By Joel Schlesinger | Special To The Globe And Mail
A decade out from retiring, it’s easy to dream of winter months spent lounging on sun-soaked beaches. But do your financial realities measure up?
Define your dreams
Daydreaming is fine, but you should seriously think about what retirement will look like, says Winnipeg-based certified financial planner Doug Nelson, author of Master Your Retirement: How to Fulfill Your Dreams with Peace of Mind.
“Sometimes people will plan their big life adventures once they are retired,” he says, but then trips can have even bigger price tags. Consider doing the bulk of your dream travel before you retire, Mr. Nelson recommends. “That way extra employment income is available just in case travel plans go over budget.” The same thing applies to that dream kitchen renovation. “It’s far better to get it done during the working years when you’re still generating income,” says Daryl Diamond, author of Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement.
Compare costs of today with costs of tomorrow
With retirement goals defined, the next question is: Can you afford them?
People who are a decade away from retirement should aim for a conservative rate of return, says Diana Orlic at Orlic Harding Cooke Wealth Management Group. “It should be 4 per cent at the maximum.”
Pre-retirees should do “a deep dive” on spending now and then project what will be needed during retirement, says Diana Orlic, director of wealth management with Orlic Harding Cooke Wealth Management Group, part of Richardson GMP, in Burlington, Ont. Many costs will disappear, such as parking and other work-related expenses. Ideally, car loans, mortgage and other debt payments will cease. But other costs will likely increase, such as those for travel and drugs.
“Then again, having debt doesn’t mean you can’t retire,” says Mr. Diamond, who is also a certified financial planner. But you need a plan to retire your debt. “You want to be on a schedule to have the debt load greatly reduced upon retiring, and eliminated at a set date hopefully within a few years of retiring.”
Tally up your income streams
With a price tag on retirement, now it’s time to figure out how to pay for it efficiently. Identify potential income streams that involve paying as little tax as possible, Mr. Nelson suggests.
Start with a top-down analysis determining how much income will come from the Canada Pension Plan and Old Age Security payments, as well as pensions, which will be taxed like earned income. Then estimate how much will be left after food, shelter and other core costs are paid.
The best scenario is when guaranteed income exceeds these expenses, putting less pressure on savings, which might be needed to make up for shortfalls. It’s also helpful to pair this approach with a bottom-up analysis. “How much income do you wish to have after-tax each month, and how can you best achieve this income from various sources?” Mr. Nelson adds. “The ideal approach is a blend of the two kinds of analyses.”
The top-down approach addresses how to cover the necessities, while the bottom-up clarifies how investments will fit into the picture as tax-efficiently as possible to cover mostly discretionary costs. At the same time, your portfolio’s current and expected growth will flesh out the picture more. This is critical if savings play a lead role rather than a supporting one.
Tune up your portfolio
Two key issues should be addressed: rate of return and asset mix.
Ms. Orlic recommends aiming for a conservative rate of return. “It should be 4 per cent at the maximum,” she says. Instead, many people who are a decade away from retirement shoot for closer to 8 per cent, but that figure requires too much exposure to equities. Given the aging bull market, your portfolio could be exposed to a retirement-killing stock meltdown. While a balanced approach is fine – with 50 per cent allocated to fixed income – equities held should be conservative, meaning low-volatility blue chips and dividend-paying stocks (so even when stocks are down, they will still pay income).
Another key strategy is enough money in guaranteed investment certificates (GICs) and bonds to cover the first three years of retirement, Mr. Diamond says. “The idea here is dedicating a sliver of your portfolio to very stable assets just in case the lifeboats come out.” The average bear market lasts about 19 months, and “that safe money keeps you on track while the rest of your portfolio can heal.”
Examine your risks
Not having enough money is obviously the top risk. But if you fall short, at least you have time to shore up the situation. For one, maximize payments to registered retirement savings plans (RRSPs) and then tax-free savings accounts (TFSAs). Another upside is you are likely in your peak earning years, says Ted Rechtshaffen, a certified financial planner and president of TriDelta Financial in Toronto. “People worry about where they’re at, but they can catch up a fair bit.”
Other key risk considerations are insurance, your health and even the estate. Having term life insurance running out at retirement’s start ensures death does not derail plans for the surviving spouse. “But it doesn’t have to be a death creating that problem,” Mr. Diamond says. “It could be a stroke, and while not fun things to think about, they are sure important.” That may mean looking at long-term care insurance, but it certainly entails ensuring your will is up to date and you have prepared an easy-to-find list of assets and passwords. Other risks to consider are aging parents and children who might need money for education or buying a home.
Run the numbers, again and again
Crunch your numbers in various ways. For example, how does drawing CPP early affect your finances compared with waiting until age 65? “You don’t know how these scenarios work without examining the impact on other income-producing assets like the RRSP,” Mr. Diamond says. With a decade to go, you have time to tweak your plan, finding the strategy that maximizes after-tax income for as long as possible. Indeed, this might mean delaying retirement, Mr. Rechtshaffen says. “You may not want to do it, but working more can make up for an awful lot.”
