Financial planners say your retirement income should be 60 to 90 per cent of what it takes to support your lifestyle today. One certified financial planner in particular, Tannya McBride (Finance ’07), lays out the reality: “Almost nobody has that kind of money at retirement.”
As proof, a recent CIBC poll found that 36 per cent of parents of kids younger than 25 years old will defer retirement to cover the costs of education. Sure, diplomas and degrees can be expensive, but does it really have to be this way?
Probably not. Saving is just one part of dealing with financial pressures that can keep you working for a living longer than necessary; the rest is strategy. Here, McBride offers tips for making the most of your nest egg – something you should consider sooner than later.
“It is never too early to start planning for your retirement,” says the JR Shaw School of Business finance instructor.
“You should have a plan in place,” says McBride, “and this plan has to be very comprehensive.” Envision your retirement. Are you barreling across Canada in a 35-foot motorhome? Baking on a Mediterranean beach? Sipping wine on the porch of your Okanagan lakeside cabin?
Be specific, because picking a destination is the first step in choosing a route. Be realistic, too. “Don’t build up expectations, thinking, ‘I’m going to live this glamorous lifestyle when I retire,’ if you don’t have the income to do so,” says McBride.
As a certified financial planner, McBride always recommends consulting a professional when planning your retirement. That said, she advises caution if they offer pre-packaged retirement funds with management fees in the neighbourhood of two per cent. (Do the math on $200,000 and you’ll see what we mean.)
What’s more, she says, “They usually do not out-perform regular mutual funds that are much cheaper.”
McBride sees index mutual funds and exchange-traded funds (ETFs) as good, inexpensive alternatives. Though susceptible to the ups and downs of the market, both tend to beat conventional actively managed mutual funds over time. Be mindful of commissions paid on ETFs, which trade like stocks (some companies waive the commission if you commit to a regular contribution plan). If you're looking at index and ETFs as long-term investments, consider them for your RRSP or Tax Free Savings Account.
When you retire, “You should be more concerned about protecting your assets than growing them,” says McBride. That is, gambling is a younger person’s game. Guaranteed Investment Certificates, which assure investors of a modest return over a fixed period, can be a good way to go.
They’re not liquid, McBride stresses, so don’t consider them ready money. Consider setting up a series of GICs to mature year after year. Cashing in early usually requires surrendering the return.
As you execute your retirement strategy, gather its components under one roof. There are savings in housing all of your assets within a single financial institution. And, given the inevitable, this ultimately makes sorting out your estate simpler for loved ones.
In part, accountants make their money by finding ways to save you money. Income splitting, then, can be a useful tactic when dealing with a finite retirement fund.
A portion of your pension income – which includes private pension funds, Registered Retirement Income Funds and Canada Pension Plan – can be designated to your spouse. The split can drop the higher earner to a lower tax bracket, potentially saving you thousands as a couple.
Defer Canada Pension Plan payments as long as possible, suggests McBride (this may be the one place where working longer to cover the kids’ education might pay off).
“The government will pay you a little more for waiting but will also penalize you for taking it early.” Start collecting at the earliest allowed age of 60 and it will cost you 0.6 per cent every month until you’re 65. That adds up to forfeiting 36 per cent. Wait until you’re 70, however, and you’ll get 36 per cent extra.
What to bank on
Not the government. “If they don’t plan for their retirement, a lot of times people think, ‘I have CPP and Old Age Security,’” says McBride. “It’s not a lot of money.”
For most of us, that means developing financial discipline to follow a plan from a trusted adviser. “But that doesn’t mean you shouldn’t do some research too,” she says. It’s your money, after all, so, “You have to do your homework.”