5 Important Things to Know About Retirement
Less than 20 per cent of the population has a plan for their retirement, a statistic that raises a lot of questions and concerns. Many of us spend our whole lives working, building our careers and accumulating finances and assets, but if there’s no plan in place, it can create a lot of challenges when it comes time to enjoy a retirement you’ve always dreamed of.
As a financial advisor with more than 25 years of experience, I’ve helped a lot of people navigate their finances successfully. One of the things I’m incredibly passionate about is teaching people financial literacy and making sure they understand everything about their financial reality and goals. I do in-person advising at Maxim Financial Group, which is my personal business, and I work with Customplan Financial Advisors Inc., which has offices across Canada, including in Saskatoon and Regina.
Although it may sound simple, retirement is anything but. There are many factors involved in retirement, beyond signing a form and withdrawing from your investments. To help ensure that you’re secure financially for your golden years, here are five important things to know about retirement.
- Five-year plan: Many people think planning starts just before retirement, but that is far from the truth. The reality is that the planning stage should start five years before you want to retire so that you can make sure your finances, lifestyle and retirement goals are all in line.
Our office also provides retirement planning seminars once a month for anyone who is interested in learning about everything from the Canadian Pension Plan and Old Age Security, to tax implications of retirement, wills, power of attorney, estate planning and more. The goal is to help individuals better prepare for their upcoming retirement.
The longer you work with an advisor, the better they can get to know you, your lifestyle and your retirement goals. I always tell my clients that my experience working with them helps me plan their future better, which is why it’s important to work with an advisor in-person.
- Tax implications: In Canada, when you turn 71, you are required to start withdrawing from your registered savings accounts, including RRSPs and pension plans. However, there is a lot more involved than simply withdrawing money from these accounts.
Take RRSPs for example; you contribute to these over time and grow. But it’s a deferred tax savings plan, which means that when you withdraw the money, all the tax comes back to you. So if you’re converting a large registered pension plan or RRSP, there are going to be tax consequences.
A good advisor will tell you about the tax implications of retirement and what impact that will have on your financial state. When I work with people, I encourage them to have both an RRSP or registered pension plan of some sort, in addition to an unregistered account, which can be a TFSA or a different savings account. The RRSP will act as your daily living account, but the fun money for travel or purchases should be coming from unregistered accounts, which have very different and less severe tax implications.
- Debt: When you start planning for retirement five years in advance, you can address any debt that has accumulated, be it a car loan, home mortgage, or credit card debt. These things don’t disappear in retirement, and if you’re carrying a high debt load, then you’ll need to draw more from your pension to pay off the debt. It can be a vicious cycle, and if you’re not prepared for it, it can end up eroding all of your retirement plans, such as travelling.
- Health and long-term care: Thinking about health is an essential part of planning well, because health can end up being a detriment to your retirement, both physically and financially.
I encourage people to purchase extra health coverage five years before they retire. Many employers do not continue to provide health, dental and medical benefits once you stop working there. Getting insurance five years before you need it means the process costs less, because your health may be better now than in five years down the road. If travel is on the agenda, it’s crucial to understand the implications of travelling with a health condition or becoming ill while abroad. You want to make sure you have proper coverage for travel, too.
It’s also important to address what will happen if you or your spouse goes into a care home. Care homes in Saskatchewan offer care at different levels based on your income, which is problematic if you haven’t considered this and have a shortage of money.
I always recommend long-term care insurance, where the policy pays for the cost of care once you need it. The coverage can be used for either in-home care or a care institution, and it’s a tax-free disbursement. Once again, if you are using a registered savings account to pay for long-term care, then you are getting into a messy tax issue, which can be avoided by purchasing long-term care insurance instead.
- Investment returns: If you have investments and have come through very positive return cycles in the past, with eight or nine per cent returns, then what happens when it slows down? When you start withdrawing from your investments in retirement it affects the growth, and when you’re withdrawing instead of contributing, and you see that number decrease, it’s natural to start worrying or feel concerned.
However, it’s helpful to know that this is a natural and normal process. Your advisor should be there to explain that to you and to make sure your money is invested in funds with a consistent return and conservative risk that matches where you are at in life.
Overall, I try to keep it very straightforward when it comes to planning for retirement. If you start early and consider all your bases, then we can look at how much money you have, how much money you need, and what you need to do in that five-year window to get there. With due diligence, an advisor can help you navigate the challenges and financial changes of retirement, so that you can be well on your way to enjoying your hard-earned money in the years to come.