Five key questions to ask for a smooth transition
Retirement. It’s one of life’s exciting, and sometimes tricky, transitions. Not only for your lifestyle, but for your finances as well. Moving from accumulating savings during your working years to using that wealth to generate income or leave a legacy brings a new set of opportunities – and risks – to plan for.
Realizing your retirement dreams and ambitions starts with preparation. Asking yourself five key questions is the first step to putting the pieces in place for a smooth transition.
1. WHAT’S MY VISION OF RETIREMENT?
A comfortable retirement depends a great deal on the depth of your financial resources. Just how deep they need to be is difficult to assess unless you set out a clear vision of what you want to accomplish. Are you looking forward to spending most of your savings, or is your priority to leave a generous legacy? How active will your lifestyle be? Do you plan to live abroad? More Canadians are choosing to phase in retirement slowly, continuing to keep a hand in their careers. Will you do the same?
Clarifying your vision sooner rather than later helps you be ready to kick off retirement how, and when, you want.
2. WHAT WILL MY EXPENSES LOOKLIKE?
Once you retire you’ll say goodbye to some significant expenses. That said, it can be a mistake to assume you’ll be spending far less once you retire. Other costs can increase, such as travel and health-related expenses.
Don’t depend solely on general guidelines to estimate your future spending. Retirement is different for everyone. Map out your projected expenses to reflect your unique circumstances.
No discussion around living in retirement is complete without factoring in inflation. The reality is that the cost of living continues to increase. Even a slow rise in consumer prices can put a dent in your purchasing power over time.
3. WHAT INCOME SOURCES CAN I COUNT ON?
When you retire you’re likely to have income from multiple sources, including government and potentially employment pensions. But it’s likely that pensions alone won’t be enough. Income can come fromyour RRSP, TFSA, proceeds from the sale of your business or home, rental income, and employment earnings if you don’t intend to retire all at once. Consider using some of your savings to secure more guaranteed income through annuities or guaranteed minimum withdrawal benefit plans; enough to at least cover your mandatory living expenses.
Various streams of retirement income may enter the picture at different times. If you’re planning to retire early, you’ll need sufficient savings set aside to fund expenses until your pensions kick in. And, depending on your situation, it can be ad- vantageous to delay taking retirement income. Much of the income you receive from pensions and your portfolio will be taxable. Retirement income planning should go hand in hand with a tax-minimization strategy.
4. DOESMYPORTFOLIO HAVETHERIGHTMIX OFGROWTHAND SAFETY?
Having decades of retirement to fund is a major challenge for your portfolio. While security is important for a typical retirement portfolio, inflation means it’s essential to consider the need for capital growth as you age. That’s why it makes sense to continue to maintain a diversified portfolio even into retirement.
Doing so allows you to take a total-return approach to generating the income you need, so you don’t have to rely only on interest, but can take advantage of the potential tax benefits of earning dividends and capital gains as well.
Holding growth assets into retirement means you’ll have a specific risk to manage, however: market volatility. Any market corrections mean a shorter time frame for your assets to recover before you need to use them. And, if you’re forced to sell at a market bottom to maintain your income, it can erode your savings more quickly, impacting your portfolio’s longevity. Pairing the ownership of growth assets with a strategy to mitigate the effects of market volatility is essential.
5. AMIONTRACK?
As retirement draws near, your priority should be to make sure your financial house is in order. Start by getting rid of any high-rate consumer debt. Catch up on any unused RRSP and TFSA contribution room. And don’t forget todosomecontingency planning through insurance and savings strategies to help you deal with an unexpected event.
Now’s the time to take steps to prepare for a smooth financial transition into retirement. Get the expert advice you need for a happy and secure landing with a professional, accredited financial advisor.