Retire Now or Later? A Brief Guide for Canadians
Retire Now?
I am fascinated by the number of videos that show up on YouTube extolling the virtues of early retirement. Often, they will have a catchy title like, “Why Wait? Retire Now!” or something similar. Oddly enough, despite the increasing interest in retiring early, trends indicate that Canadians are retiring later than they were two decades ago. According to Statistics Canada, the average age at retirement in 2002 was 61.2. In 2023, the average age reached 65.1, 3.9 years longer than just 21 years ago.
In this blog post, I will discuss some of the issues around retirement including some clues as to whether it is reasonable to retire “now” (whenever “now” might be for you).
The Discrepancy: Canadians are Delaying Retirement
Several potential reasons exist as to why Canadians are, on average, delaying retirement.
One of the first that comes to mind is that the federal government prohibited mandatory retirement in 2009. There were, of course, always people who retired after 65, but an employer could set age 65 as the retirement age and employees would have no recourse. It was not considered an illegal discriminatory practice. Since more people could work past age 65, this tended to bring up the average.
The rise of so-called “gig economy” jobs. According to a 2019 Angus Reid survey, one-quarter of Canadians over age 55 have participated in gig economy jobs. While we usually think of these kinds of jobs as food delivery driving or ride-sharing services like Uber, the bulk of such work is taken up in freelance office work or home maintenance services. Among those between the ages of 55 to 64, nearly 90% of those who engage in gig work do so out of necessity.
This leads to a third reason the age of retirement is increasing. It’s a matter of necessity according to a 2022 Labour Force Survey from Statistics Canada. A CBC article, based on the radio program Cost of Living, cited the example of James Kadri who, at age 70, is working three part-time jobs to make ends meet.
Inflation and the cost of living. Even though inflation is below 3%, much less than the 8.1% Total CPI of June 2022, for those senior citizens who remember inflation rates of 10.9% in 1982, high rates were thought to be a thing of the past until 2022 came around. Retirement assets that seemed perfectly adequate in a world of 1.9% inflation in 2019 suddenly didn’t look that reassuring. Look at the table below. For 30 years, inflation looked pretty tame.
The Value of Retirement Planning
This is not to say that retirement “now,” or at least earlier than previously thought, is not achievable. One of the most important things that we can do, beginning as soon as we are earning an income, is to plan for retirement. In those early years, not a lot of planning necessarily needs to be done, but there are a few ongoing habits that we can adopt to make retirement at our desired age work for us. I would describe this as setting up the process to reach the desired goal.
That leads to the next question, though: what is an appropriate goal to set? Recently, Qtrade has been running online advertising asking people how much they think they need to retire, followed by the observation that it will take $1.7 million to retire.
Steps You Can Take Toward Retirement
Debt Management
I think it is fair to say that we Canadians are more interested in saving and investing than we are in debt management. If we can grow our wealth, then even if our debt doesn’t go down it will become a smaller part of our household “balance sheet.” Unfortunately, it doesn’t always work that way. You cannot out-invest 20% credit card debt, 10% line of credit debt, or 7.5% car loan debt. Consider as well that these debts are paid with after-tax money. If your investments are in a non-registered account and your marginal tax rate is 30%, you have to generate interest income of nearly 29% for your investments to break even with your credit card debt. Even if the income comes only from capital gains, you still have to get growth of nearly 24% to break even.
With this in mind, the habit or process regarding debt, especially high-interest debt, is to pay it off as quickly as possible. Every credit card I have allows for automatic payments to pay off the balance each month. If you haven’t set that up yet, I encourage you to do it now. The same can be said for virtually every other debt that has an interest rate higher than you can reasonably expect to generate from your savings or investments.
Track Your Income and Expenses
I don’t particularly care about creating a budget, but I think it is useful to track what’s going on with your money. Set a goal of doing this for three months. Are you spending more each month than you are bringing in? It may be time to take a knife to your spending and cut away things that are of lesser priority. Or, if the spending is meant to serve an important purpose in your life, e.g., going out with your friends for social engagement, consider less costly ways to achieve the same purpose.
