Retirement is something that many Canadians look forward to throughout their working lives. It can be amongst the most enjoyable periods of one's life. However, failing to plan properly can create a number of potential pitfalls. Take a look at the list below to see some of the common mistakes that people make in planning their retirement.
In 2015, one in five Canadians aged 65 and older, or nearly 1.1 million seniors, reported working during the year. Seniors with a bachelor’s degree or higher and those without private retirement income were more likely to work than other seniors.
In 2014, 10% of seniors (ages 65 and older) declared bankruptcy.
Retirees go back to work for two main reasons. They either need additional cash flow or they enjoy working (that is, the structure, sense of community, and so on). To avoid the pit, you can do the following:
Do you believe your expenses will drop once you stop paying off debt and children’s expenses? Try living off your projected retirement income for six months before retirement.
We all need income to cover expenses. If every retiree had a fully indexed defined benefit pension that met his/her income needs, planning would be easy. Instead, the majority of us have Canada Pension Plan/Quebec Pension Plan (CPP/QPP) benefits coupled with investment-generated income. We may continue to work and receive salary and/or some of us will have defined benefit pension payments.
The more a retiree depends on assets for income generation, the more work is required to sustain and protect the portfolio for the long term. Plan ahead. You have multiple risks to manage. They are as follows:
Be aware and plan accordingly if your only income is from “non-indexed” pensions or annuity payments or the return on your investments is less than the rate of inflation. Identify whether you will have any built-in inflation protection beyond what CPP/QPP and OAS offer. To manage this risk, consider the following:
Benefits paid annually to eligible seniors are subject to an OAS benefit repayment of 15% on all retirement income exceeding the minimum threshold (approximately $75,000). This gradual repayment “claws back” OAS until it is entirely eliminated (once annual income exceeds approximately $125,000). Avoid this pitfall:
The OAS clawback is applied against each person’s income, not the family’s income. That means that each spouse/partner has a personal threshold. Pay attention to tax planning and focus on income splitting. A couple with their income evenly split 50/50, rather than all with one partner, will be in a better position to avoid having the clawback applied.
Beating the pitfalls in retirement may be outside our control but anticipating them and doing some planning is a sound first step.