A quick checklist to keep you focused on the financial issues that matter most during retirement
No doubt about it: personal finance can be a complex subject. There’s a lot to learn. A lot to review and stay on top of. And if you’re not already well-versed in the subject, it can seem as if the knowledge required to become skilful at it is difficult, if not impossible to attain.
That complexity only increases during retirement. Building and monitoring a portfolio which needs to provide you with income for 20, maybe 30 years (or longer!) can be a stressful job. Then there’s the challenge of budgeting and managing your finances to fund important to-dos on your life’s bucket list, support a grandchild’s education or, potentially, pay for additional health-care costs in your later years. Add in the instability of a shaky economy, a volatile stock market and an uncertain political environment and you can understand why some people feel overwhelmed by it all.
The result is a kind of paralysis: the subject is so vast and the possibility of making a bad decision, missing a critical piece of information or overlooking an important change seems so large, that some individuals become incapacitated and fail to take necessary, critical steps to protect and preserve their wealth for the coming years.
The solution to this paralysis is to prioritize – make a simple checklist that can help you understand the financial issues and questions which you should be addressing during retirement, while also giving you some important insights regarding how to go about resolving them. Whether you just hung up your work boots, are busy checking items off of your bucket list or are well into a long and happy retirement, the following checklist can help to ensure that you make the most of your golden years.
1. Expenses: track, project and adjust
Understanding how much you’re spending, and on what, is an important habit to get into no matter what stage of life you’re in. But it becomes a critical exercise in retirement: without a regular paycheque to “refill” your bank account every couple of weeks, figuring out how much money is flowing out of that account, and where it’s flowing to, takes on a much greater importance.
So, as your first retirement priority, take some time to track and analyze your spending for a month or so. Then, you’ll want to project that spending into the future as much as you reasonably can, and make necessary adjustments. If you don’t have the patience for itemized budget tracking (and let’s face it, many of us don’t), a list of recurring “baseline” expenses – the phone bill, your annual property tax, weekly groceries, electricity and gas, and so on – will give you a good idea of what you’re facing now, and what you’re likely to face in the coming years.
While you’re doing this, it’s a good idea to give some thought to one-time, bucket list expenses as well. If it’s always been your dream to buy a cabin by the lake, for example, or to take a world cruise, or to finally purchase that car which you’ve had your eye on since you were a kid – make sure to account for it in your expense planning so that you can set money aside.
- Formulate a rough budget of “baseline” expenses
- Project that budget into the future: which expenses are likely to increase? Decrease? Stay the same?
- Determine a reasonable budget for potential bucket list expenses
- Identify potential danger areas in which you’re spending excessively
2. Income: protect and maximize
Closely related to the above. Income is always important. But, without a regular paycheque, protecting and maximizing that income becomes an even greater priority in retirement.
Start with an analysis of your monthly income: Canada Pension Plan and/or Old Age Security benefits, a company pension if you’re fortunate enough to have one, rent from a rental property or basement suite, and also the income which you might withdraw monthly from your investment portfolio. For each one, ask yourself the following questions: how secure is it? Is there a potential for it to fluctuate in the coming years? Is there anything that you can do to make it more stable, or even grow?
With some income sources, the answer will be no: your CPP or company pension might increase slightly with inflation, for example, but the amounts are likely to be set at the time you start to receive them. With other income sources, there might be opportunity to minimize the volatility: moving your allocation from equities into government bonds might improve the stability of the income from your investment portfolio, for example. And, in some cases, there might even be an opportunity to boost your income: building a back deck on your rental property, for example, might enable you to charge more rent.
- List sources of retirement income
- Assess the security of those income sources: how likely are they to change?
- Determine how you can improve or boost income from existing sources
3. Part-time work: think about it
Some snowbirds look forward to the last day of work as truly being their last day of work. For others, retirement is the time when work becomes less of a thing which they have to do, and more of something that they want to do – particularly in the early years of your retirement, when people tend to miss the sense of purpose and personal challenge that work often offers.
There’s nothing wrong with either decision. But because whatever you decide can have a big impact on other, important elements of your retirement (your income, your taxes, your ability to fund bucket list items, etc.), it makes sense to think about how some form of part-time work fits into your retirement, if at all.
These days, more and more people are using early retirement as a time of transition; a time to try out a part-time job in a completely different field, for example. Or a time to take on some consulting work or a freelance gig once in a while. Others use retirement as a time to try out a small business idea which they’ve always wanted to explore. And these days, it’s never been easier to turn a hobby – jewellery-making, photography, fishing, music, whatever – into a part-time business (or “side hustle,” as the younger crowd calls it) by selling wares online, or by coaching, teaching or guiding others in how to do whatever it is you love to do.
- Determine whether you’re interested in working part time for a few years after retirement
- Examine whether there’s a demand for consulting or freelance work in your field
- Ask yourself: is there a small business idea which you’d like to explore?
- Explore ways to “monetize” a hobby or interest that you have
4. Safety net: build it
Safety is something that everyone needs. But retirees need it even more. If a financial disaster arises during retirement, there’ll be less time to recover, and usually a lot less income to build back with.
