Become financially fit
Establishing a financial fitness plan can be as daunting as a trip to the gym for an assessment by a personal trainer. For many, planning for the future is overwhelming, even a bit scary because it forces us to take a good, hard look at where we are and where we want to go.
But just like that initial trip to the gym, once you’ve made a plan, you’ll feel better because, whether you’re 52 or 82, making plans to secure your future always goes a long way toward giving you peace of mind. It also gives you something concrete to fall back on if you start feeling panicky about the ups and downs of the stock market.
Set out your goals
To embark on your financial fitness plan, you must first establish goals. It may seem like putting the cart before the horse, but think about it: if your physical fitness goal were to feel healthier and lose some weight, you wouldn’t train like an Olympic weightlifter because the chances of your ever needing to lift 400 pounds are remote. The same thinking applies to financial planning — you should tailor your fitness plan to your goal.
Naturally, everyone’s goal is to live comfortably during retirement, t you have to be more specific than that because your retirement needs may be very different from the needs of your friends or neighbours, according to Thie Convery, a financial adviser in Hamilton. “I’m often asked, ‘How are we doing relative to everyone else?’” says Convery. “It’s irrelevant because if you’ve got twice as much money as everyone else but you’re going to spend twice as much in retirement, then we have more work to do.” So, you have to figure out how you plan to spend your retirement. “This is the most important step because only then can we back up and say, ‘Here are the price tags associated with those activities,’” explains Convery.^
How will you spend your time?
Making the transition from working 40 hours a week to being retired can be a challenge, especially for men, whose jobs are often a big part of their identity. Convery says women have an easier time because they’re used to wearing a variety of hats in their lives — nurse, mother, wife — whereas men often define themselves solely by what they do between 9 and 5.
That’s why it’s important to decide ahead of time how you’ll spend your days when you’re retired. Convery asks her clients to describe an average Tuesday in retirement — Tuesday because it’s not the weekend when you may have tickets to the opera or be heading to the cottage.
While many people want to travel, that only accounts for a few weeks of the year, so you have to decide what you’ll do for the other 48. To get started, think about the activities you do already — participating in a church group, golfing, it doesn’t matter. If you’re still stumped, think about what aspects you like about your job and how they could translate into volunteer work. If you want to travel, decide how many weeks of the year you want to be away from home and see how much plane tickets cost to your destination. Be very specific because it’s these activities that will determine how much money you’ll need for retirement.
Next page: Find out where you stand
Find out where you stand now
Once you’ve set goals, you need to figure out where you stand today so you can figure out how best to prepare for the future. The best way to do this is by calculating your annual income. You’ll need a variety of documents to do this, most of which you will probably have at hand.
Your income is simply how much money you have at your disposal on a yearly basis. If you’re working, your T4 slip will tell you how much you make; otherwise, put in a call to your employer’s human resources department. If you can’t find your T4, contact your accountant, tax preparer or Canada Customs and Revenue Agency for copies of your latest income tax form or notice of assessment.
If you’re retired, you’ll need a few more papers, such as:
- statements for registered pension plans
- deferred profit sharing plans (DPSPs)
- locked-in retirement accounts (LIRAs)
These should all be available from your employer’s human resources department, or from your financial adviser if you’re already retired. You’ll also need current statements for registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) as well as any non-registered investment accounts (those held outside your RRSP), all of which are available from your financial adviser. For statements regarding Old Age Security (OAS) and Canada Pension Plan (CPP) income, contact your local Human Resources and Development Canada office, which you can find in the blue pages of your telephone book.^
By adding up your different sources of income, you’ll arrive at your annual gross income. That will give you a good idea of how much money you live on now and how much you can earmark for savings. Once you’ve figured out your income, you can proceed to the next step of your financial fitness plan — determining how much you need to save to be able to live the life you established as your goal.
Cost may be lower than you think
If you’re like most of us and you worry you’ll never be able to save enough to maintain your current level of income throughout retirement, take heart: according to Malcolm Hamilton, a noted personal finance expert and pension consultant with Mercer Human Resource Consulting, in Toronto, the average Canadian senior couple lives on about $30,000 a year during retirement.
Next page: Standard of living is key
Does that surprise you? Think of it like this: take your family’s gross income during your working years and subtract everything you don’t spend on you and your spouse, from payroll and income taxes to RRSP and pension contributions. “If you do that, you get a sense of what you and your spouse are actually living on, which is an amazingly small number for many Canadian families,” says Hamilton.
He says a typical family that makes $70,000 only ends up spending between $20,000 and $25,000 on the parents. So if you can go into retirement with an annual income of around $30,000, you’d be able to live in the standard to which you’ve grown accustomed. And when you consider that between OAS and CPP payments, a typical Canadian couple where each partner had $40,000 annual income all their lives and retired at 65 will get about $28,000 from government pensions, it seems a lot less scary.
Standard of living is key
“It depends on whether you’re trying to reproduce the standard of living you had the year before you retired or what you had on average during your working life,” explains Hamilton. “The difference is profound.” For most of their working lives, most of your after-tax income goes to raising kids and paying down a mortgage. The year before you retire, though, things change—in most cases, people have long since paid off their mortgage and no longer support their adult children. That translates into better cash flow and a higher standard of living for the last few years of working life.
Although the old rule of thumb was that you needed 70 per cent of your working income for retirement, Hamilton says 50 per cent is suitable for most couples. “If you target 70 per cent, that’s fine, but the consequence is you’ll have to save much more heavily during your working years,” says Hamilton. “If you go with the 50 per cent target, you can take a little bit of pressure off your pre-retirement finances, and then when you retire, you’ll live like you’re used to.”^
Get rid of debt and reduce taxes
Once you determine how much you need to save for the future, taking government pensions and personal savings into account, you need to think about how to make it work the hardest for you. “Hopefully, by now you’ve done everything you can to eliminate all non-deductible debt,” says John De Goey, a financial advisor in Toronto. Getting rid of high-interest credit card debt and your mortgage is essential.
After that, De Goey says the time-tested advice of maximizing your RRSP contributions still holds true—you don’t have to transform your RRSP into a RRIF until you’re 69, so take advantage of your ability to save and reduce your taxable income at the same time while you can. But what happens when you reach the $13,500 contribution limit per person?
There are lesser-known investment strategies and products that can help reduce taxes. For example, De Goey says buying oil and gas flow-through limited partnership shares offers advantageous tax treatment because the government wants to spur investment in certain mining, petroleum and some renewable energy companies exploration projects.
Regular review important
Finally, once you have your plan in place, you should review it on a regular basis. This is also a good time to review important documents such as wills and powers of attorney. “Part of being financially fit means having contingencies in place with regard to ‘what if’,” says De Goey. Make sure you have an up-to-date legal will, which could save your estate money in probate fees, and an executor you trust to see your wishes carried out and who knows who your financial advisor is and where your safety deposit box is.
Having a power of attorney is also a good idea so that if the situation ever arises, your wishes are clear as to whether you wish to be kept alive on life support or not. You should also make sure that the beneficiary information on your insurance policies and pensions is current to provide peace of mind to yourself and your survivors.