Planning early for retirement pays off

MANY SENIORS FACE TOUGH FINANCIAL REALITIES AS THEY AGE

Being aware of what you’re spending, and what your spending patterns are will help you decide if you need to for go something to reduce expenses.”

NGOC DAY FINANCIAL ADVISOR AT MACDONALD, SHYMKO & COMPANY

For so many seniors, retirement is the time to kick back and relax after decades of all their hard word. Travel, time with family, golf: it’s a life of leisure — at least, that’s the dream.

In fact, money is a major concern for today’s retirees. Nearly 60 per cent of retired Canadians are carrying some form of debt, according to a CIBC poll. Although retired Canadians hold less debt than those still working, they’re also less likely to be taking steps to accelerate their debt repayment.

Paying down debt gets that much harder during retirement when people transition to a fixed income. Monthly payments must come from pension earnings or from retirement savings — both of which were intended to serve as retirement income. As a result, retired Canadians may carry debt for longer than they anticipated, incurring higher interest costs and affecting their cash flow.

Even more alarming is that Canadians over the age of 65 have the highest insolvency and bankruptcy rates in the country, according to a 2011/12 report by the Vanier Institute for the Family. Seniors were 17 times more likely to become insolvent in 2010 than they were 20 years before, the report found. During that same period, the insolvency rate for people aged 65 and up increased by 1,747 per cent.

Without a regular paycheque coming in, it is more important for people to live within their means. The good news is that with a little legwork, people can enter their golden years in the most fiscally stable position.

“It’s important to have a very good, firm financial plan in place,” says Saltspring Island’s Karin Mizgala, cofounder and CEO of Money Coaches Canada. “You have to have very good control over your cash flow and truly know what’s coming in and what’s going out. Typically in retirement people are operating on less income than what they had before, so it’s important to establish cash-flow parameters and ensure you’re staying within those parameters so you don’t increase your debt.”

The top questions Vancouver fee-only financial advisor Ngoc Day gets from senior clients are: Will we outlive our money? And can we afford to maintain same lifestyle we’re used to?

“You have to prioritize your objectives,” says Ms. Day, who’s with Macdonald, Shymko & Company Ltd. “Being aware of what you’re spending, and what your spending patterns are will help you decide if you need to forgo something to reduce expenses. That can’t happen if you haven’t got a clear budget or a clear idea of what you’re spending on.”

It’s also crucial that seniors have a realistic idea of what their expenses will look like in retirement. There’s a prevailing notion that expenses are highest in the earlier years of retirement, when people are taking month-long cruises or visiting museums in Europe, and that expenses then dwindle as individuals become less active. In reality, those later years can end up being the most costly, particularly if people need home care or long-term care. Subsidized nursing homes exist, but waiting lists can be long. Private nursing homes in B.C. cost anywhere from $2,275 to $9,500 per month, according to Sun Life Financial.

Then there are costs for prescription drugs and dental and eye care.

“In some ways, the biggest issue facing seniors is the health issue,” Mizgala says. “With people living longer, we’re dealing with the new reality of the aging body and what that means as far as people’s finances are concerned.”

Making matters more complicated is that the tax implications of income and investments in retirement are complex and wide-ranging. Plus, the age of eligibility for the Old Age Security (OAS) pension and Guaranteed Income Supplement (GIS) is changing from 65 to 67. This change will be implemented between the years 2023 and 2029. (Anyone aged 54 or older as of March 31, 2012 — those born before April 1, 1958 — will not be affected.)

Withdrawals from different investments have different tax consequences, so seniors need to ensure that their withdrawal plan is tax-effective.

“Check with a tax consultant to see how much you should be withdrawing from your RRSPs, converting all or part to RRIFs, of course, because you don’t want to leave yourself vulnerable to bigger taxes and OAS clawbacks when you’re 71,” says South Surrey certified financial planner Bettina Schnarr of Hollis Wealth. “Seniors should ask their accountant about pension splitting to lower their taxes too. During retirement, preservation of capital is key, as is tax-efficiency.”

There are many tools and resources available online to help people prepare financially for retirement. They include:

• RBC Retirement Designer

• Service Canada’s Canadian Retirement Income Calculator

• TD Canada Trust Retirement Savings Calculator

The earlier you start saving for retirement the better. But even if the future seems daunting, taking things step by step can help you move forward with confidence.

“No matter what your situation, if you have a plan, you always feel more empowered and more in control,” says Mizgala. “It’s never too late to start planning for the future.”