RETIREMENT PLANNING

Retirement Planning involves building up your savings for retirement. Generally there are three stages involved in this process; pre-retirement planning, preparing for retirement, and post retirement. Each phase has its own issues.

Pre-Retirement

• Try to start at least 15 years before your retirement.
• Start using the refund you get from purchasing a RRSP in a financially smart way – paying down your mortgage, paying off high interest credit cards, loans, etc.
• Make a realistic assessment of the age you wish to retire.
• Establish the amount you require to maintain the life style you expect.

You really have four options:

1. Save more for retirement
2. Retire later and save more for a longer period
3. Be prepared to live on less (sometime considerably less)
4. Increase the risk of your invested money to get a higher return (careful with this one)

Reality Check

• What are the amounts you will receive from government sources? (Old Age Security and Canada Pension Plan)
• What will your company pension pay? (Assuming you are still with the company).

At Retirement

• Update your net worth statement to get a clear picture of your potential retirement income sources.
• Prepare a cash flow statement. i.e. How much will be coming in versus how much money will you need to live. It will change quite a bit, since you no longer have employment income, but your expenses of going to work, clothing, lunches, etc. will decrease. On the other hand your pensions, CPP and OAS, savings funds will now be drawn down. A detailed forecast will show if your resources will be adequate, and to take into account any changes in tax laws, personal circumstances and such. You may also wish to explore whether you should opt out of a company pension plan. (This is usually not a good idea, but under certain circumstances it can make sense.)

After Retirement

• Be aware of the “claw back” which applies to the basic age exemption and to OAS.
• Make certain that the pension income amount (in 2007 – $2000.00) is taken advantage of. Look into pension splitting for all your pensions (if you have a wife, common law partner or same sex partner).
• Reconsider your investment strategy. This usually means becoming more conservative in how you invest. You are less able to replace any losses, so your aim is to preserve capital.
• On reaching retirement you may need to reorganize your finances. Before you sell investments or dip into RRSPs you may wish to consider some or all of the following:
  • Use tax paid investments first (GIC, savings accounts, or other fixed income investments.
  • Spread the sale of assets with large capital gains over a period of time in order to avoid a large tax hit in one year.
  • Instead of receiving sales proceeds in one year, look into claiming a capital gain reserve over five years. (Don’t try this on your own. See a competent professional for advice.)
  • Consider a reverse mortgage on your home. Again this is not a good strategy for everyone so be sure to get professional advice.