By Julie Jaggernath
The start of a new year is a great time to think about preparing for retirement. RRSP contributions you make during January and February can be used in the current or previous tax year, wherever it’s most beneficial for you. But when retirement is looking over the horizon, any month is a good month to take an active interest in your money. Whether your nest egg has been growing for many years or you’ve just started thinking about what you need to do to retire, here are five tips to get you started:
1. Create a Budget and Align Your Goals
It is easy to put off working towards goals that seem less urgent. For many Canadians, retirement is one such goal. It can be decades away when we start our working lives. However, time flies and before we know it, it’s time to see where we stand with our money and when we can retire.
If you’re guilty of not taking an active role in planning for retirement, one of the best ways to understand where you’re at is to create a budget. Take your finances off autopilot and plan how you will spend, save, and meet your goals.
Be savvy as you give each dollar in your budget a job. Prioritize savings, debt payments, and planned expenses. Consider all of your weekly and monthly expenses carefully. Determine which can be reduced, which must stay about the same, and which need more funds allocated towards them. Reign in any lifestyle spending that is financed with credit cards so that you can live within your means.
Interactive Budgeting Calculator With Expense Guidelines
2. Prevent Debt from Prolonging Your Working Years
Your retirement date will be impacted by your financial situation. While savings is important, how much you owe on your home equity line of credit (HELOC), credit cards, loans, and mortgage can delay your ability to retire on your terms. Use the 10 to 15 years before you would like to stop working to outline a plan to pay off what you owe. That will help you enjoy your golden years without having to worry about payments that could be difficult to afford on a lower income.
Solutions to Deal With Debt
Consider all of your options when it comes to determining the best way to deal with your debts. It can help to speak with an accredited non-profit credit counsellor in your area. They will provide you with guidance and resources and answer all of your questions. When interest rates are low, every dollar you pay down on your debts goes further because you’re paying less interest overall.
Should Your House Lend a Hand?
When retirement looks unaffordable, many Canadians turn to borrowing against their home equity. However, once your income decreases, as it often does in retirement, taking out a loan against your home isn’t always possible. Your financial institution might not be able to lend you more money or restructure what you owe. A home equity lender often charges significant interest and/or fees, as do reverse mortgage lenders. Reverse mortgages also have a number of conditions that may be serious drawbacks, depending on your situation.
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Will Downsizing Get You Out of Debt?
A home is typically the largest purchase most Canadians make in their lifetimes, so it’s only natural to consider downsizing your home as you consider ways to manage your finances better leading up to retirement. Speak with a realtor as well as your mortgage lender to explore what downsizing will mean for you. Buying a smaller home doesn’t always lead to less housing expenses, especially if your new home comes with high monthly strata fees. The actual selling your current home may also prove more costly than you anticipate. However, downsizing from a large family home that requires a lot of maintenance to a home without as much of an ongoing drain on your finances could prove advantageous, especially as you age and are less able to do the work yourself.
Will Downsizing Get Us Out of Debt?
3. Stagger Large Expenses to Keep Them from Coming Due All at Once
Speaking of owning a home, when did you last replace your hot water tank, buy new furniture, upgrade your appliances, or put on a new roof? It’s easy to forget to plan for these types of expenses when what we have is working just fine. However, in the years leading up to retirement, if you’re responsible for these costs, your budget needs to include them.
Create a checklist for yourself so that you can anticipate large future expenses and determine the best schedule to pay for them. For example, stagger when you replace your large appliances. That way they don’t all need to be replaced at the same time again, which could make things easier after you retire. This can mean looking for deals that don’t involve buying several appliances all at once or split a great deal with a friend.
Low-Cost Home Improvement to Save Money on Household Bills
4. Plan For the Future With a Will, Power of Attorney & Medical Directive
Each of us needs to have a Will, Power of Attorney, and possibly a medical directive in place. However, many people find it difficult to think about their wishes for ‘the end.’ Not speaking to loved ones can cause a lot of undue hardship as they must guess what you may have wanted. In addition, planning for what will happen if you become incapable of managing your affairs yourself is part of managing your finances effectively today.
Contact a lawyer or notary in your area for help with preparing these legal documents. Each one serves a very specific purpose and is used at different times and for different reasons:
- Your Will ensures that your wishes are carried out after you pass away and is the key document, along with a death certificate, that is used at that time. The other 2 documents are used before you pass on and cease upon someone’s death.
- A Power of Attorney can be drawn up in several ways. It allows a designated person(s) to act on your behalf either with limited scope and at specific times (e.g. to pay your bills while you’re out of the country), or more broadly should there come a time when you’re no longer able to make your own financial decisions (e.g. to sell a senior’s home and manage their finances when they enter long term care).
- A medical directive, sometimes called a Representation Agreement, outlines the medical decisions you would like your substitute decision-maker to make on your behalf if there comes a time when you’re no longer able to make your own decisions about your care.
As you think about your future wishes, take the time to review your life insurance needs as well. If you have current policies, including through employment benefits, ensure that they still meet your needs, or arrange for new policies if you need them.
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5. Invest In Your Health and Wellbeing
Prioritize taking care of your health and wellbeing as early as possible. Be proactive with regular exercise and a healthy diet. Even when you start this later in life, it can go a long way towards minimizing unnecessary health care expenses as you age. Many retirees are caught off guard when they realize how costly health, vision, and dental expenses are once they must start paying for them out of pocket.
Ensure that you are setting aside enough money for all of the costs that you will no longer have coverage for once you stop working. Also consider which expenses you’ll want to incur before your coverage ends. For example, check your policies to determine when to buy new glasses or when to have dental work done.
At the time your employer-sponsored policies end there is often an opportunity to buy a private extended health policy. While these policies are tax deductible, they can be costly and premiums often increase with age. Begin your research early because once you lock into a policy, should something change with your health, you may no longer be able to adjust your coverage or purchase a new policy elsewhere.
Saving for Retirement on a Small Income
It’s Never Too Early to Start Preparing for Retirement
Most Canadians face a reduction in their income when they retire so it’s never too early to start preparing for retirement. It’s also important to co-ordinate your financial planning with your spouse to end up in the most financially advantageous position possible. Check with your financial advisor at your bank or credit union to learn more or contact an accounting professional. If you’re not sure where to start organizing your affairs or dealing with debt, a non-profit credit counsellor would be happy to answer your questions and point you in the right direction. Spending time and energy improving your finances and knowledge around financial topics is a sound investment that will always pay off.