Preparing for Retirement: Start Here
When you think of retirement and everything you need to do to prepare for it, I suspect you might think that some of your success hinges on getting the answers to these questions right:
When should I apply for Canada Pension Plan benefits to get the most out of them?
Should I think about deferring Old Age Security? Am I at risk of having it clawed back?
When should I convert my RRSP to an RRIF and when should I withdraw from it? How does that even work?
Should I take the lifetime benefit from my pension plan, or should I take the commuted value and manage it myself?
Will buying an annuity make sense for me, and – if so – when do I buy one and with what pot of money?
First, let me assure you: there are no right answers; there are only right answers for your situation, values, and constraints. A successful retirement for you is different from a successful retirement for me. All we may have in common is that we both want to be safe and happy, without having to worry about money every day.
Second, you will have to make decisions about what to do with your pension or how to withdraw from your portfolio or when to apply for CPP and OAS benefits, even if your “decision” is to take the default option offered.
Finally, no one is grading how successful you are at making these decisions. The consequences – both good and bad – play out in slow motion, over decades. You are the only judge.
So what does all this mean for you, knowing you need to prepare for retirement, still holding the list of questions and wondering where to start? Start here:
If you do only one thing to prepare for the day you stop earning income, this is it: you must get really, really familiar with what your life costs and hone the skills necessary to monitor and adjust those costs as your life changes.
This doesn’t mean you need a budget. It doesn’t mean you need a spreadsheet, or money in jars, or receipts in an envelope somewhere. At the heart of it all, this has very little to do with money at all, and everything to do with what “happy and safe” means for you and what you need to get and stay both. Of course you should have a system that gives you regular feedback on how this translates into dollars and cents and what the trends look like…but that comes after you do the hard work.
Why does this matter so much? It matters because you can’t make decisions that feel right about CPP or when you should convert your RRSP to a RRIF until you know why you’re making them. Is it to protect your spouse’s feelings of safety and happiness if you die first? To have enough and give away the rest? To spend your last dollar on your last day?
Mind the Gap
There’s a scene in Neil Gaiman’s Neverwhere where Richard Mayhew, having used the underground his whole adult life, ignores the loudspeaker announcement to mind the gap and has a close encounter with the monster that lives in it. From then on, he pays attention to the space between the tube train and the station platform.
Identifying your gap – the difference between your annual income from pensions, CPP, OAS, and how much your safe and happy life costs – is the other thing you should be spending time on to prepare for retirement. Bad things happen when you stop paying attention to the gap.
If most or all of what you need is going to be covered by guaranteed income that will pay you until you die, is protected at least somewhat from inflation, and might even keep paying your partner after you’re gone, congratulations! You’ve got a lot less to think about, and the consequences for deciding poorly on any given retirement choice will probably involve paying higher taxes than you should have, but is unlikely to change your day to day life.
If there’s an uncomfortably wide space between your annual income and how much your life costs, the consequences for deciding poorly on any of the above questions can permanently affect your safety and happiness. Even the healthiest investment portfolio can be chewed up by a poor sequence of market returns, taxes, and fees. A small nest egg plus a big gap means you may need to revisit what safe and happy means to you and make some difficult – even impossible – choices.
It shouldn’t be too hard to get a good enough sense of your gap to know what camp you fall into. Service Canada can estimate your Canada Pension Plan benefit (it won’t be exact, since they don’t know how much more you’ll contribute or if you’re eligible for any adjustments until you actually apply, but it will be close enough for this purpose), Old Age Security pays the same amount to everyone who meets the residency and net income tests, and you should have a pension statement from last year or access to a personalized online portal lying around somewhere.
Don’t even worry about taxes at this point. All you want to do is add up your income, subtract your expenses, and notice the difference. Are 30% of your expenses covered? 50%? 80%?
Sharp readers will have noticed that none of the questions we started with have been answered yet, and frankly it’s because one more article on the internet about how most people should answer them isn’t going to answer those questions for you.
What I want you to walk away with is where to start. Consider this your guide to step zero of retirement preparation. Do not pass go until you’ve clarified what safe and happy means for you, and expect to circle the board and re-evaluate this many more times before you’re done with living. Do not make any decisions about pensions or portfolios until you have a rough idea of the gap you’re dealing with.
Every piece of information you need is out there for the asking at low or no cost: valuable resources like Retirement Income for Life by Fred Vettese, or Pensionize Your Nest Egg by Moshe Milevsky and Alexandra MacQueen are probably on the shelf at your local library right now, just waiting for you to take them home.
Answering your questions with a financial planner who knows her retirement onions might cost you a few thousand dollars. Reviewing your progress and making course corrections as life unfolds might cost you again every couple of years.
Take care of step zero first, because that will help you refine the questions you need to ask to make sure you enjoy a successful retirement. Then – and only then – do you go looking for answers.