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Approaching retirement? Get your money right

Yasmin Jaswal
Pay Day

Retirement: no more mindless meetings, early mornings hunched over your BlackBerry or back pain due to long hours at your desk. You've saved diligently and are now ready to make the move from saver to spender. But how do those in retirement, or approaching retirement, best manage the accounts they took decades to build?

Whether you plan on traveling the world or moving to a smaller home in a quiet neighbourhood, you need to make sure your plans won’t cause you to run out of funds too soon.

“As you enter retirement, it’s not about the number or how much you’ve built up any longer,” says Cynthia Caskey, vice-president and portfolio manager of TD Waterhouse Private Investment Advice. “The whole conversation pivots and changes into ‘What’s my lifestyle? What income and cash flow am I going to be able to draw to pay for that lifestyle?'"

You should start managing your registered retirement savings plan (RRSP) long before you plan to retire, says Howard Kabot, vice-president of financial planning for RBC Wealth Management.

Meeting with a financial advisor to talk about your savings and retirement will allow you to keep track of your money and have a rough idea of how much you need to allocate to fixed expenses and how much will be left over. According to Caskey, people in their mid-40s can especially benefit from seeing a financial advisor, who can give them an idea of how the monetary side of life will be different after retirement.

As you approach retirement, here are a few financial moves to consider:

Asset allocation
Changing the asset allocation in your portfolio is another important step in preparing for retirement. Decrease your equity holdings in favour of fixed income, in an effort to preserve the capital you've worked so hard to amass.  Upping your fixed-income allocation will allow investors to continue to earn interest while decreasing risk and exposure to market volatility. That being said, you don’t want to be too conservative because even in retirement, the goal is to grow your money.

“I wouldn’t get out of equities completely because you could have another 30 years or more of life ahead of you and there’s certainly as much risk in making it too conservative as there would be in making it more open to the returns of the markets,” says Kabot.

Government supplements
Retirees may be eligible for Old Age Security, as well as the Canadian Pension Plan, but these payments vary depending on the individual and their work history.

According to Caskey, most Canadians realize they cannot depend solely on government aid to pay for their retirement expenses, but they are unaware of exactly how much money they will have because they overestimate what the government will give them.

“There’s sometimes a lot of misunderstanding about exactly how much people think they’re going to be collecting versus how much they actually are,” she says. “You may be overestimating how much you’re going to get from the government programs. So it’s worthwhile looking into how much you’re entitled to.”

One thing to look out for with OAS payments is clawbacks. This year, if your annual income is higher than $70,954, the Canadian government will begin to take back 15 per cent of the amount over the $70,954 limit. If your income is $114,640 or more, you will have to pay back the entire sum of the OAS payments you receive.

You can avoid the clawback by remembering to account for all income, including any company pension payouts and RIFF income you may be receiving. One helpful tip is to use spousal RRSPs to your advantage, by splitting withdrawals with your spouse to avoid the clawback limit.

Withdrawal rate

Technically, there isn’t a specific withdrawal rate, but Kabot says there is a theory in the investment world on how much of your retirement savings you should be using every year.

“There is a theory around withdrawal rates. Individuals should not draw down more than 3 or 4 per cent of their portfolio on an annual basis to keep it sustainable for the rest of their lives so that they avoid running out of money or drawing down the capital completely,” he says.

Fixed expenses don't go away

A final note to keep in mind is that fixed expenses, such as food, shelter, and clothing, will remain once you turn 65. But retirement will mark the end of certain discretionary expenses, such as your CPP payments or your monthly transit pass to get to-and-from work. However, this doesn’t necessarily mean you’ll have more money to spend. As Kabot points out, these expenses are going to be replaced by others.

“Whatever you’re doing, there’s an expense associated with that," he says.

Other expenses to keep in mind include increased healthcare costs, increased life insurance premiums and rent should you decided to sell your primary residence.

Whatever your retirement plan, the key point is that you must have a plan and that plan starts many years before you give up the corner office.