Thursday, May 16th, 2019
Retirement isn't what it used to be. The idea of working at the same job until 65, collecting a guaranteed pension, and then golfing and gardening until the ultimate "quitting time" is as antiquated as the flip-up phone. Many of us fantasize about working less and having more freedom to do what we like. To make that fantasy a reality, a little pre-planning is in order.
The less you spend, the more you can save; these are two peas-in-a-pod. If you haven't done so yet, pre-retirement (ideally at least ten years before you plan to leave your job), is the time to evaluate your spending habits, while you have a steady income.
To create a "retirement needs analysis" you need to calculate three things:
1. How much cash you need coming in each month to meet lifestyle expenses.
2. How much cash flow will be coming in from all sources such as CPP, OAS, pensions, savings, etc.
3. The difference between the two.
If there's a surplus, hurray! But if there isn't, now is the time to step up your saving and trim spending. Keep in mind that some expenses will likely vanish in retirement, such as office commutes, mortgage payments, RRSP (called an RSP at Tangerine) contributions, etc. If you're a typical retiree your spending may increase in the early years as you travel and dine out more or renovate your home, but will likely drop again until potential health care issues arise.
My husband and I did this exercise recently and it was an eye-opener. For one thing, his post-work fantasy is to travel the world whereas mine is to study and go to spas. The sooner you have those "dream retirement" conversations, the easier it is to plan. Another important issue is whether you want to leave an inheritance or spend every last loonie. Your answer will have a big effect on your spending limit.
Now is the time to review your investments and make adjustments. You probably want to minimize risk as much as possible. There are a number of ways to do this. First, review the fees you're paying. High management fees cut into returns. You may not notice this in rising markets but you definitely will in falling ones. Make sure that you're not overpaying in fees and that your investments are sufficiently diversified, which also reduces risk.
Pre-retirement may be the time to gradually shift assets away from riskier asset classes, like stocks, to fixed income equivalents like GICs. Consider keeping at least 2 years' of expenses tucked away. Some experts have even suggested it should be closer to 5 years' worth. Even if the markets tumble, your basic expenses will be covered, and it will be easier to wait out the turbulence.
In a word: Don't. Adding to your debt load is the last thing you'll want to do as you near retirement. In a perfect world, you'd retire debt-free. However since many of us still have mortgages, this may not be possible. Interest rates are historically low, tempting people to pile on debt, but these rates will not last forever. Once they start moving up, you could find yourself in a tight spot, having to give up lifestyle expenses to service the loans. This is not a recipe for a good night's sleep.
The Tangerine Retirement Calculator can get you started crunching those retirement numbers.