Unless you’re fortunate enough to be blessed with an extremely large net worth, make financial protection a priority. Take a look at the various financial risks that you face with your savings and assets, with your debts and liabilities, and with your health.
If you don’t have a “rainy day” or “emergency” fund tucked away in an easily accessible savings or chequing account (and no, a home equity line of credit is not the same thing), build one. If your portfolio is overloaded with speculative positions, trim them back. If you have a mortgage or other debt that hasn’t yet been paid off, come up with a plan to do so. If it’s been a while since you’ve assessed your insurance needs – life insurance, home insurance, health insurance, critical illness, etc. – conduct a review of your coverage and determine whether you’re protected against catastrophic loss on any or all of your assets.
- Do you have a rainy day fund? Is it sufficient to fund several months of baseline expenses?
- Have you paid off any outstanding debts which you carried into retirement?
- What about insurance? Do you have enough? If you’re not sure, do you know a professional who can perform an audit for you?
- Create a “disaster game plan”; identify expenses that you could cut if worse comes to worst
5. Withdrawal rate: calculate and review regularly
The vast majority of snowbirds rely on their investment portfolios (an RRSP or RRIF, a TFSA and non-registered accounts) to generate income for at least a portion of their everyday living expenses. What exactly is an appropriate withdrawal rate from those accounts? How much can you regularly withdraw from your investment portfolio without depleting your long-term savings? Answering that question is a critical financial priority.
In days of old, most financial professionals would rely on the so-called “5% rule” to determine an appropriate withdrawal rate: retirees could reasonably withdraw up to 5% of their retirement capital without worrying too much about outliving their money. In 1994, U.S.-based financial advisor William Bengen did some very important back-testing analysis which determined that 4% was a much safer target. Some very recent analysis from investment research group Morningstar has determined that 4% might be too conservative. Given the recent run-up in government bond yields, retirees should be able to withdraw a little more and still not run out of money.
The problem with all of these rules is that they’re based on an entire host of assumptions: an average life expectancy; reasonable spending habits; investment in a reasonably conservative portfolio; a reasonable level of inflation; an average amount of stock market volatility; historically average bond yields, and so on. Needless to say, all of these things require a good deal of guesswork. Given the inherent uncertainty of the future, it’s probably safer to think of the 4% rule as a starting point for a more detailed withdrawal rate calculation. But you won’t know until you sit down and crunch the numbers for yourself.
- Determine how much income you’re required to withdraw from your RRSP/RRIF
- Calculate a 4% base withdrawal rate from your investment accounts
- Use an online calculator to perform an analysis of whether that withdrawal rate is feasible over the long term, and adjust your withdrawal rate accordingly
6. Investments: assess risk and control it
When it comes to your investments, your priority during retirement should be to control risk. The key word here is “control,” not “eliminate,” because that’s impossible when it comes to investing, and don’t think “avoid” either, because that suggests staying clear of all stock market risk, and that’s just not wise.
Rather than being obsessed with risk, your goal in retirement should be to be deliberate about the risks you choose to take on in your portfolio. Doing your homework and understanding the possible risks behind any investment before you get into it is one way to do this. Diversifying your portfolio and avoiding “all in” bets on any one investment is another. Keeping a cool, unemotional attitude to market volatility is yet another. All of these things can help you adapt a defensive posture in your portfolio and ensure that the risks you do choose to take on are reasonable, well-thought-out and controllable.
Keep in mind that as you grow older, your assessment of risk will change. Later on in retirement, it’s sensible to trim back your exposure to highly cyclical companies, speculative startups and “hot stocks,” while increasing your allocation to government bonds, guaranteed income certificates (GICs) and less volatile investments. There’s no rule as to when that shift needs to take place – so make sure to take stock of your own “feeling” about volatility and risk as the years go by.
- Get in the habit of thinking risk first, and being honest with yourself about how much risk you’re actually taking on when you get into a given investment
- Assess your own personal risk tolerance: how do you feel about the possibility of financial loss?
- Trim back speculative, “high-risk, high-reward” positions accumulated over the years
7. Taxes: seek advice
Many people go through their working years without thinking all that much about their taxes. They see their deduction on their payroll stub, they file their returns every April and they get their refund in May. And by and large, that’s about it.
As we enter retirement, however, our tax situation can become more complicated, with deductions, credits and potential “watch outs” that we didn’t really have to pay attention to during our working lives. And the stakes become higher, too: with limited income, the amount of tax that we save can have a meaningful impact on our overall financial health. Which is why it’s a good idea to prioritize a thorough tax review and determine whether there are strategies that you can take advantage of, in order to reduce your tax liability in the years to come.
When you do, make sure that you don’t rely too heavily on tax advice which you might read on the internet, see on TV or read in newspapers. Instead, seek out professional tax advice from a qualified, experienced accountant or tax lawyer with a track record of helping people in retirement. Sure, you’ll pay a little more for such advice. But it could end up paying for itself many times over.
