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Mar 6, 2020

Financial Planning As We Age

by Janet Gray

The 2018 Omni Report Seniors and Money by Leger shows that the most common source of retirement income for 73% of Canadian retirees over 60 years old is “government” money like Canada Pension Plan (CPP), Old Age Security (OAS), and/or Guaranteed Income Supplement (GIS). 44% of today’s retirees aged 60 or more receive pension income and 35% use their investments savings, while four out of five are receiving multiple sources of income like government money and/or pension and investment savings.

56% of the survey respondents carry debt (mostly credit card or line of credit) and 31% are supporting children. According to Statistics Canada, the average after-tax income of married elderly couples was $55,900 in 2010.

Knowing these numbers is helpful but not enough to ensure you have the retirement you want to have. Start with a plan.

The first step to any plan (financial or otherwise) is to state a clear desired goal or outcome. These can be short term, medium or long term—even within retirement. The transition from working to retirement involves preparation and decisions which needs planning and time. Major goals in retirement may now be less oriented to accumulating wealth and more about de-cumulating or using your savings as income in your retirement years. Other periodic goals may include travel, car replacement, home maintenance and health related costs. Some people have various family related goals such as support (current) or legacy bequests (at death). For people retiring at age 60, and with increased life expectancies, retirees could be looking at as many years (or more) in retirement as they had working years.

Then, do a thorough assessment of your current lifestyle expenses which gives an indication of your retirement spending (less any work-related costs). Review bank and credit card statements and assorted bills and make sure not to miss any spending. You are looking for an “average” month of costs and you may also want to add a buffer to allow for fluctuations in utility bill costs or minor variances in some spending areas like groceries or gas. Look to cover your “necessary” living expenses with your regular income sources and then if possible use your surplus income/savings for your “discretionary” spending.

With more than half (56%) of retirees having debt in retirement, ensure you have a plan to either pay off the debt (thus reducing debt interest and increasing cash flow surplus) or have the payment of interest and/or principal accounted for within your spending limit.

Next, total all your income sources such as CPP, OAS/GIS, company pension, annuity income or investment withdrawals. Some seniors may continue to have employment or self-employment income. Some may have financial support from family members also. Add it all up if you receive it on a regular monthly basis so you can compare it to your regular monthly spending costs.

Now, compare the outgoing and the incoming amounts to see if there is a surplus or deficit. If there is a deficit, you may need to find ways to save more in advance, cut spending or boost your income in retirement.

Here are additional recommendations to help you prepare and/or refine your planning as you age:

1.    Live within your income—even more important in retirement. If your lifestyle needs are met with your income, then your dependence on your investments or other sources will be minimal. You may still have to use your investments for larger purchases or expenses.

2.    Look for small ways to save more. Consider cutting back on your spending for discretionary items like lottery tickets, magazines or fancy coffees. It all adds up.

3.    As you get closer to using your investments as income, move a large portion of your savings to a lower risk investment. Consider annuities, low fee income funds and other options to discuss with a financial professional. Your investment selections are very much linked to your goals, lifestyle needs and sources of income.

4.    Revisit your investment strategy regularly. Look for ways to get a little more growth without more risk than you can tolerate. If you choose only the most conservative investments for your retirement savings, your savings may not grow fast enough to give you the income you need after you retire and keep ahead of annual inflation increases.

5.    Determine the best timing to receive your government benefits. CPP is available as of age 65 but you can also receive a reduced benefit from age 60-65 or an increased benefit age 65-70. There is no right answer for everyone on the optimal time. Speak to a financial professional who can help look at your best option.

6.    Once you decide when to receive CPP benefits (OAS is available from age 65, with increased benefits up to age 70), apply up to 6 or 9 months in advance of your desired payment date. Note that payments are made at month end so be sure to allow for this in your cash flow planning.

7.    CPP and OAS benefits are considered taxable income. You can ask Service Canada (or Retraite Québec for Québec Pension Plan (QPP)) to withhold tax at source. Otherwise you should be prepared that you may have to pay the tax owing when you submit your annual tax return.

8.    Review your life insurance needs as you approach retirement. You might have fewer financial dependents (your children are living on their own) and less debts. But you may still want to maintain life insurance for estate planning and legacy purposes. Speak to an insurance professional before cancelling any current policies as they can sometimes be modified or converted to match your needs going forward.

9.    A common financial concern of seniors is that they may need additional funds for increasing health care costs as they age. Confirm what benefits you have within your health insurance or your retirement benefits. Consider Critical Illness insurance or Long-term Care insurance to offset some of those costs. Speak to an insurance Living Benefits specialist about these products to see if they are a fit for your situation and budget.

10.  Review your Will and Powers of Attorney before you retire in case changes or updates are needed. Your Will is important in order to distribute your estate assets at death without unnecessary complications and costs to the executor and your heirs. Your Power of Attorney agreements (one for Property and one for Health Care) name a trusted individual that you have chosen to make your financial and health care decisions when you are not capable of making them.

11.  Canadians over 65 years old may be able to use tax credits to reduce the amount of tax they pay. Look for credits that are available to you and consider working with a tax professional to understand your options.

12.  Contribute to a Tax-Free Savings Account (TFSA) if you have surplus income- even in retirement. A TFSA allows your savings grow tax-free and you won’t pay any tax when you withdraw. In 2020, you will have another $6,000 of TFSA room. Contact Canada Revenue Agency (CRA) to confirm your current available TFSA room.

13.  Take advantage of any unused Registered Retirement Savings Plan (RRSP) contribution room. The government allows you to carry forward unused contributions each year so if you have unused contribution room, try to use it as soon as you can to take advantage of tax-sheltered savings. Even if you are over 71 years old, you can contribute to a younger spouse’s spousal RRSP if you have unused RRSP room. Speak to a tax professional to ensure this strategy works for you.

14.  Some seniors want to supplement their income and look to renting out part of their home, or sharing their home with a friend instead of living alone. Remember that you will pay tax on your rental income and may be able to deduct applicable expenses.

15.  Finding part-time or occasional work in retirement can provide extra income and help you stay engaged and active.

Preparing a plan in advance of one of the major life events is worth your effort. It’s never too late to begin planning, but the longer lead time you have, the easier it is to make adjustments. Speak to a financial professional so that you are receiving a customized plan suited to your situation and future needs.

Janet Gray, B.A., B. Admin., CFP®, EPC, CPCA is an advice only, fee for service Certified Financial Planner (CFP®) with Money Coaches Canada. Janet was the founding Chair of the Ottawa chapter of CARP from 2009 to 2016. She frequently appears in media and can be reached at janet@moneycoachescanada.ca