Tuesday, February 26, 2019
Your Retirement Checklist, at Any Age
As we near the end of February, we inch closer to the deadline for RRSP contributions for the 2018 tax year. This time of year springs many into gear, thinking about the future and retirement planning. Others meanwhile stay on the sidelines and ponder what they should be doing. The truth is, we all know we should be saving for retirement, the problem is that many of us just don’t. A startling 32% of Canadian’s between the age of 45-64 have nothing saved for retirement. Another 19% enter retirement with less than 50K saved. Let’s flip that script and start thinking seriously about retirement. I give you my 10-point Retirement Checklist for any age. Remember it is never too early, or too late to save some money.
1) Budget, now and then
Yes, I say it a lot, but there is a reason for it. Your budget is the key to your financial success. Why you might ask? The reason is simple: You never know what you need to live, need to save, and need to invest, unless you have a dedicated budget. You also need to know how much money you will roughly need once you are retired. For some of you this is 30 or more years away, so estimating what you will need is enough. The simple truth is that by implementing a budget you will have a clear grasp on where your money is and where it’s going. This alone will allow you to grow your money which is necessary for a comfortable retirement.
2) Emergency savings
We all know how important emergency savings are during our working years. The cat gets sick, the car breaks down, a tree falls on the house. What about when we are retired? That same stuff happens when you aren’t working. Aside from retirement savings, emergency savings during retirement is vitally important. You may spend 30 years not working at the end of your life. That’s multiple cars, probably a new roof or two, and plenty of other surprises. A retirement slush fund is definitely in order and a perfect place for it is a tax-advantaged vehicle like our Tax-Free Savings Account or a Roth IRA for my brothers and sisters in the States.
3) Understand taxes
I spent a good hour yesterday teaching a group of people how the Registered Retirement Savings Plan works (RRSP). Many reach their retirement and forget that there will be a tax bill upon withdrawal. Many also reach retirement and forget that their pensions are taxed, or their government retirement benefits. Just a heads-up folks, YOU WILL ALWAYS PAY TAX. Even when you die sadly. Understanding the tax implications of being retired is important. They will eat away at a large portion of your retirement income, so careful planning is needed. A good accountant and financial advisor can help you navigate this in an efficient manner.
4) Speaking of the government….
You must understand your government retirement benefits before heading into retirement. For those of us in our 30’s or younger, assume they won’t be there until proven otherwise. For those of you nearing retirement age, they are a real factor in your planning. In Canada, we have Old Age Security and Canada Pension Plan (OAS and CPP). They pay you roughly 20K annually if you qualify for the maximum. Sadly, the average Canadian does not qualify for the maximum CPP, so knowing what you will get is very, very important. Take the proper steps to find out while you are working, so you can do something about an income shortage while you can.
While we are working, we often neglect to concentrate on health. Sure, we work out and that’s great, but what about our benefits. A huge expense in retirement is the cost of health benefits. Things like prescription drugs and dental only get costlier and more frequent as we age. The problem is that we take for granted our workplace coverage while we have it, only to scramble when it’s gone. Take into consideration what your health care costs may be when you are retired. An extra $200 a month could be the difference between eating normal food or Alpo. Review your group health insurance and see if it extends into retirement. If it doesn’t, devise a strategy during your working years to cover this cost.
6) Life Insurance
I’ve said it before, and I will say it again. Everyone needs life insurance. Getting it at a younger age is always best for the simple reason of cost. Relying on workplace insurance and then waiting till retirement age may cost you a fortune if you can even get it at all. Health is a factor and sadly some people wait until they are unhealthy to start thinking about getting insurance. Funerals aren’t cheap and there is also the taxable burden that occurs at death. Any solid financial plan and estate plan includes life insurance. It is the easiest, more tax-efficient way to leave money to the next generation.
7) Do your investments align with your goals?
This point is important at any age. A true review of your retirement investment strategy is vital to your success. Doing this will show you if you are on track, or if a change is needed. While retirement investing is often seen as “set it and forget it,” there should be consistent reviews. Also, understand the nature of the market. I have seen far too many people lose out on huge retirement savings because of a market downturn that caused them to jump ship. Stay the course, but also know where the course is taking you. Remember, Trump will come and go, but nothing should get in the way of you achieving your retirement investment goals.
As my main man, Dave Ramsey says, “The paid off mortgage has taken over the Mercedes Benz as the new status symbol.” People underestimate the importance of being mortgage free. “Well if you aren’t in debt you aren’t living.” Fuck that! Carrying a mortgage into your retirement is a huge cost. Remember that your expenses will stay relatively the same, and in fact, might grow because you have more leisure time. The burden of large mortgage payments during those years diverts money that you could be using to have fun or just live period. Seriously think about where you want to live when retired and how you will afford it. Remember that the house you own outright will transition you into one-day possible downsizing, or even long-term care if it is needed. That’s the reality.
9) When will you stop? Will you?
The age of 65 comes to mind when most people think of retirement. The reality is that many people are working, even part-time, into their 70’s. I personally don’t ever plan on not working anymore. I figure, if you enjoy what you do, why stop? The question of when you will stop is one that should not be taken lightly, but also should be known to be flexible. When you are young, think about when you might want to stop. Again 65 comes to mind. As you get older, let your situation dictate your best possible reality. This is why careful planning and regular review are necessary as you get older. You don’t want to plan to retire at 60 when you are 63.
10) Are you saving enough?
This is the question that haunts most people and even keeps me up at night. With the cost of living these days, whether or not we are saving enough is a real issue. The simplest way to know the answer is to pick an income in retirement and multiply it by 30, age 65-95. If that income is 30K annually, you will need 900K to retire comfortably. Simple compound interest calculators can help you see what you should be saving, including the rate of return you get on your investments. Where people go wrong is that life gets in the way and they forget to monitor their progress. This is where a decent advisor can guide you and keep you on track. Ultimately, like anything in life, more is better. I have always found that the clients I have that are terrified about their savings rate are usually the ones that are ahead of schedule. Don’t be the guy that thinks everything is fine while the house is on fire.
I’ve coined the phrase, “Either you chose how you retire, or you will have no choice.” It’s sad but true. We never really know how retirement will be until we get there. The key is to not be oblivious to the whole thing. Take the rights steps while you can and you will be flying high through your later years.
“Well, today people have to be self-reliant if they want a secure retirement income.” – Scott Cook
Email – email@example.com