Seniors entering retirement often ask Doug Lamb, CFP®, at Toronto-based Investia Financial Services Inc./Spera Financial how much they can spend now on discretionary items like travel and entertainment without being financially compromised in a later stage of retirement.
“Many seniors don’t have the peace of mind this knowledge can bring because they assume the planning process is time-consuming, costly and intimidating,” says Doug.
Marc Lamontagne, CFP, a founding partner at Ottawa-based Ryan Lamontagne Inc. agrees and says retirees often spend more in their early years away from the 9 to 5 work environment.
“It’s the initial excitement of retirement, but then as they get older they spend less. It’s helpful to walk people through the various stages to find out how much they will actually need,” he says.
If you don’t already have a financial plan, the first step a professional financial planner will often take is a detailed analysis of your current expenses followed by anticipated changes in these expenses in the various stages of your retirement.
Stages of retirement
These stages are typically the active stage, the less active stage, the downsizing and seniors’ environment stage that could include a retirement residence or 55+ building, and a nursing home stage. Activity-based expenses like travelling often decrease as you move through the stages, while medical expenses often increase, says Doug.
“Projecting these expenses and their changes in today’s dollars [or current dollars] through the retirement stages is an excellent approach,” adds Doug.
“Seniors understand today’s dollars and the projections in the financial plan take into account the impact of inflation. This allows them to engage in their plan and truly understand it. They sleep better at night knowing how much they can safely spend on various items,” he says.
Understanding expenses and how they may vary in future years also allows planners to analyse different scenarios for you, like remaining in your home versus moving to a senior’s facility.
“At any age a financial plan is a road map to help people achieve their goals and this of course applies to their retirement years,” says Marc. “For many people who don’t have a financial plan, the fear of not having as much money as they need later in life means they spend less than they could have in their earlier retirement years.”
Income from different sources
Marc observes that part of this uncertainty is because retirees are often unsure of their net income. “That’s because you’re getting income from different sources like pensions, CPP and drawing from investments like a Retirement Income Fund. Unlike when you get a salary and the company knows how much tax to withhold at source, the CPP people aren’t talking to the RRSP people, so retirees could find themselves with a big tax bill at the end of the year. If they know how much tax to have withheld at source, they know how much they actually have available to spend,” he says.
It’s especially important to meet with a CFP professional in the transition year between working fulltime and retirement because there may be some advantages if you have some flexibility regarding your last day at work.
“If you’re going into a lower tax bracket the following year, it may make sense to consider deferring some income,” he says.
These are the types of decisions that are typically built into a financial plan and are the foundations of the type of care-free retirement that lets you know exactly what you have to spend.
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For more on retirement planning, read Keep debt down to ensure a happy retirement, How to banish the RRSP rush and It's never too late: starting your retirement planning in your 40s and 50s.