Build an Emergency Fund
A review of your expenses and your credit card/line of credit debt may reveal periodic expenses that were unanticipated. These sorts of random expenses are inevitable no matter how well-organized we are with our money. For that reason, almost all financial planners will recommend setting aside money in an “emergency fund.” At a minimum, aim for a reserve equal to three months of spending. If you own a home and people who are dependent on your income, then six months is a better goal to shoot for. This is often best held in a high-interest savings account.
Contribute to Your RRSP and/or TFSA
RRSP versus TFSA
If you only have enough savings available every month to contribute to one of these two accounts, the one to prioritize often depends on your income and your family situation. Depending on your province of residence, an individual income of around $55,000 or higher is the approximate threshold at which it starts to make more sense to contribute to an RRSP. However, if you participate in a registered pension plan with your employer, you may find that you do not have a lot of RRSP contribution room because of the pension adjustment (Box 52 on your T4 slip). Nevertheless, it will often make sense to maximize your RRSP contributions even if you have less room available.
An important consideration in choosing the RRSP instead of the TFSA even if your income is not that high, comes into play when you have minor children, especially if under age 7. Your eligibility for the Canada Child Benefit (CCB) is determined by your adjusted family net income. The higher the income, the less you receive. This income figure can be lowered by contributing to RRSPs, which will in turn allow you to receive a larger amount of the tax-free CCB.
Ideally, though, if you have the savings, you will maximize your RRSP and your TFSA contributions.
Lower-Income Savers Should Prioritize the TFSA
The RRSP works best when your income and, therefore, your marginal tax rate, are higher in your working years and lower in your retirement years. That scenario is less likely if you are in the lowest tax bracket. If you can save a portion of your income despite a lower income, the TFSA is the clear winner. RRSP contributions do not make much of a difference for those in the lowest tax bracket and who like the idea of a bigger tax refund. In retirement, which is our concern for this blog post, those carefully husbanded dollars in your RRSP will come back to bite you. They will need to be withdrawn and added to your taxable income. That extra taxable income will negatively affect how much you may be able to receive from the Guaranteed Income Supplement (GIS) beginning at age 65. The TFSA on the other hand, offers no tax refund when contributions are made, but it does not count as income when it is withdrawn.
Minimize taxes
Investment Strategies
As already alluded to, the account types in which you invest can make a significant difference in your taxes and benefits. Therefore, one of the first things you can do to minimize taxes is to make strategic investments in tax-advantaged accounts, whether the RRSP or the TFSA. If you get to the point where you have more savings than you have contribution room for your RRSP and TFSA, then it is time to start thinking about investing through non-registered accounts.
Three broad types of income are taxed in a non-registered account: interest, dividends, and capital gains. Debt instruments, like bonds and GICs, generate interest. Dividends come from corporate earnings. Capital gains are realized when you have sold a property for a higher value than your cost. This is typically the case when you buy, and later sell, shares in a company, either directly or through a mutual fund/exchange-traded fund. Since many bonds or bond funds have been recently trading at a discount to their par value, you may also find yourself generating a capital gain when you sell a bond, too.
Capital gains are more tax-efficient than interest since only 50% of the gain is included for tax purposes (up to $250,000 per year, rising to 66.67% as of June 25, 2024, if the government’s latest budget announcement holds). I would argue that capital gains are also potentially more efficient than dividends, too, in that you can, with a few exceptions, decide to realize and pay tax on the capital gain at a time of your choosing. This doesn’t mean that you should actively avoid dividend stocks; it just means that there are more important considerations than dividends when deciding on an investment portfolio for a non-registered account.
Tax Deductions and Credits
Instead of writing several paragraphs here, I will point you to my recent blog post on some tax planning strategies for Canadians. These strategies apply regardless of your age, and once you reach 65, you qualify for even more credits.
