpful pointers for starting your retirement without money stress:
Have an Emergency Fund
When it comes to setting up your retirement incomes, there is only one way to do it right and 100 ways things can go wrong! You can be dealing with government agencies, pension companies, investment companies, financial advisors, banks, your former employer and more. With a lot of potential for human error or delays of bureaucracy, there is a high probability of experiencing at least one hiccup in processing your requests.
If you start retirement and can’t afford the pension company to be two weeks behind in processing, or you can’t afford your bank to put a hold on a cheque for three days, you will naturally be stressed out!
Try aiming for your first month or two of expenses to be covered by the funds in your chequing or savings account. This will give you ample time and breathing room should you run into trouble getting a particular income source online in time.
Start Early
When retiring, don’t expect to make the transition with only a few weeks’ notice! I often recommend giving your employer a bare minimum of three months’ notice so the HR department can get the ball rolling. Be sure to check your employment agreement to determine if even more advanced notice is required!
If you’re applying for Canada Pension Plan benefits or Old Age Security, those departments recommend at least a month’s notice. For investment accounts, like LIFs, RRIFs, or Annuities, you should have the paperwork done at least a month before you need your first income payment.
Go Digital Where Possible
Having paper copies of applications can feel more secure for some but comes at a cost of timeliness. Not only is physical time required for Canada Post to get your documents where they need to go, many institutions have adapted to processing electronic forms significantly faster (and with less chance for human error).
For government benefits, like CPP & OAS, you can apply online through your My Service Canada Account. For many financial institutions, like banks, pension companies, or investment firms, digital applications can be sent over secure email or via portals. Using digital tools can help buy you time and improve the accuracy of your requests!
My last piece of advice is to start by getting organized. If you go into your final working months with a game plan for the transition weeks, you’ve already won the battle! So if you’re looking forward to making the retirement transition in the near future, be sure to plan ahead, start early and leverage technology where possible.
by Thomas Johnson
If you’ve read virtually any financial literature before, you’ve likely come across the notion of the “70% Rule” for retirement income. The rule simply states that a comfortable retirement income should equal approximately 70% of the after-tax income in your working years. For example, a couple who takes home a combined $8,000/month, while working, should strive for an after-tax retirement income in the neighbourhood of $5,600/mth.
But… is this a good rule? Does the 70% target work when put into practice?
Why 70% Works, In Theory
When you’re in your working years, you likely have a great deal of cash outflows that won’t stay at the same level once you retire. Expenses like:
- Saving for retirement,
- Your mortgage,
- Payroll deductions (CPP, EI, Union Dues, etc…),
- Cost of commuting and/or parking,
- Work wardrobe,
- Feeding, clothing, or supporting children
Without these expenses, it can be quite common to see a substantial drop in your monthly income needs. If you take the time to work through your budget or track your expenses, you’ll have a great idea as to how much these add up! If you’ve never done an in-depth analysis on your cash flow, using a ballpark estimate that they add up to 30% sounds pretty reasonable.
Having a rule of thumb also works really well from a conceptualization standpoint. As people, we tend to appreciate some context for where we stand, relative to the average. If you believe the “average” Manitoban gets by on 70% of their income, surely you’ll feel good about doing the same! The 70% rule can give you the mental confidence in making the transition to retirement.
Why 70% Doesn’t Work
The short answer is: not all people are the same! Every circumstance is different and we can’t neatly average it out to a single ratio.
Some people will need to replace MORE than 70% of their income. Perhaps they’re still carrying a mortgage in retirement or financially supporting parents, kids or even grandkids. Maybe their retirement goals are costly; foreign vacations, country club memberships, and any other number of hobbies can quickly add up. There are countless reasons why a retiree may have ongoing bills in excess of the 70% mark.
Other folks will need far LESS income replacement in retirement. I’ve met with countless pre-retirees who have built very enjoyable, but frugal lifestyles. Their working career income has far exceeded their basic needs, interests, and hobbies. Trying to keep their incomes at 70% of their working levels would only result in drawing money from one pot to turn around and save it in another.
