2022 is officially underway. We’re not even a week into it and resolutions are being broken everywhere you look. Thanks to our Provincial government and the Omicron variant, you can kiss that “get back in shape” resolution out the door, but what about that retirement plan. Here’s an idea: Let’s make 2022 the year you get your finances in order! You know you’ve been talking about it for years. You keep saying you’ll get to it once you have some free time. Well guess what? With all the lockdowns and closures, you’ve got lots of time to take a closer look and take that deep dive.
Retirement is creeping up on you faster than you think. So let’s get you ready. In this series of blogs, I will walk you through all the steps I use to make sure my clients have all the money they need, all the security they crave and how I do it as tax efficiently as possible.
Step 1 – Retirement Income planning
Every journey needs a starting point and a destination. After all, if you don’t know where you are and where you want to get to, how are you ever going to get there?
In terms of planning for your retirement, the journey starts with income planning. It seems pretty obvious. You are about to stop working for money for the rest of your life. So you had better make sure you have enough money set aside and money coming in to cover your expenses. Not just for today, but for the next 30 years. We are living longer than ever before in human history, so we have to make sure that your money will last. How do you do that?
Start with Your Expenses
All of us have bills to pay every month. It’s just sort of, part of the deal. We eat, sleep and pay bills. But how often do you look closely at how much you spend? What does it cost you to live every month. At Klyne Financial, I ask my new clients to take a look at their last 3 months of expenses. Where exactly is your money going and how much do you need to live a good life. 1 month could be an anomaly, but 3 months usually gives us a good average to work with. Once you know how much it costs to live each month, you’ll have to project how much it will cost you to live in retirement. Some expenses will stay the same like utilities but others will change. For example, if you commute to work every day, your fuel bill will drop considerably in retirement. In fact, you may not even need that second car anymore.
The good news is that most people overestimate how much they will actually need in retirement but if you’re having trouble with this, a good rule is to project about 70% of your current expenses.
Where is the Money Coming From?
Once you’ve calculated your budget for your living expenses, the next thing to do is determine where the money will come from. In your working years, it was pretty easy. A cheque came in usually every 2 weeks from your employer. Now it gets more complicated. You may need to draw from 3, 4, even 5 different sources to reach you monthly target.
Pensions First – You may or may not have pension income from your old job(s), but even if you don’t, every one of us is eligible for government pensions like CPP and Old age Security.
All retirees earning less that $79,054 per year will receive $642.25 per month from CPP.
The CPP payout is different for everyone. On average, retirees receive $619 per month. If you’d like a more precise calculation, you can go online to your “My Service Canada Account”
2. Investments and Rental Income
After you’ve calculated how much money you will receive from CPP and OAS, the next step is determine what other sources of income you have to draw from. You may have money in savings accounts, GIC’s, Mutual Funds and Segregated Funds, Stocks and Bonds. You may also be receiving income from rental properties. This money may also be registered as RRSP’s and TFSA’s which will affect how it is taxed upon withdrawal. This is where it is crucial to get a financial professional involved. I work closely with my clients at this point to show them exactly how much they should pull from each of their investments and when. This step; if executed properly can save you Tens of thousands even hundreds of thousands of dollars in taxes paid to the government. Seek help
3. What About my House?
In a perfect world, you and your advisor at this point will have devised a strategy that will provide you with enough income to live every month for the rest of your life. But what if you come up short? What if there isn’t enough money there? Then what? Well, as much as I don’t want to include your home’s value into your financial plan if it can be avoided, I’ve got to be honest too. And if you own your home, there’s a very good possibility that there is a lot of equity built up in it. Depending upon your circumstances, it might make sense to set up a line of credit or even a reverse mortgage for a portion of your home’s equity. Alternatively, some people may consider selling their home outright and moving into a rental or moving to a less expensive region. I realize that these may not be the most attractive options to some but remember what we’re trying do here. Create income for life and remove any stress about running out of money.
So to recap, step 1 to your Retirement Resolution is creating an income plan for your retirement that will provide you with a steady stream of income, not just for today, but for the rest of your life. There will be multiple sources of money. By working with your advisor, you can devise a strategy that will give you all the money you want, all the security you crave and save thousands in taxes all at the same time.
Want to learn more planning your retirement? See our section about retirement income planning? Don’t have an Advisor? Don’t be shy, pick up the phone and give me a call. I’m happy to help.
