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Your Finance
By Sheldon Rice, CIM, FCSI
Retirement Worthy
Get the retirement lifestyle you deserve
We’re living longer — and more actively — and
retiring earlier than we used to do.These are positive
changes, but the new challenge is how to
ensure that we have enough retirement income to provide
the lifestyle we want for as long as we need it.The answer
lies in planning.
Planning for retirement has always been important,but
today it’s even more essential.Recent figures from Statistics
Canada show that the median retirement age in this country
fell from 65 in 1979 to 61 in 2004. Over the same period,
life expectancy for a 65-year-old Canadian rose from
81.9 to 84.5 years. In this environment, if you retire at age
61 and live to be 84, you will spend almost 20 years drawing
on your savings for your retirement income.
How much money will you need?
For years,it’s been the accepted view that you need 60
to 70 per cent of your average pre-retirement earnings to
live comfortably in retirement. However, new research
from Fidelity Investments shows that many Canadians may
need more. In fact, depending on your circumstances, you
may need as much 75 to 85 per cent of your pre-retirement
income.
So when should you start planning? For my clients,
retirement planning begins as soon as we meet. Whether
they are 30 years old or 60, I ask questions to get them
thinking about the way they envision their retirement.
Many of them have high-priced plans.They want to travel
in style and pursue new hobbies.One of my clients took up
competitive ballroom dancing, which costs about $2,000 a
month for lessons and costumes. The point I’m trying to
make is that many people are surprised to discover that
they don’t spend less money in retirement; they actually
spend more, especially in the early years.
To determine the level of retirement income that’s
right for you, begin by preparing a budget. I know, I know,
you don’t like budgets, but what I’m talking about here is
using a budget as an estimating tool. In fact, I recommend
two budgets: one that tracks expenses today and another
that forecasts expenses in retirement. Once clients have a
sense of how much income they’ll require, I crunch the
numbers to show how much they’ll have to save and the
rate of return their investments must deliver.
May 2008 • 31 • Fifty-Five Plus Magazine
RRSP maturity options
The most popular and effective way to build savings is
through an RRSP.An RRSP must be collapsed by the end of
the year in which you turn 71. There are several options
for managing these matured funds.These include transferring
them to one or more Registered Retirement Income
Funds (RRIFS) or transferring them to one or more annuities
or doing a combination of the two.You can do this at
any age, but I advise my clients to wait as long as possible
to withdraw money from their RRSPs, doing so only when
and if they need the income and maintaining a RRIF to provide
for a long retirement. From an income tax point of
view,it makes sense to leave your RRSP money to grow and
compound tax-free for as long as possible.The more years
your money compounds, the better your chances of having
enough money to last your lifetime.
How do RRIFs work?
While an RRSP is designed for you to accumulate savings
in a tax-sheltered environment, a RRIF generates taxable
retirement income from these savings. Some of my clients
under age 71 have transferred only part of their RRSP to a
RRIF. This way, the RRIF provides only as much income as
they need while their RRSP continues to grow,tax sheltered.
RRIFs include a number of key features:
• Income flexibility and control for tax and investment
planning purposes.
• The ability to defer your first payment until the end of
the year you reach age 71.
• There is no maximum amount of income you must take
but there is a minimum that must be withdrawn annually.
The payout formula is based on your age at the beginning
of the current year and on the size of your RRIF on
December 31 of the preceding year.
• As long as you are under age 71, you may transfer any
remaining RRIF back to your RRSP if you no longer require
the extra income.
• Upon your death, any remaining RRIF forms part of your
estate and becomes fully taxable, unless it’s eligible for special
rollover provisions for a spouse or dependent children.
• When you withdraw money from your RRIF, tax is withheld
at source and sent to the government. This not an