Re-evaluate Your Insurance Needs
A surprising number of young families purchase some form of permanent (whole life or universal life) insurance. Unfortunately, this is often not the best choice. Instead, consider term life insurance. I think of life insurance as meant to protect those who are dependent on your income from experiencing the catastrophic financial loss that comes along with your death. Term insurance will address this at a much lower cost, and you can “ladder” the terms so that the insurance coverage will slowly decrease as debts like your mortgage are paid off, as your children grow up, complete their education, and set up their own households, and as your wealth grows to the point that insurance is less necessary to fund the needs of your surviving spouse.
The lower cost of term insurance also means that you will have extra money to invest for your retirement (RRSP or TFSA) or your children’s education (RESP).
This is not to suggest that there is no place for permanent insurance. However, in my opinion, its best use is primarily as a tool for estate planning, to absorb the costs of the final tax returns, and to leave tax-free funds to your beneficiaries.
Understand How Much CPP and OAS You Will Receive
The straightforward answer to this question is to search the internet using the words, “CPP How much could you receive.” There you will find that at age 65, the maximum monthly amount you can receive is $1,364.60. However, the average monthly amount paid for a new retirement pension as of January 2024 is $831.92. A fellow CFP® professional, David Field of Papyrus Planning, has developed a CPP Calculator, building on the work done by Doug Runchey, that can provide a more accurate estimate.
As you may know, the Canada Pension Plan is based on contributions. Someone with a short work history in Canada or with income that was consistently less than the Year’s Maximum Pensionable Earnings (YMPE) is going to receive less than the full pension. This will also be the case if you elect to begin receiving CPP payments before age 65.
Old Age Security (OAS), on the other hand, is not based on contributions but rather on residency. You need at least 40 years of residency to receive the full OAS. Currently, that figure if you began OAS at 65, is $713.34 per month (as of the April to June 2024 quarter). You can find this information by searching for the words “Old Age Security How much you could receive.”
It should be noted that it is possible to earn so much in taxable income that you reduce the OAS that you are eligible to receive. You can find out more about the Old Age Security pension recovery tax here.
Are You Ready to Retire?
In researching a blog post from December 2023, I found that the average senior family generated an after-tax income of $69,900 per year in 2021. Bringing this forward to the present day, I came up with approximately $77,600, or $38,800 per person for a two-person household. To get a sense of what this might look like in before-tax terms, using Taxtips.ca, I estimated a combined federal and Ontario tax rate of 13.4% (the combined marginal tax rate is 20.05%). Other estimates included $418,600 per person in RRSP/RRIF assets and $44,400 per person in TFSA assets, both at age 65. I assumed 4% withdrawal rates. This resulted in the following:
The CPP figure is based on the average monthly figure as of January 2024, mentioned earlier, and the OAS figure assumes that the couple begins OAS at 65 and has at least 40 years of residency in Canada since age 18.
You can see that the after-tax totals in the right column fall short of the average household incomes provided by Statistics Canada for seniors. That is even more the case when one considers that the figures are less than the 2021 figures, let alone the CPI-adjusted figures that I had included above. Still, these are estimates based on averages. The figures also exclude any pension income. Furthermore, I have not estimated the spending side.
Takeaways
Several potential challenges and issues might argue against immediate retirement. Among them are inadequate savings. Also included, however, are such things as increased longevity, unexpected medical expenses, or poorer-than-expected investment returns. Nevertheless, if you get the processes in a row, reducing debt, investing, cutting unhelpful spending, etc., you can set yourself up for a successful retirement.
I want to emphasize the importance of making a well-informed decision. Relying on averages can help illustrate some of the issues involved in retirement. However, for projections about the sustainability of your current assets and income streams, it is valuable to seek professional advice so that your unique circumstances and goals can be integrated into any decision made about when to retire.
This is the 249th blog post for Russ Writes, first published on 2024-06-03
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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.