As you approach the final five years before retirement, you may feel a mix of excitement and concern about what the future holds. One of the most important steps in ensuring a comfortable retirement is to carefully assess your retirement savings and income streams.
This will help you understand whether you're on track to achieve your financial goals, and if not, what adjustments need to be made.
Why is this so important?
By the time you're five years away from retirement, you should have a pretty good idea of what your retirement lifestyle will look like. Whether you're dreaming of traveling the world, enjoying time with family, or simply relaxing at home, your retirement plan should be aligned with your financial reality. A solid assessment of your savings and income streams will ensure that you have enough resources to support your desired lifestyle without the fear of running out of money.
Here’s how you can approach this:
1. Take Stock of Your Retirement Savings
Start by taking a thorough inventory of your existing retirement savings. This includes your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), pensions, and any other investment accounts you may have.
RRSP: Your RRSP is likely your largest retirement savings account, and it’s important to understand how much you’ve accumulated in it, and what tax implications you may face when you start drawing from it. Remember, RRSP contributions are tax-deferred, so withdrawals are taxable, which could affect your overall tax strategy in retirement.
TFSA: Unlike RRSPs, your TFSA contributions are made with after-tax dollars, and withdrawals are tax-free. The TFSA can be an excellent tool for additional tax-efficient savings, especially if you’ve maximized your RRSP contributions.
Employer Pension Plans & Other Accounts: If you have a pension plan through your employer or other retirement accounts (such as a group RRSP), ensure that you fully understand how much income these will provide in retirement and when you can begin drawing from them.
2. Estimate Your Retirement Income Needs
Once you have a clear picture of your savings, the next step is to estimate how much income you’ll need in retirement. Keep in mind that your retirement income needs may differ from your current living expenses due to lifestyle changes.
Estimate Expenses: Consider what your monthly expenses will be during retirement. Will your mortgage be paid off? Will healthcare costs increase? Do you plan to travel or take up new hobbies that could require more funds? Create a detailed budget for your retirement years to get a clear picture of what you’ll need to live comfortably.
Factor in Inflation: The cost of living will continue to rise in retirement, so it’s crucial to factor inflation into your calculations. A good rule of thumb is to assume an average inflation rate of 2-3% per year, though it may vary depending on economic conditions.
3. Review Your Income Streams
After understanding how much you need to live in retirement, evaluate your current and future income streams. The goal is to make sure you’ll have enough income to cover your retirement expenses without depleting your savings too quickly.
Government Benefits: In Canada, two primary government programs—Old Age Security (OAS) and Canada Pension Plan (CPP)—will provide a base level of income in retirement. It's important to understand what you are entitled to, and when you could consider drawing on each benefit.
Employer Pension Plan: If you have a defined-benefit pension plan through your employer, it’s important to understand how much income it will provide in retirement and when you can start accessing it. If you have a defined-contribution plan, it’s crucial to know how much is in your account and how that translates into a monthly income.
Investments and Other Savings: The income generated from your savings and investments, such as dividends, interest, or rental income, will play a major role in covering your expenses. Make sure you understand how much income you can expect from these sources and whether you’ll need to adjust your investment strategy as you near retirement.
4. Closing the Gap: What If You’re Behind?
If your assessment shows that your savings won’t fully cover your desired retirement lifestyle, it’s not too late to make adjustments. Here are a few options to help close the gap:
Increase Contributions: You have five years to max out contributions to your RRSP and TFSA. Every additional dollar you save today will work for you in retirement, especially if you take advantage of tax-deferral or tax-free growth.
Downsize or Adjust Expectations: If your current savings won’t generate the income you need, consider whether you can downsize your home, delay retirement a few years, or adjust your retirement expectations in terms of travel or hobbies.
Delay CPP and OAS: If you’re able to, delaying your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits until later could increase the monthly amount you receive when you start taking them.
5. Get Professional Help
If you’re unsure whether your savings are on track, or if you’re struggling to get a clear picture of your retirement income, now is the perfect time to speak with a financial planner. A professional can help you assess your situation, review your retirement goals, and create a strategy to bridge any gaps in your savings or income.
A financial planner can also help with tax strategies to maximize your withdrawals in a tax-efficient way and ensure you’re on track to meet your retirement goals.
Final Thoughts: Get Ready for a Secure Retirement
The five years leading up to retirement are critical in ensuring that your finances are in good shape. By carefully assessing your retirement savings and income streams, you can avoid surprises down the road and feel confident that you’re on the right track to achieving the retirement you’ve always dreamed of.
Remember, it’s not about how much you’ve saved, but how well you plan for the future.
Small adjustments today can make a big difference tomorrow!
Need help assessing your retirement plan? Let’s talk about how we can create a strategy that works for you.
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