There are equally as many reasons why the denominator (a.k.a. their working career income) doesn’t support this rule. For a Manitoban family who is just making ends meet while in the workforce, slashing 30% out of their budget simply isn’t doable. They may need 80%, 90% or even 100% income replacement just to maintain their standard of living. For high income earners, the opposite is equally true. They could be in the enviable position of maintaining their lifestyle with only a tiny fraction of their annual career earnings.
What Should I Do?
It’s not the fun answer, but the right answer is to budget. Start by tracking your spending as it exists today. Take careful notes over the course of a month where you spend and how much. Once you’re done, you can take a pencil to your spending habits and cross out everything that will go away when you’ve stopped working. Also add in any new costs that will come about for your retirement lifestyle. Now you have YOUR number and it’s almost certainly NOT 70% of what your take-home pay is today.
You can build a retirement plan around 70% of your income very easily. But if it’s wrong, you’ll wind up either outliving your money or unnecessarily delaying retirement altogether. The 70% rule can make for a great baseline, or a realistic goal if you’ve never thought through expenses, but it will never replace the accuracy of a real budget.
by Thomas Johnson
If TV ads are to be believed, everyone (and they mean everyone) is better off investing on their own without professional guidance. Platforms alluding to riches, so long as you happen to use their platform, is nothing new. This recent do-it-yourself (DIY) boom of investing has seen more Manitobans than ever trying their hand in the markets. When it comes to your retirement goals, are you better off to seek help or can you really DIY?
The Case For DIY
For many DIYer’s, investing becomes a fun hobby. Spending free time on research, watching market news, tracking investment performance, and bragging about wins are all part of the game. Stock-picking can feel a lot like gambling; seeing your “bet” pay off on a company you support is a guaranteed dopamine rush! If you enjoy the experience, understand the risks/rewards, and keep your taxes/fees/liquidity in check, then you can likely feel good about doing it yourself.
When Not To DIY
There are many, many scenarios where being a DIY investor stops making sense. Some of the most glaring are when:
- The Risk Is Too Great – I think most of us would feel comfortable tending to minor injuries without going to the ER. Put some ice on that sprain or a bandage on that scrape; you can handle it on your own. But at some point, the severity of an injury crosses a line where you know you need a medical professional. The risk becomes too high to try and manage on your own. The same holds true for your finances.
If you’re starting off and only have a few dollars invested, losing it on bad picks isn’t the end of the world as you have time to recover. If you’re within five years of retirement, trying to manage 40 years of building your nest egg, the risk of loss may just be too high to bear on your own.
- It Has Become Too Complex – if your only investment account is a TFSA, you may not need much help in managing your finances. If you own several account types through different institutions, perhaps a small business or rental properties, face looming capital gains or have engaged in complex transactions, it may be time to ask for help. Consolidating, organizing, and unwinding, without making mistakes, can be a daunting task for even seasoned DIYers.
- It’s Too Time Consuming – if you’d rather be on the golf course, the beach, spending time with family, or literally anything else other than managing your finances, it may be time to delegate. I recently had a conversation with a retiree who loved to make his own investment picks but felt like the time commitment was holding him back from enjoying his passions (gardening, cycling, travel, etc..). The time had come to unburden himself from day-to-day management of his money and focus on what’s important to him.
At the end of the day we all must live with the choices we make. If your decision is to make your personal finances your own responsibility, go for it! If you’ve reached a point in your life where you’re not enjoying that responsibility, the downsides outweigh the upsides, or the complexity is too daunting, go hire a professional.
My last word of advice is simply this: being a DIY investor or a delegator doesn’t have to be an all-in approach. Consider delegating the important stuff (tax planning, financial management, investing for retirement or kids’ educations) and keep some “play money” on the side. That way you get to continue enjoying your investment hobby, while keeping it a hobby!
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