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Nicole Ewing LLB, TEP, CLU - Senior Strategist, Advice & Guidance
These are difficult times. We collectively find ourselves in unknown territory where many established plans are being rewritten in real-time. If you are planning to retire in the next few years, perhaps you’re wondering if your own plans should be revised. Does nearing retirement in the face of a global pandemic, unprecedented market volatility, and continued uncertainty about what the short-term and long-term future may change how you should be thinking about your plans? Let’s look at some of the steps you can take to remain in or regain control and stay on track to meet your goals.
Your Physical and Emotional Health
First and foremost, staying healthy is of paramount priority. Not just in the immediate future, but throughout your retirement as well. Staying healthy is not only critical to your emotional and physical well-being, but also to conserving and maximizing financial resources. The cost of long-term care can quickly erode savings so the longer those costs can be averted the better. While it may be more challenging than ever to stay physically and emotionally healthy, your efforts will pay dividends to your current and future self.
Your Financial Health
Our financial strategies are built using assumptions based on decades of historical market performance, our risk tolerance, our ability to save, our current and anticipated spending rates, the length of our retirement, and so on. If you’ve recently lost your employment, had a significant decrease in the value of your investments, or are a business owner experiencing particularly low revenues, you should revisit your retirement strategy to determine what adjustments may need to be made. The following are some of the factors to consider.
Review Your Goals & Comfort with Risk
The recent large market swings may have triggered a need, or an opportunity, to rebalance your investment portfolio to ensure you’re appropriately diversified. As you rebalanced your portfolio, you may have realized that your goals for retirement or your comfort with risk have changed. You may now be reconsidering when you want to retire and how much you’ll need each year for expenses. Your portfolio objective and asset allocation (your mix of stocks and bonds) may need to be adjusted to reflect your new circumstances. But not necessarily. Your financial advisor can guide you through this process to determine what, if any, changes need to be made to your portfolio.
Reviewing Your Budget
If your circumstances have changed, you should update or create a budget which includes your new expenses (such as supporting a family member through financial hardship) and/or your decreased income sources. If your spouse has lost their income or a tenant of your rental property is unable to pay rent, your budget should reflect this. You'll want a clear view of how much money you have to work with and where it's going. This will help you to prioritize your spending and identify where there may be opportunities for adjustments.
Emergency Cash (Restocking the Coffers)
Our general guidance is that individuals nearing retirement should have three to six months of living expenses in emergency cash. This recommendation is a general guideline – you may need more or less, depending on factors such as your job security and access to outside credit sources. As recent events have demonstrated all too clearly, having an emergency fund is critical to your financial health. If you have depleted your cash reserves, it is important to replenish these accounts once you are able to do so.
If you have exhausted your emergency cash, you may need to access some of your investments. Your Edward Jones financial advisor can work with you to determine the best liquidation strategy based on your account type (taxable, tax-deferred, non-taxable) and individual holdings.
You may be deferring or reducing payments you had expected to make, and you may be incurring additional debt. Depending on your retirement timeline, this may have an impact on your ability to meet your retirement goals.
We recommend you review your debt obligations in the context of your overall financial strategy. You may have an opportunity to consolidate high-interest debt into a lower-interest credit facility, however before transferring any balances, be sure you understand the conditions of the offer and the obligations for repayment. And create a plan for paying it down. If having your debt paid off was a prerequisite for your retirement, you may need to adjust your retirement date or your spending expectations.
RRSPs and Pensions
If you have been laid off or had your hours significantly reduced, you may need to plan to work longer than you had intended. You also may not be able to make your anticipated Registered Retirement Savings Plan (RRSP) contributions this year or even next. If possible, plan to make larger contributions to offset these reduced amounts once you are able. To account for lower annual contributions savings, we recommend that you have your Edward Jones financial advisor update the retirement projection portion of your financial strategy. Being conservative in these estimates and erring on the side of caution by assuming lower contributions, will help ensure you’re not surprised or unprepared for your retirement.
Similarly, if you’ve been laid off or are working reduced hours, your pension contributions may be lower than expected this year. If you have a defined benefit pension that is based on your “last five” or “best five” years, you may want to consider working a year or two longer than you previously planned.
You may have had to access your Tax-Free Savings Account (TFSA) to fund current expenses or to help a laid off family member. You will not have to pay tax on the amounts you withdraw, but you do need to consider whether your retirement projections included these funds, and the extent to which reduced balances will impact your retirement income sources. Additionally, if you wish to replace or re-contribute all or a portion of the withdrawn funds back into your TFSA in the same year, you can only do so if you have available TFSA contribution room (i.e. pre-withdrawal). If you do not have available contribution room, you will have “over-contributed” to your TFSA and will be subject to a tax penalty of 1% per month on the excess amount until it is withdrawn. If you do not have available contribution room, it is best to wait until January 1st of the following year to re-contribute the funds.
Canada Pension Plan (CPP)/Quebec Pension Plan (QPP)
The amount of your CPP/QPP depends on a number of factors, including the age you decide to start your pension, how much and for how long you contributed to the CPP/QPP, and your average earnings throughout your working life. The typical age to start taking CPP/QPP is 65, however, you may take it as soon as age 60 or delay receipt until age 70. The monthly amount you receive will be smaller the earlier you begin and increases to a maximum amount by age 70.
Periods of low or no salary may decrease the amount of your CPP/QPP entitlement, however the impact will vary. For example, up to 8 years of your lowest earnings will be excluded in calculating the base component of your CPP retirement pension. We recommend you review your expected sources of income in retirement and assess your reliance on CPP/QPP. Working with your Edward Jones financial advisor you can determine the best age at which to start receiving CPP/QPP, whether to continue working while receiving CPP/QPP, as well as whether adjustments need to be made to your retirement income projections.
Old Age Security (OAS)
Your current financial strategy may include assumptions about the amount of OAS you will receive during retirement. OAS may be taken beginning at age 65 and can be deferred for up to 60 months in exchange for a higher monthly amount. If you delay receiving your OAS pension, your monthly pension payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70. Low income individuals may be eligible to also receive the Guaranteed Income Supplement. If you earn more than the maximum annual income allowed for a given year some, or all, of your OAS pension may be “clawed back” (i.e. subject to the Recovery Tax).
Whether or not to delay receiving OAS is generally determined based on anticipated income leading up to and during retirement. Your existing plans may have anticipated higher income levels than you now expect to earn. This may result in a reduction of in the expected claw-back and an adjustment to the optimal time to begin taking your OAS pension. We recommend you review this aspect of your planning with your financial advisor.
Spending Rate Assumptions
In building your retirement strategy, we will have discussed with you your spending expectations, both before and in retirement. You may now have unanticipated costs or increased expenses that weren’t contemplated when your plan was built. These might include supporting children who have lost their jobs or are unable to enter the workforce as expected; providing support to parents or other loved ones as they experience their own financial hardships; or losing the income of a spouse. We recommend reviewing your assumptions and updating them to reflect your new circumstances. In assessing whether you can meet your goals or need to consider modifying them, be sure to consider all sources of income including CPP/QPP, OAS, pensions or locked-in accounts, as well as your spouse’s income and retirement plan.
While things may not be going exactly according to plan, you may still be in a better position than you realize to reach your retirement goals. Now it’s about taking control, adjusting where necessary, and working with a professional to understand your options to make the appropriate decisions. And we can help.