With the average Canadian spending about two decades in retirement (it’s about 23 years for women, and approximately 19 years for men)1, it’s important to prepare so that you can easily transition into this new chapter and start enjoying the lifestyle you want.
We’ve compiled a getting ready for retirement checklist with some key things to do, questions to ask and strategies to consider. Whether you’re well on your way to retiring and your plan is in place, or you have some time before the big day and would like a quick list of things to think about.
Take stock of income sources
During our working years we do our best to set aside savings for our life after work; in retirement, the tables turn. It’s important to determine what your income sources in retirement will be, such as government and/or workplace pensions, registered and non-registered accounts, and Tax-Free Savings Accounts (TFSAs).
According to a 2020 investment poll by Scotiabank, the average amount Canadians expect they’ll need to fund their ideal retirement is approximately $753,000.3 Ultimately, everyone’s figure will be different as much will depend on your individual spending habits and lifestyle goals. Now’s the time to assess what you’ve saved so far and can expect to have.
Can you answer these key questions?
- What’s the value of your retirement and savings accounts? If you’re holding investments at number of financial institutions, make sure to include all your accounts.
- What’s the value of your current assets (home, cars, real estate investments etc.)?
- What do you expect to receive through the Canada Pension Plan (CPP), which you can start drawing on as early as age 60 or as late as age 70?
- What do you expect to receive from the Old Age Security (OAS) government benefit starting at age 65 or older?
Did you know?
What’s the difference between the Canada Pension Plan (CPP) and Old Age Security (OAS)? The main difference between CPP and OAS is their source of funding.
- The CPP is considered a contributory retirement plan funded through contributions from both you and your employer. The amount you receive each month is based on your average earnings throughout your working life, your contributions to the CPP and the age you decide to start your CPP retirement pension.
- OAS benefits are government funded. It’s a non-contributory pension plan that’s funded through a percentage of income tax that all Canadians pay. Unlike CPP, it’s not dependent on a person’s employment history, and a person does not need to be retired from a job to qualify for it. To be eligible for OAS benefits, you must have been a citizen or legal resident of Canada for at least 10 years after age 18.
For more information, visit the Government of Canada website at canada.ca.
Track or create a budget
Many retirement professionals suggest that prospective retirees should expect to spend about 70% to 80% of their pre-retirement budget. If you’re not in the habit of keeping a budget, take some time to review your current expenses. Factor in all your fixed costs (rent or mortgage, utilities, etc.) and then review your credit card and bank statements to track your discretionary spending.
Tracking your expenses will help you to estimate how much you may spend in retirement, while also identifying debt or expenses that can be reduced or eliminated. Paying off debt before retirement is recommended as every dollar you owe reduces your retirement income and will impact your standard of living. A Scotiabank advisor can review your financial situation and suggest options to pay off or reduce debt before you retire.
Factor in all the stages of retirement
When thinking about retirement, it’s helpful to think of retirement in three stages. This approach will help you determine how much income you’ll need to live the lifestyle you’d like.
- Early retirement (first 5 to 10 years of your retirement): Spending tends to be higher in this stage, as more time may be spent travelling, or trying new hobbies and activities – mainly crossing the remaining items off your “bucket list.” Working part-time might also be an option during early retirement.
- Mid retirement (10 to 20 years into your retirement): In what could be the longest chapter, time spent with family and friends often takes priority, as routines are established. At this point, you’ll start thinking about how you’ll adjust your plans as you get older – especially where you’ll choose to reside, possibly a retirement or other support residence.
- Late retirement (Less than 5 years): In the later stage, the focus is typically on health care, estate planning and leaving a legacy – for example, ensuring your loved ones and cherished causes are taken care of. A comprehensive estate plan will help to transfer assets with minimal tax burden, ensuring a smooth transition to the next generation.
Estimate future health care costs
Unforeseen medical costs can significantly impact anyone’s retirement plans. While it’s impossible to foresee the future, it’s important to be realistic about future health care costs – taking into consideration if you’re currently suffering from chronic health conditions, such as diabetes or hypertension.
To help you get started to think about health care costs, we’ve provided some general information on employer and government benefits in retirement.
- Workplace health and dental coverage typically ends at retirement. Some retirees have ongoing coverage paid by their employer or the option of continuing coverage at their own expense. Find out if your employer provides medical benefits for a certain amount of time after you’ve retired. Even if medical benefits are paid for a short time after you retire, this is a cost you can temporarily remove from your expenses.
- Provincial health care plans vary widely and may only cover some of the costs for prescription drugs and long-term care facilities. It’s a good idea to look into health insurance that often includes options like prescriptions, paramedical services, and vision and dental care to supplement items not covered by provincial coverage. It’s worth noting that with health insurance there may be limits to annual or lifetime coverage, and pre-existing conditions prior to purchasing coverage may be exempt entirely from the insurance coverage.
To make an informed decision on health insurance in retirement, it’s important to understand the coverage that’s available and if it will meet your needs. Equally important is setting aside funds to pay for health insurance premiums.
Determine if downsizing is right for you
While it may seem like a great idea to downsize given significant gains in current home prices, you may find there’s less of a boost to your nest egg than expected – especially after paying costs like real estate commissions, legal fees and any applicable land transfer tax.
Keep in mind that if you move to a smaller house, you may not always see a significant decrease in expenses, as you’ll still have common expenses like utilities, property tax, insurance and maintenance. Moving to a condo may not be beneficial either, since a potential reduction in property taxes and other costs may be offset by new condo fees.
Consider if you’ll be emotionally ready to retire
Although many Canadians aspire to retire early, the fact is many potential retirees haven’t considered the reality of a life without work. For many of us, work provides a sense of self and an essential social outlet. Does your job still give you a sense of satisfaction and the chance to continue learning? Consider how you’ll fill that void in retirement.
The start of a new journey
The thought of retiring may seem overwhelming, but with careful preparation, you can move into this next stage with ease and peace of mind.
The checklist provided is not comprehensive and is simply meant to provide some important topics to consider as you prepare for retirement. Speak with a professional, like your Scotiabank advisor, for retirement planning advice and guidance to ensure everything is in place for an easy transition into this stage of your life.
This article originally appeared in Advice Matters.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third-party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
1 Organisation for Economic Co-operation and Development, 2018 data, https://stats.oecd.org/index.aspx?queryid=54758
2 World Population Review, Life Expectancy by Country 2021, http://worldpopulationreview.com/countries/life-expectancy
3 Scotiabank, 2020 Scotiabank Investment Poll
4 Scotiabank, Scotia Global Asset Management Investor Sentiment Research, May 2020
5 Scotiabank, 2021 Scotiabank Investment Poll