Most people don’t want to become a financial burden on their children after they retire, which is why many of them regularly contribute to retirement savings plans to bolster whatever state or company pensions they will receive. That’s good, but saving and investing is only part of it; people also need to be planning now to get their investments retirement-ready to maximize their income after they stop working.
If we look at how retirement trends have evolved over the last few decades, it’s easy to see why this is important.
Living longer, retiring eariler
When the Canada Pension Plan was set up in 1965, Canadians had an average life expectancy at birth of about 69 years for men and 75 for women; today, it’s 79 for men and 83 for women. But that’s only part of the story. Latest figures show that men and women who reach 65 can now expect, on average, to live until about 84 and 86 respectively.
But we’re not just living longer, we’re also retiring earlier. In 1976, the average retirement age was 65; now, it’s just over 62. That means today’s retirees probably need to stretch their retirement funds over more than 20 years, whereas someone who retired 40 years ago only needed to make those funds last for about five or six years.
Unfortunately, not every retiree has managed to put aside enough to remain financially independent, while others haven’t created a tax-efficient plan to draw upon their retirement savings, leaving many to rely on their adult children for at least part of their living expenses.
A recent TD survey found that, of the two-thirds of Canadians aged 40 to 64 who provide or expect to provide care for an aging parent or in-law, 20 percent also provide or expect to provide some financial help to them. No wonder most of the people surveyed say they don’t want to put their own children in the same situation.
The question, of course, is how best to do that…
Save the most during your peak earning years
Clearly, maximizing your retirement savings during your peak earning years is a very important part of any plan to remain financially independent. But thinking about how you will draw from your retirement funds is just as important, even if you’re still several years away from retiring.
That’s what I mean by getting your investments retirement-ready, and it’s something you should be discussing with a financial advisor so you can get the most out of those investments, including finding ways to keep taxes to a minimum.
For example, while money invested in a Retirement Savings Plan (RSP) is tax-deductible while you’re still working, it’s only tax-deferred, not tax-free. So it helps to talk to an advisor about when it makes sense to withdraw money from your non-tax-sheltered investments rather than your tax-deferred ones such as an RSP or a Registered Income Fund (RIF).
You also need to decide such things as when it’s most advantageous to convert your RSP to a RIF, bearing in mind that, when you do, you have to make a minimum annual withdrawal based on either your age or your spouse’s age. Because you have to elect whose age to use before your first RIF withdrawal and can’t change your decision once it’s made, a financial advisor can help you choose the right option, which could mean significant tax savings every year.
Other things to consider include how to make sure whatever additional income you get after retirement doesn’t reduce any government payments and credits you might be eligible to receive; whether you or your spouse should include any dividend income in order to minimize the tax bite; and whether to split your Canada Pension Plan benefits with your spouse if he or she has a lower income than you, again to save taxes.
By maximizing your savings during your working life, making sure those funds are invested tax-efficiently before you stop working, and having a well-thought-out plan for starting to draw from those funds once you retire, you can do a lot to increase the likelihood your money will last for the length of your retirement and eliminate the need to rely on your children for help later on.