Preparing for the Retirement Journey
Meet Emma and Roy, a couple from Winnipeg eagerly counting down the days to their retirement, just five years away. Aware of the importance of careful financial planning, they decide to engage an advice-only financial planner to support their transition into their “golden years.”
Step 1: Assessing the Financial Landscape
In their first meeting with the financial planner, Emma and Roy begin by evaluating their current financial situation. The planner helps them review their investments, savings, and real estate holdings. They discuss the couple’s risk tolerance and long-term goals, laying the foundation for a personalized retirement plan.
- Asset Review: The couple considers consolidating their investments with a single firm so that it is easier for them to manage. They also recognize that they need to get a better handle on understanding and managing investment risk as they recognize that instead of saving, they will soon be spending from their investments.
- Debt Management: Emma and Roy have a home equity line of credit (HELOC) that they have been using to update their home. The financial planner suggests they set a goal of paying off the HELOC before their retirement date to eliminate that drag on their cash flow.
Step 2: Setting Retirement Goals
With a clearer picture of their current financial state, Emma and Roy focus on setting specific retirement goals. The financial planner helps them estimate future expenses, from basic living costs to dream vacations.
- Determining Income Sources: The couple explores the various income sources they expect to receive in retirement: government benefits (CPP and OAS), employer-sponsored pensions (they each have defined contribution plans), and personal savings (RRSPs and TFSAs).
Emma and Roy are in good health and have a history of good longevity on both sides of their families. They decide to prioritize maximizing CPP by delaying it until age 70. Each month they delay the beginning increases the amount they receive by 0.7% or 8.4% per year. In addition, it is inflation-protected and secure for the remainder of their lives. They decide that they will transfer their RRSPs into RRIFs in the year they turn 64 and draw enough from their RRIFs beginning the year they turn 65 to make up for the CPP shortfall. Their planner explained to them that this strategy lets them exchange risky assets that don’t have any guarantees or inflation protection, for a guaranteed and inflation-protected stream of income.
- Categorizing Expenses: With their planner’s help, Emma and Roy divide their current spending into non-discretionary and discretionary. Then they decide how those expenses will probably change as they shift into retirement mode.
With retirement, they anticipate a decrease in spending related to work, like commuting costs and professional clothing. They also plan to keep debt-free once their HELOC is paid off. And of course, they won’t need to save for retirement anymore because they’ll be in retirement. On the other hand, they expect to spend more on travel and other personal interests. Overall, they expect to spend less throughout most of their retirement years.
Step 3: Assessing Risk Tolerance and Time Horizon
The couple wants to review their risk tolerance and reassess their time horizon.
- Investment Approach: Emma and Roy ask about the potential impact of shifting toward a more aggressive, growth-oriented portfolio with a higher allocation to equities for potentially higher returns versus a more conservative portfolio with a higher allocation to bonds for capital preservation. They also want to understand how their time horizon impacts the level of risk that is most appropriate for them.
Their planner points out that as they get older, their “capital” is shifting from their ability to earn an income from work, their human capital, to the financial capital they are accumulating in their investments. A significant loss on their financial capital because they took too much risk, could seriously limit their choices in retirement. On the other hand, reducing risk too much by focusing excessively on the preservation of capital could also mean losing the potential for their financial capital to grow sufficiently to last for their lifetimes.
Their time horizon does not have only to do with their planned retirement date; it also enters into expectations about how long they will live. Given the earlier recognition of their good health and family history of long lifespans, their planner points out that at their age, it is quite likely that one of them will live to age 94 or longer. This will make their retirement “careers” nearly as long as their working careers. And that means they cannot be too conservative.
Emma and Roy, recognizing the need for a balance between growth and preservation, choose a moderate approach by reducing their equity allocation, making it more globally diversified; they also plan to carve out a portion of their portfolio that will go into an investment savings account for current spending.
Step 4: Tax-Efficient Investing and Long-Term Care Planning
With retirement on the horizon, the couple wants to know which account types make sense to withdraw from first from the point of view of tax efficiency. They are also looking down the road when they may no longer be able to care for themselves.
- Tax-Advantaged Accounts: It has already been decided that Emma and Roy will defer CPP, which will require them to draw more from their RRSPs/RRIFs to make up the difference. The couple feels anxious about having to pay tax on those withdrawals, but their planner points out that if they were receiving CPP income, it would be taxed at the same rate as their RRIF payments. The planner also points out that the money in the RRIF does not get taxed until it is withdrawn so the remaining balance continues to be tax deferred.
Emma and Roy also plan to start drawing on their pension plans as soon as they retire, transferring them into LIF accounts at that time.
Their planner points out one other thing about RRIFs and LIFs. If one of them were to die relatively young, the remaining balances would roll over to the surviving spouse and the mandatory withdrawals would be fully taxed in the survivor’s hands. By reducing these accounts in their earlier years, over the long term, they can be more tax efficient.
Their TFSAs are a perfect account to hold in reserve for their later years. If they need more money than they are drawing from their RRIFs, LIFs, CPP, and OAS, they can begin to withdraw from the TFSAs without any tax consequences. However, their ideal goal is to keep the TFSAs as an inheritance that will pass to their children tax-free at the end of their lives.
- Long-Term Care: Considering the potential for health-related expenses, the couple asks their planner about insurance options. The planner tells them, however, that most insurance companies in Canada have stopped offering long-term care insurance, meaning they must rely on provincial government supports or self-fund their care.
Fortunately, Emma and Roy have been, and continue to be, diligent in saving and investing, and with their retirement plans now an ongoing part of their lives, they feel they can move forward confidently, making changes as needed.
Emma and Roy’s planning meetings demonstrate the importance of a well-thought-out financial strategy to support a comfortable and secure retirement. The couple feels confident and well-prepared as they anticipate this next phase of their lives.
This is the 223rd blog post for Russ Writes, first published on 2023-11-13
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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