You have a plan for retirement: You know how much to save now and what income streams you'll have when you stop working. It's a good start. But what if your plan could do more for you?
With a few adjustments, it can give you greater financial freedom, let you enjoy your retirement to the fullest, or even allow you to retire sooner. Here are eight practical strategies to improve your plan.
01 Take an accurate inventory of your finances
The more complete your financial picture is, the more reliable and useful your projections will be. Do you have all the information you need?
Certain information tends to get misplaced or overlooked: a pension plan from a former employer, a TFSA you haven't contributed to in a few years, a new loan, etc. Make sure you've included:
- Your income: salary, rental income, business income, etc.
- Your savings: RRSPs, TFSAs, investments, employer pension plans, etc.
- Your assets: property, vehicle, other valuables.
- Your debts: mortgage, loans, lines of credit, and credit cards.
This inventory will help you make better decisions for your future.
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02 Estimate your retirement expenses, factoring in inflation
Your retirement could last 30 years. Does your plan take into account how much you'll really need to maintain your standard of living? What about inflation for all of those years? Over the long term, rising costs can have a significant impact on your budget.
Assuming an average inflation rate of 2%, a weekly grocery shop for two that costs $250 today could cost up to $375 in 20 years. Plan to save enough to cover inflation and maintain your buying power.
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Start by drawing up a retirement budget based on the lifestyle you'd like to enjoy. Otherwise, to give you a point of reference, Retraite Québec suggests aiming for an income equivalent to approximately 60% to 80% of your gross income to enjoy a comfortable retirement. For example, if you earn $70,000 a year, aim for between $42,000 and $56,000 in gross annual income during your retirement.
03 Grow your retirement savings, one step at a time
The best way to gradually build up your savings? Automation. If you haven't already done so, set up an automatic transfer to your RRSP or TFSA every payday. Then, gradually increase the amount. You could start with just a few dollars. When it happens automatically, you'll barely notice the impact on your budget.
The next time you get a raise, consider bumping up your savings by the same percentage. You won't feel the difference in your budget, but your savings will add up over time.
Contributing an extra $100 a month means saving an extra $1,200 a year. Over 20 years, with compound interest and an average annual return of 4.5%,[1] that amounts to an additional $37,646 in your account.
04 Invest unexpected income
Sometimes, life can bring positive financial surprises. Investing part of an unexpected windfall could help you reach your goals faster. Consider doing so the next time you:
- Get a tax refund
- Earn a performance bonus
- Receive an inheritance or cash gift
- Pay off a loan (Suddenly, you have extra funds available in your monthly budget. It's the perfect opportunity to redirect it to your savings.)
05 Adjust the risk level of your investments as needed
As retirement approaches, it may be wise to review your portfolio's risk level. A more conservative profile protects your capital against market fluctuations, but be careful not to be too conservative too soon, as this could slow down the growth of your savings. There's no one-size-fits-all solution. It all depends on your investment horizon, your risk tolerance, and your personal situation.
06 Delay taking government pensions
For many people, taking their Québec Pension Plan (QPP) pension at age 60 or their Old Age Security (OAS) pension at age 65 is a given. However, waiting a few years can be one of the most financially savvy decisions you'll ever make.
For every month you defer, your monthly benefit increases. And that supplement is guaranteed for life.
- QPP: additional 0.7% per month of deferral after age 65, up to age 72.
- OAS: additional 0.6% per month of deferral after age 65, up to age 70.
Please note: If you apply for your QPP pension before age 65, you will receive a lower pension for life (decrease of 0.5% to 0.6% for each month before you turn 65).
If you wait until age 70 to claim both of these pensions, you could receive more than $100,000 in additional benefits during your retirement. This is a substantial boost that first and foremost requires patience. But it also requires enough savings to get you through the years before you claim your benefits. This is known as your financial bridge.
07 Plan as a couple
If you have a significant other, you should approach retirement planning as a joint effort that allows you to align your visions, combine your strengths, and take advantage of strategies unavailable to single people.
Some important points to discuss with your partner:
- Spousal RRSP: The person with the higher income can contribute to the other's RRSP and claim a tax deduction. It's a great way to rebalance your savings and reduce your family's taxes.
- Retirement income splitting: When it's time to cash out your savings, you can split some of your retirement income to reduce your overall tax bill.
- Retirement dates: Who's retiring first? Is one of you working longer to maximize the pension plan from your employer? These are decisions that need to be made together.
- Protection in the event of premature death: It's a difficult conversation, but a necessary one: What happens financially if one of you dies before the other?
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08 Review your retirement plan regularly
Your retirement plan is a snapshot of your life at a specific moment. But life keeps moving. Get into the habit of reviewing your plan at least once a year or as soon as significant events occur, such as a career change, separation, or inheritance. It's the perfect time to make sure you're still on track and adjust your plan if necessary.
Now it's your turn
These strategies can have a real impact on your retirement experience, no matter where you are in your journey. But there's no need to apply them all at once. Every small step brings you closer to the retirement you want and the peace of mind that comes along with it.
Need help planning your retirement?
My Game Plan helps you bring your plans to life and prepare for the retirement you want. Thanks to its personalized recommendations, it can help you determine the ideal age for retirement and optimize your savings between now and then.
