Maintain your lifestyle at retirement

Un femme, un homme et un chien

From the moment you get your first job, you start hearing about retirement. We’re encouraged to set money aside, to save and plan ahead. We’re bombarded with ads in which retirees, all smiles, are living it up on a sailboat, far away from our harsh Canadian winters. So how can you retire without any financial concerns?  Here are several tips that will help you plan your retirement so you can take full advantage of it.

Be aware of the financial risks

Like with any other planning exercise, the first thing to do is learn about the risks related to retirement. These will often include a few curve balls that you won’t see coming. Keep these risks in mind when you implement your savings strategy.

The risk of longevity

For a few decades now, life expectancy at 65 has increased by 6 years and should continue to go up by approximately 3 years in the next 50 years. That means retirement lasts much longer than it used to. As a result, you have to plan to have income for a longer period of time. For example, a 65-year-old today has:

  • A 75% chance to reach 80 years old
  • A 50% chance to reach 86 years old
  • A 25% chance to reach 92 years old

What we see most often these days is retirees stuck in a financial rut because they didn’t think they would live to such an advanced age. So it’s vital to have a savings plan that would let you live comfortably for as long as possible.

The risk of inflation

Inflation has been rocketing upwards over the last several months. This impacts the cost of living for everyone. At retirement, only one part of your income is protected against the risk of inflation:

  • The benefits paid by the Quebec Pension Plan (QPP)
  • The Old Age Security (OAS) pension
  • The Guaranteed Income Supplement (GIS)

Inflation otherwise makes an impact on your personal savings and your employer’s pension plan. The best solution is to obtain a positive real rate of return on your investments to offset inflation. This means that the return on your investments must increase at least at a rate equivalent to the rate of inflation to match the increase in the cost of living.

The rate of return risk

Normally, we invest money in financial products to use the investment income during retirement. However, all these investments have their own specific features and various risk levels. The rate of return risk is directly associated with the uncertainty of returns on investment income. It not only includes a loss of income, but also the possible significant variations in investment income. You should also go with the risk level you’re most comfortable with. You can pick from secure, balanced or growth investment strategies.

Liquidity risk

Liquidity risk is related to the availability of funds to meet your short-term needs. A “liquid” portfolio makes transactions easier. If your investments are liquid, you can access them more easily than a registered plan. A good way to manage liquidity risk is a personalized withdrawal strategy, which takes into account several factors, including the other risks mentioned above.

Remember these 4 principles when you’re developing your retirement strategy. And don’t forget that illness can hit at any time and derail all your plans. The same applies to the death of a spouse.

Call on a financial advisor

To help plan your retirement, especially with all these risks to consider, it pays to call on the services of a financial advisor. As opposed to investment advisors, financial advisors take into account a multitude of factors that can make an impact on your finances, such as:

  • Legal and tax aspects
  • Your current investments
  • Your total finances
  • Insurance

With an in-depth knowledge of your personal finances, advisors can develop a solid and diversified plan to achieve your goals. They can guide you when it comes to the insurance options that would suit your new lifestyle best during retirement. They can also help you develop a tailor-made savings withdrawal strategy.

Un couple rencontre un conseiller

Determine your monthly needs

To know what you’ll need for your retirement, you’ll first need to get a good grasp of your current expenses. Take the time to create a detailed budget that includes all incoming and outgoing funds. Include vacations, any small pleasures you partake in, restaurants, etc. This way, you’ll have an excellent idea of your lifestyle and you’ll know how much you need to save to continue enjoying the same lifestyle when you retire.

Determine your monthly income at retirement

As a general rule, you’ll need about 70% of your annual gross income to maintain the same lifestyle during retirement. To know how much you’ll need for a comfortable retirement, thoroughly go over your sources of income. Fortunately, needs and expenses tend to be lower when we retire. However, if you’re waiting for retirement to embark on major projects, you’ll need to save more to make them happen.

The lucky ones among us receive a pension plan from their employers. All Quebec residents with an income above $3,500 a year also contribute to the Quebec Pension Plan. At 65, you can start collecting from this plan. You’ll receive between 25% and 33.33% of the income on which you made contributions. The amount is calculated based on your situation at age 65 (full retirement, partial retirement, part-time work). The longer you contribute, the higher your benefit amount. The Old Age Security pension is a monthly benefit paid to all Canadians. It’s a taxable income. It is indexed to the cost of living 4 times a year.

Next comes your personal savings, which you will have been amassing throughout your active life. Make sure the amounts you withdraw will be enough to maintain your lifestyle during your retirement. This income can come from:

  • Real estate
  • A Registered Retirement Savings Plan (RRSP)
  • A Tax-Free Savings Account (TFSA)
  • A Voluntary Retirement Savings Plan (VRSP)

When you turn 71, your RRSP will be converted into a Registered Retirement Income Fund (RIFF) and become taxable. Discuss the ideal withdrawal strategy with your financial advisor. You can then take advantage of graduated rate taxation.

Lastly, more and more retirees are working part-time for a variety of reasons. If you think you’ll keep working part-time after age 65, factor it into your expected income. By having a clear picture of your income during your golden years, you’ll be better positioned to assess how much you need to save.

Don’t forget about inflation!

Inflation can really take a bite out of your purchasing power over time. The subtle increase of the cost of living diminishes the value of your savings. You first need to know which of your retirement income sources will be indexed and by how much. To maintain your current lifestyle, determine the amount to withdraw by year with your financial advisor. He or she will be able to tell you for how long you’ll be able to maintain your lifestyle with your current assets. You can also establish the amount you’ll need to amass to make your savings last longer.

Take advantage of programs and discounts

People over 65 can take part in various government programs to help them lower their taxes.

  • The age amount is available for people born before January 1, 1958. To receive this sum, the person must live alone or exclusively with minors studying full-time. Also, their net retirement income must be under $92,480.
  • The amount for a person living alone reduces the tax amount for people living alone or exclusively with minors, or exclusively with children, grandchildren or great grandchildren studying full-time.
  • The goal of the refundable tax credit for medical expenses is to pay for part of the medical expenses paid by a taxpayer.
  • The Canada caregiver credit is a non-refundable tax credit offered to people supporting their spouses or dependents with a mental or physical impairment.
  • The Guaranteed Income Supplement is a monthly payment for the elderly who receive Old Age Security and have a low income.
  • Pension income splitting helps elderly couples. Spouses can then decide to share up to 50% of their eligible retirement income with their partner.
  • In Quebec, members of the FADOQ (This hyperlink will open in a new tab) can also get some interesting discounts.

In summary, the key to a comfortable retirement is good planning and an in-depth understanding of your needs. With the help of your financial advisor, you can find solutions to maintain your current lifestyle until an advanced age. Start saving early and make smart investment choices.