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.
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