Countdown to retirement

Think of it as a countdown. As your retirement gets closer, you need to pay attention to different aspects of your finances. If your flight plan is taking you off course, you can make adjustments before you hit the launch button.

We’ve based our countdown on the traditional retirement age of 65: that’s a typical target for those without good employer pensions, though we recognize individual situations will vary. And because planning doesn’t end the day you quit work, we’ll extend the countdown well into your post-retirement life.

Key variables

To get retirement right, you need to manage three key variables: how much you save, when you retire, and how much you spend in retirement. Save plenty and you can retire early with a healthy budget. Save less, and you may need to work longer or spend less.

You also need to be careful managing the risks of getting thrown off track. With investments, you need to manage your allocation of stocks, fixed-income GIC rates and annuities to get reasonable returns without too much risk. In most cases, as you age, you should reduce your exposure to stocks and invest more in fixed income and annuities. Once retired, you should be careful to spend at a sustainable rate to reduce the risk of outliving your money.

It helps to invest in stocks that offer value and pay reliable dividends with little risk of being cut. To help you find stocks that are particularly well-suited for stability and income, Norm Rothery has prepared his annual Retirement 100 list, starting on page 34. His approach has produced exceptional returns with relatively low risk since MoneySense first introduced the list in 2007.

T-Minus 10 Years

At this point, your retirement plan is probably a bit hazy. If it looks like you’ll be hard-pressed to finance the kind of retirement you want, now’s the time to hunker down and save as much as you can. The good news is, if you have an average salary or better, have paid off your mortgage and the kids are on their own, you should be able to salt away more than 30% of your income (including reinvested RRSP tax refunds). Do that consistently for the next 10 years and you’ll accumulate a healthy nest egg even if you started with little.

With your investments, you can afford to take more risk than later on, but you should still keep a big chunk in fixed income. Your specific asset allocation will vary depending on your risk tolerance, financial circumstances and market conditions. Most experts would suggest a mix of 40% to 60% in fixed income (including cash) with the remainder in equities.

T-Minus 5 Years

Now it’s time to fine-tune your plan. You don’t have quite as much time to save, so your focus will shift to figuring out when you should retire, as well as getting a better sense of the retirement lifestyle you want and what it would cost.

If the math doesn’t work at this point, take a close look at your plans for retirement spending. It turns out many people overestimate the cost of a comfortable retirement. Most people need much less in retirement than they do in their middle years, because many of the biggest costs are stripped away—including mortgage, raising kids, work-related costs and saving for retirement itself—and with less income you’ll pay lower taxes. We find most couples need 50% to 60% of the income they enjoyed in their peak earning years to live an equivalent lifestyle, while singles can typically do so on 60% to 70%.

You should gradually shift more of your investments to fixed income during this stage. It also helps to shift to less volatile stocks, such as those with modest but reliable and growing dividends.

We have liftoff

Time to make your retirement plans real. Now you’ll need to live within your means, since you’ll have little opportunity to replenish the pot with additional savings. The rough consensus among experts is that each year you can withdraw about 4% (plus inflation adjustments) of your initial portfolio and run little risk of outliving your wealth.

A key decision is when to start your Canada Pension Plan and Old Age Security benefits. The normal retirement age is 65 for CPP, while the starting age for OAS is in transition from 65 to 67. You can take CPP early at a reduced amount, or you can take CPP and OAS later and collect a larger benefit. In most cases there is no great financial advantage to starting these benefits early or late, assuming you have average life expectancy. So if you’re hankering for reliable income and have stopped working, you won’t go too far wrong if you go ahead and start your government benefits as soon as you become eligible.

You’ll also need to figure out how to draw down your portfolio in the most tax-efficient way. If you don’t touch your RRSPs until later, you may face large mandatory withdrawals after you’re forced to convert them to RRIFs or annuities after you turn 71. Because higher incomes are taxed at much higher rates, you’re generally better off taking a balanced approach to RRSP and non-registered withdrawals so you can avoid spikes in taxable income.

You also want to avoid too much investment risk. It’s a good time to increase your asset allocation to even more fixed income, though reliable dividend stocks can help generate the income you need to live on. Obtaining most of your income through interest and dividends will make you less vulnerable to a bear market that might otherwise force you to sell investments at beaten-down prices just to cover living costs.

To infinity and beyond

You have to keep making adjustments to your plans after you retire. As it turns out, age 70 is a good time to consider converting part of your portfolio to annuities. Low interest rates mean annuity payouts are currently low, but they get better if you wait until you’re older before purchasing them. These days, many experts recommend buying annuities gradually over several years, starting in your early 70s. (You also need to convert your RRSPs to either RRIFs or annuities by the end of the year you turn 71, which makes it convenient to add annuities at this age.) One good strategy is to buy annuities to cover basic spending needs (after factoring in government benefits and any employer pensions). That provides the assurance you’ll at least have basic needs covered no matter what happens in the markets. As you age, you run an increasing risk of high health-care costs, so it’s a good idea to have some wealth in reserve. For example, if you have high home-care costs, you can tap your home equity with a reverse mortgage or home equity line of credit. Or you can use the proceeds from selling your home to help pay the costs of a retirement home. If you never run into these costs, the value of your home can still provide a nice bequest to your heirs.

While this should give you a high-level outline of what you need to do at each stage, you’ll still need to figure out your plans in more detail. If you haven’t done so already, consider working with a qualified financial planner. But overall, if you do the right things at the right times, you should be able to count down to a rich and rewarding retirement.