Investors who are nearing retirement have plenty to worry about and consider. Among the top concerns for many entering this new stage in their lives (beyond the identity crisis that many of us will feel in leaving the workforce) is whether we’ll outlive our savings. And with Canadians living longer than ever, that’s becoming an even bigger concern.
Here are three top strategies I’ve come across that I’m trying to implement early, to get ahead of the game. Indeed, for any age group, these tips may be helpful in putting a plan together to retire comfortably.
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Optimize tax-advantaged accounts
Perhaps the most important factor in ensuring portfolio longevity in retirement is one’s overall return over a given period, as well as one’s portfolio mix. But outside of these factors, knowing where one’s funds are invested (as in, which accounts one chooses to put capital to work in) can make the most important difference over the long term.
Canadians working in most jobs will be eligible to put capital to work in the Registered Retirement Savings Plan (RRSP), which allows for pre-tax dollars to be invested (with an up-front tax break). But when one retires, these funds have to be withdrawn with tax, lowering the amount retirees ultimately receive.
That’s what makes the Tax-Free Savings Account (TFSA) so valuable, particularly for younger investors with the ability to invest early and often. This account allows one’s dollars to grow tax-free into something much larger over time. And since it’s after-tax dollars one puts in, these funds can be withdrawn tax-free (including capital gains), leading to a much more pleasant tax season each year in one’s golden years.
Build a plan for withdrawals
There are many competing ideas around how quickly investors can (comfortably) withdraw from their various retirement accounts. There’s also a tax-efficient order in which investors can do so, which speaks to the point I made above.
But in order for Canadians to live their best lives in retirement, ensuring that one has a rough annual budget to spend (knowing what one’s “number” is) and enough income to live off of via CCP, GIS, and other steady streams of income allows investors to back into the withdrawal rate they’ll need to spend.
Most financial experts suggest a withdrawal rate in the 4%–5% range, though that may not be possible for many Canadians depending on the size of their portfolio when they’re ready to retire. That leads me to my next point.
Consider other income strategies in retirement
We’re all living longer, which is a great thing. And while the retirement age has been pushed up in Canada (and may be going up globally), one’s health and personal dynamics will vary from the median Canadian out there. Some may not be able to work or pick up additional sources of income in retirement.
That said, for those with the willingness and ability to do so, picking up a side hustle or earning some extra income on the side (up to certain limits) can be beneficial in bridging the gap between what one needs to comfortably retire and what is expected to come in each month.
In addition to other planning strategies like having a will in place and putting together one’s estate plan, ensuring there’s enough left over to give something away is the first priority.
