The Pre-retirement Check List

You have done the hard part and made it to your ‘50s in better financial shape than where you were at a decade ago. If you have children, they are now launched, and their financial dependency on you has hopefully decreased. If you did not have children, you probably used the additional cash flow to hammer away at your mortgage and build up your assets.

Now as you look at your options for retirement you are wondering, “can I do this early or am I looking at the traditional age of 65 to make it happen?”

Here are just a few details and highlights I have collected from working with hundreds of clients over 43 years as a financial advisor.

Make a realistic budget for what you will need in retirement years.

  • While people think during retirement, they will need 50% – 60% of the gross income they had during their high earning years, reality says it is closer to 80%.
  • If your pre-retirement gross income was $100,000 as an individual (or combined with a spouse) expect to need $80,000 going forward.
  • Those trying to retire early on less than 80% tend to exceed their budget mainly due to the plethora of lifestyle choices now available to them. With good health and a desire to spend more time in the sun belt or on the golf course, financial budgets tend to get overstretched with demands for expensive activities.

Are you prepared to make financial sacrifices?

  • Is a second vehicle with all its upkeep, insurance and fuel really needed now?
  • Do I upgrade to a newer vehicle and carry debt or maintain the older car which is paid for?
  • Can I reduce our entertainment budget, which includes home delivery services and dining out?
  • Do we need all of the various cable, streaming and magazine subscriptions we have now going forward?
  • Can we spend less on family Birthday and Christmas gifts?

Total your various sources of retirement income

  • Get a current CPP and OAS projection to see what you are entitled to.
  • Do you have an employer-sponsored pension plan, and what can you expect at age 65 versus age 60?
  • How much do you have in RRSPs and can your advisor create a RRIF illustration to show you the stream of income you can expect?
  • Is there a stream of investment or rental income available to you?

Factor in a realistic rate of return and an inflation number

  • While interest rates have increased in the last 12 months and GICs are now earning 4%+ what is realistic to expect in Fixed Income investments going forward?
  • Should you have more in Dividend Funds that average 7% over the last decade but also can experience negative return years?
  • Inflation in February 2023 is now 6.9%, in the fall of 2022 it was 7.9% and in 2021 it was less than 3%. Your rate of return should equal or exceed the rate of inflation or you risk eroding your capital more quickly to make ends meet.

Take into consideration taxation and OAS “clawback”

  • If your income is less than $53,000, your combined federal and provincial tax rate will be around 21%.
  • OAS “clawback” starts at around $86,900. so be aware of your total gross income which will include GIC interest, dividend, and rental income.

How will you be paying for future dental and medical expenses?

  • Private medical and dental plans are available through Blue Cross and Manulife, but they have large deductibles and coinsurance limits, plus a hefty monthly premium.
  • Do you self-insure instead and how much should you budget for unexpected expenses?
  • If you still have shares in a corporation, consider a Personal Health Services Plan to fund your medical and dental claims.

Remember how Estate Planning fits into all of this.

  • It’s important to know how your various assets will flow to a surviving spouse, or to your children. If you are single without children, do you want your favourite charity or non-profit society to share some of your estate?
  • Discuss with your advisor the advantages and disadvantages of jointly owned assets, Preferred Beneficiary designations on investments with a Canadian insurance company vs going through your estate.
  • Final income tax returns which are needed to settle an estate can have a large tax hit related to Capital Gains or from the payout of an RRSP/RRIF going to someone other than a spouse.
  • Probate Fees also nibble away at one’s estate, so know in advance which assets can be used to minimize this last type of tax.