- Conduct a tax review of your finances
- Review your individual tax situation with a qualified accountant or tax lawyer
- Take advantage of specific deductions and credits which you may not have been able to use during your working years
8. Health care: assess your needs
If you’re early in your retirement and reasonably healthy, or if you’re fortunate enough to be able to carry your employee health plan into retirement, then perhaps health care isn’t a financial priority right now. On the other hand, if you have a history of illness in your family, or if you only have the basic health coverage offered in your province, or if you travel a lot, then perhaps it should be given greater consideration.
In some cases, it may make sense to purchase additional health-care coverage to supplement the standard coverage that you get from the government – for expenses such as optometry and glasses, dental care, hearing aids, massages, psychologists, orthotics, medical supplies, dieticians and the like. Depending on your personal circumstances, it might make sense to check out critical illness insurance, which can offer a financial cushion if you’re diagnosed with cancer, heart disease or other serious illnesses. Some retirees might also want to look into long-term care insurance, which can provide coverage for at-home nursing, extended care and similar expenses.
One particular note for snowbirds: pay attention to what your province covers when you’re out of the province. We’ve all heard horror stories about how costly health-care emergencies south of the border or overseas can be. Do yourself a favour and get a policy that covers travel. The money which you spend on this could end up saving you a fortune.
- Review existing provincial health-care coverage and purchase supplemental coverage, if needed
- Explore critical illness insurance, particularly if you have a family history of serious illness
- Investigate long-term care insurance
- If you spend time outside of Canada, get a comprehensive travel policy
9. Giving: craft a strategy. Or not.
As we move through our golden years, our minds naturally shift from making more money to giving more of it away – to family, to causes which we care about, and to charities and organizations that have made a difference in our lives.
While the topic of charitable giving is vast, at its most basic, it comes down to a crucial decision: whether we want to be reactive or proactive in our giving. Do we want to give as a response to immediate needs which we see, or do we want to establish a detailed strategy for our giving and donate in a structured, planned way.
There are pros and cons to each of these approaches. The reactive approach is by far the simpler one, and it allows you to target specific causes that might need more help right now, as well as to adjust the amount which you give according to your personal circumstances. On the other hand, by taking a proactive approach, you can often take advantage of specific tax benefits and giving vehicles that can amplify the impact of your gift. More strategic giving can also provide the opportunity to make much more sizeable gifts and create foundations or endowments that can last for many years after you pass away.
- Ask yourself: are their family members, causes or organizations which you’d like to support?
- Make a rough estimate of how much, and when you’d like to give
- Think about whether you’re more of an “ad hoc” giver, or if you’d like to take a more structured approach
- If you’re planning a larger gift, seek out professional advice on the best way to accomplish it
10. Estate planning: just get it done
Of all the topics within financial planning, estate planning is probably the one that’s most often overlooked. This is partially because it’s complex, time-consuming and often costly. It’s also partially because it’s somewhat distasteful – who wants to think about their eventual demise? And it’s partially because it doesn’t really come with the same sense of gratification as picking a winning stock, for instance.
Yet it remains one of the most important financial priorities of all, with grave consequences for not getting it done. If we don’t invest the time and effort in crafting a proper, professionally written will and estate plan, we risk losing family assets to the taxman, or causing unnecessary legal hassles, delays or family arguments. We have a responsibility to ensure that this doesn’t happen.
All of which is to say: if you haven’t made it a priority yet, you need to adapt a “just do it” attitude and get it done now. If you haven’t written your will, write it. If you haven’t reviewed your will in several years, review it. If you haven’t told family about your intentions or what you’d like to do with your personal effects, start communicating. If you own a business and haven’t figured out a succession plan, put your mind to it. And, if you don’t know where to start with any of this, talk to a qualified estate professional and get the ball rolling.
- If you don’t have a will and/or power of attorney document, make creating these a priority
- If you do have a will, ensure that it’s accurate and reflects your current life situation
- Revise your will with a qualified professional and bring it up to date
- Schedule an estate review every two to three years
- If you own a business, formulate a succession plan
11. Professional help: decide whether you need it
Many snowbirds derive great satisfaction from managing their money: they take pride in their financial house being in order, in thinking about and enacting various financial strategies and in making profitable investment choices. But many more take no particular satisfaction in these things at all – in fact, they find the entire subject complex and arcane, and they’d much rather “outsource” some, or all of the difficult stuff to someone else and get on with their lives.
As the last item on your priority list, ask yourself into which of these two groups you fall. If the former, then commit to the effort of developing your financial knowledge and your investment-picking acumen. If you belong to the latter group, then make it a priority to find a qualified financial professional who can help guide you through the challenges and opportunities of managing your money during retirement.
- Determine whether you enjoy looking after your finances, or if you’d rather ask a professional to do it for you
- Ask yourself whether you could benefit from a second opinion about financial matters and investments
- Shop around for reputable financial professionals who specialize in financial planning for retirees
- Seek out a referral from friends and family