Don’t Gamble With Your Retirement

The consensus is, as increasing numbers of baby boomers start to retire, nearly 30 per cent of modest-income and middle-income earners are not saving enough to be able to replace the recommended 90 per cent of pre-retirement expenses once they stop working.

Risks to Consider While you discuss your plans with your accountant, be certain you take into account these risk factors: Inflation: Price rises over the long term pose a serious threat to your retirement income stream. The gradual gains in the cost of living erode your purchasing power. Structure your investment portfolio to keep pace with inflation. Healthcare: Canadians are living much longer than before because of advances in prescription drugs, awareness of healthy lifestyles and improved healthcare. While it’s great that we can enjoy life longer, for many retirees, this may mean outliving their savings. Rates of return: When you build your investment portfolio, you and your adviser generally use average rates of return. Be certain they are realistic. You may be counting on an eight per cent return but average out to just five per cent. Taxes: It may be difficult to get your head around this concept, but it is possible that you can put too much money into your RRSP. Registered plans and funds, when combined with government or company pensions, life annuities, rental income, and part-time business income, can leave you with a hefty, and unnecessarily high, tax bill. If retirement income sources bump you up into the top tax bracket, each dollar you withdraw from your RRSP may be slashed by as much as 50 per cent after taxes.

In fact, a lot of Canadians simply admit that they are doing a poor job at building savings.

That doesn’t mean that Canadians are going to live in retirement poverty. Not at all. According to the Organization for Economic Cooperation and Development, Canada has the second lowest poverty rate for senior citizens after the Netherlands.

The problem, instead, is that many retirees won’t be able to maintain their current lifestyles after they stop working. They may not be able to spend as much going to restaurants, taking vacations or driving the same class of car.

If you are in your late 40s, early 50s or even older, and feel you are not putting enough aside for a comfortable retirement, you still have time to speed up your savings and build a substantial safety net for the years after you stop working.

First, calculate your total savings and the precise amount you will need for retirement, taking into account the potential risks outlined in the right-hand box. Knowing how short you are from your needs can help motivate you to change your savings behavior. Then consider and discuss with your accountant, these tips and how they might fit into your retirement-planning strategy:

1. Utilize your peak earning years to substantially boost savings. Typically, the final years of employments are peak income years. Rather than enhancing your lifestyle with each pay increase, put pay raises into savings vehicles. Look for ways to downgrade your lifestyle without crimping it, add the savings to your retirement fund. Making this change now also means you are likely to be more satisfied with a lower lifestyle when you stop working.

2. Consider asking your non-working spouse to take a job. If your children are out of the house or don’t require much supervision, it may make sense for your spouse to work and put all the earnings toward retirement. Alternatively, or in addition, you might want to take on a second, part-time job or start a business for additional income.

3. Sell your house. If you can sell your current home and get by in a smaller dwelling, you can reduce living expenses and put the difference in savings.

If you are like many Canadians, the bulk of your retirement income may come from withdrawals from Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), or both. Ask your accountant how you can make the most of these plans.

One advantage of the TFSA is that the more you put into one the more money you can live off of tax-free during retirement.

Consider that you may actually be at the same or a higher marginal tax rate after you retire (see right-hand box about risks). If you are likely to bump up into a higher bracket, ask your accountant if it would be reasonable for you to delay RRSP contributions and make the most of a TFSA.

For middle-aged individuals, a combination of the two accounts might benefit you. The current low limit on TFSA contributions won’t let you accumulate enough for retirement, but it does offer more planning flexibility in estate and retirement income planning.

In any event, consider contributing the maximum to both types of tax-advantaged accounts. If your employer offers group plans, take advantage of them and the company’s matching contributions.

The following chart compares the features of TFSAs and RRSPs and can help guide your discussion with your accountant and your ultimate decision:

TFSA	RRSP
No need for earned income to build contribution room	Earned income is needed to be able to contribute
Annual contribution limit for 2017 is $5,500	Contribution limit is 18 per cent of previous year’s earned income or the limit set by Ottawa, whichever is lower
You need not contribute every year but can accumulate room	You need not contribute every year but can accumulate room
Withdrawals, including investment gains or interest, are tax-free	Withdrawals, including deposits and investment earnings or interest are taxable
Contributions are not tax-deductible	Contributions are deductible and provide a refund at your marginal tax rate
Withdrawals are added to the next year’s contribution limit	Early withdrawals are not added to the contribution limit and are taxed heavily
Need not be converted to a Registered Retirement Income Fund (RRIF)	Must be converted to an RRIF at age 71, and minimum annual withdrawals are required
Withdrawals are not used to calculate OAS clawback	RRSP and RRIF withdrawals are income used in calculating the OAS clawback