How to transition into retirement

As a veteran financial advisor, T. E. Wealth senior vice president Warren Baldwin often regaled clients with his “glide path” approach to semi-retirement and gradual retirement. As noted in our review of Clay Gillespie’s book, Create the Retirement You Want, retirement is a gradual process, not a single event, and consists of several stages.

At 66, Baldwin is on his own personal “glide path” to retirement, retrenching to roughly a day a week of work or a few hours at a time here and there: acting on the advice he has dispensed to clients hundreds of times before.

When used in the context of airplanes and flight, glide path is a familiar image that Baldwin’s clients easily understand. His own “glide path” to semi-retirement began three and a half years ago. “Maybe it takes five years because it takes two years to plan and get your mind around it. For me, it was coming up three years ago, when I was 63. The timing was right.”

Another way to describe this is the “Work Optional” stage of life, a term popularized by Emeritus Retirement Solutions’ Doug Dahmer. At first, you’re still working essentially five days a week but as you reach the twilight phase of your career, you have more flexibility about work hours and vacations. During the pre-glide path planning phase, perhaps you no longer get in to the office at exactly 9 am every morning. It’s like preparing to go to the airport but “the true glide path is when you get into the glider,” Baldwin says, “When you pull the lever on the glider and release the hook, there’s no turning back. You’re now gliding and it’s up to your skill with updrafts and flaps, then you have to circle around for a landing.”

Portfolio manager Adrian Mastracci, of Vancouver-based Lycos Asset Management, likes the term but says “remember the glide path eventually comes to an end. You need to hold the controls now and then and make sure you have enough gas to get where you want to go.”

That gas is of course money, which becomes finite once you stop earning it. You’ve now created as much wealth in your life as you’re likely to in any serious fashion. Now you are “decumulating” — taking money out of investments and starting to draw down on pensions. “So the glide path allows you to step gradually into retirement,” Baldwin says.

Some employers facilitate this by allowing workers to go down to a four-day or even three-day workweek, with corresponding cuts in gross pay of 20% or 40%. But the impact on net pay may be muted because of how our marginal income tax system works. As I like to say, if you consider Mondays to be almost tax free because of the Basic Personal Amount that constitutes a “tax free zone,” then you can view Fridays as the highest taxed day of the week. Fridays tend to result in more income taxed at your top marginal rate, like bonus income. So when you cut back your workweek by 20% or 40%, in essence Ottawa shares the pain of your receiving lower earned income.

“If you were making $200,000 a year and give up earning the last $50,000, you’re really just giving up $25,000: the government loses the other $25,000 you would have paid in income tax at the top marginal rate,” Baldwin says. Meanwhile, you have gained 100% of the time you would have lost Fridays working: you’re giving up 50% dollars for precious 100% time, although he cautions that if you end up playing golf or other costly activities on those freed-up days, you may end up spending more than you anticipated.

The government recognizes Phased Retirement in its tax and pension legislation: depending on the employer pension, you may even be able draw a pension while also working a few days a week and accruing more pension benefits.

During Baldwin’s full-time years, clients were accustomed to having two advisors on their accounts: Warren and an associate, with the pair working as a tag team to make sure someone is always there for the client (covering for holidays etc.). As he began to retrench, the challenge was to get clients used to the idea they “No longer needed him.” For both sides, this was a metamorphosis. “Now I had to go to clients and tell them I’m taking my own advice and will be gone in a few years.” Of course, he’s still there as a resource, a kind of “greybeard concept: part of the institutional memory.”

The glide path can entail some tricky mechanical maneuvers about the timing of receipt of income sources and tax treatment of same. On his glide path, Baldwin still receives T-4 income from his part-time work at T.E. Wealth, so he’s not yet set up a RRIF.

While many financial professionals advise clients to defer the Canada Pension Plan and Old Age Security benefits as long as possible, Baldwin has just started to collect CPP and OAS himself. Here, he finds himself echoing comments clients used to make to justify taking CPP early. Many were senior movers and shakers with generous DB pensions, paid-for homes and lucrative directorships in their semi-retirement. Even so, many would opt to take CPP early at 60 even at the discount. The reason cited was “I’m getting some of my money back: I’m getting paid for what I put into it.” Many just don’t trust the government, Baldwin says; there’s “an undercurrent of do I really believe this guys?” So they look at the numbers and decide they might as well go now.

It can make financial sense too. Baldwin notes that in dual-career households where both partners have maximum CPP, if one dies, spousal benefits are cut way back for the survivor. “It’s an artificial clawback down the road, and almost impossible to calculate, let alone talk about.”

For those who take early CPP or OAS, the question arises whether tax should be deducted at source. Baldwin doesn’t himself, saying many retirees make quarterly installment payments anyway. Employer pensions are different; at certain levels you can ask to have tax taken off or not but above certain substantial levels, most opt to have it taken at source. “You don’t want a $5,000 shock come tax filing time.”

The same applies to RRIF payments. Tax deducted at source on a RRIF can become a form of forced savings, particularly if you “dial it up a little high,” as Baldwin puts it. If they know they’re in the 33% bracket and they pay slightly more than that at source, “it helps deflect taxes or maybe gives them a bit of a refund. It’s quite doable.”

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at [email protected]

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About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.