Lifestyle Planning Strategies For Individuals Nearing Retirement

Canada faces record retirements from an aging workforce, with more than one in five working-aged individuals approaching retirement.

If you plan to retire within the next ten years, consider rigorously planning your finances and bolstering your portfolio as your retirement date nears.

Establishing Your Retirement Landscape

The key to a stable retirement is to plan ahead. Explore these strategies outlined below as you prepare to welcome a new chapter in your life.

Determine Your Debt

The ideal debt level when nearing retirement is zero, but this is not possible for everyone. It is not uncommon to have some type of debt upon retirement, such as credit card debt or mortgage. Currently, three in four Canadians live with debt.

In navigating your savings for retirement, your first step is to understand your debt. Here are the steps to take to figure out what you owe:

Pull your credit file. Access it online for free from Equifax or TransUnion.
Record all corresponding interest rates for credit lines and loans.
Prospect your payments for the next year, including interest rates.
Prioritize debt repayment in your budget.
In paying your debt, choose the method that best fits your situation.

Snowball Method

Pay off your debt in order of smallest to largest. When the smallest is fully paid, roll the payment you were making on that debt into the next-smallest debt owed. Continue until you have paid all your accounts.

Avalanche Method

Start paying the loans with the highest interest rates first. When you have paid the highest loan in full, proceed to the next highest one, and so on, until you pay off all your debt.

Create A Comprehensive Budget

Establishing a budget guides you toward your retirement goals and helps determine how much you need.

Record your income and monthly expenses down to the dime to start your budget.
When nearing retirement, you want to prioritize saving over spending and paying off any outstanding debt.
Create a budget and set a goal to have a feasible amount paid down each year until your goal retirement age.
Figure out how much you need to retire. You should have around eight times your income saved at age 60 to retire comfortably and maintain a similar lifestyle.

Explore Government Programs and Incentives

The Government of Canada offers the following programs and incentives that help save for retirement:

Registered Retirement Savings Plan (RRSP)

RRSP is a savings plan that employees contribute to throughout their working lives to help save for retirement. The idea is to keep the money in the plan until you retire.

How Do RRSPs Work?

The contributions are tax-deductible. You can contribute up to 18% of your previous year’s earned income, up to a maximum each year. You only pay taxes when you withdraw funds. At the end of the calendar year you reach 71, you are required to close your RRSP, withdraw the cash, convert your account to a Registered Retirement Income Fund (RRIF) or purchase an annuity.

Group RRSP With Your Employer: Should You Enroll?

If your company offers a group RRSP program, consider signing up and contributing to it to grow your retirement savings. When you join the program, you keep your management fees low and lower your income tax. You may also get an employer match, which amplifies your savings.

Investment Options For Your RRSP

These include savings deposits, qualified investments like cash, gold, bonds, ETFs, mutual funds, and guaranteed investment certificates (GICs).

How Much To Contribute When Nearing Retirement

If you have not maximized your contributions in previous years, contribute a lump sum during the final year before converting your RRSP. Make the contribution by December 31 of the year you turn 71.

When to start withdrawing from your RRSP

Before retirement, you can withdraw funds anytime, provided your RRSP is not locked in. Once you retire, you can cash out all your RRSP savings as a lump sum (income taxes will apply), convert it to an RRIF, or purchase an annuity.

Tax-Free Savings Account (TFSA)

A TFSA lets Canadian adults with a valid social insurance number (SIN) save money each year tax-free.

How Do TFSAs Work?

Aside from savings, TFSAs can hold stocks, mutual funds, bonds, ETFs, and GICs. Contributions not only earn interest like a savings account but can also grow when you invest through your account. All your investment returns are tax-free, so when you withdraw your funds, there is no need to pay taxes, unlike with an RRSP.

Investment Options For Your TFSA When Nearing Retirement.

If you are a soon-to-be retiree, keep some of your money accessible in high-yield savings accounts and other low-risk investments.

Old Age Security (OAS) and Guaranteed Income Supplement (GIS)

The OAS pension and the GIS are monthly payments you get if you are age 65 and older. The month after you turn 65, you receive your first OAS and GIS payments, which will be based on your income.

Canada Pension Plan (CPP)

CPP is for seniors at least 60 years old and who have made contributions. Valid contributions can be from your work in Canada or credits received from a former spouse/common-law partner at the end of the relationship.

Lifestyle Changes to Implement

Making changes to your lifestyle is crucial since it is integral to a successful retirement.

Cut Expenses Where Possible

In 2019, housing (29.3%), transportation (18.5%), and food (14.9%) made up the majority of monthly expenses for Canadian households. As retirement gets closer, you want to cut down on unnecessary costs and shift financial priorities.

Here are tips for cutting expenses:

Plan your grocery trips and only buy the necessities.
Shop with cash to avoid the temptation and convenience of using credit cards.
Buy in bulk when possible.
Plan your entertainment/fun expenses in advance.
Opt out of vacations and reallocate money to savings.
Sell a vehicle if you have two.
Refinance your mortgage if it makes sense based on current rates.
Invest in energy-efficient appliances in the home to save on energy costs in the long run.
Consider downsizing by renting to save on housing costs.
If you live in a favourable location, consider renting out your house.
Take steps to maintain your overall health to reduce out-of-pocket medical expenses.
Reduce insurance costs by shopping around for a less expensive option than your current provider.

Don’t Shy Away from Investing

Even with retirement on the horizon, investing is vital for ensuring you make the most of your savings. It also assures you of having enough money to enjoy a comfortable way of life after retirement.

As you age, you want to transfer investments into “safer” options that will ensure less risk.

High-Interest Savings Accounts. These are generally safe places to put your money without fear or loss because it has nearly zero inherent risks.
Government of Canada Treasury Bills. Due to government backing, treasury bills are among the safest investments. The yield is not very high, but these investments have a 100% guarantee.
Term Deposits. These offer a guaranteed return at a fixed rate over a period of time, reduce a portfolio’s exposure to market volatility, and are more stable than other investments.
Bonds. Bonds are conservative investments that minimize the overall risk in your portfolio. They pay interest regularly, so they can help produce a predictable income stream from your savings.
Fixed Annuities. Annuities help you get a steady income stream when you step into retirement and provide guaranteed income for life.

Conclusion

Leaving the workforce and retiring is a decision that can be costly. This is why retirement planning comes into the picture.

Before retiring, work toward eliminating debt, creating a comprehensive budget, determining how much you need to retire and exploring government programs aimed at helping you save for retirement.

Dr. Enoch Omololu, MSc (Econ), is the Founder of Savvy New Canadians, a popular online financial resource.