Critical Considerations in Retirement
In the case of your retirement picture, your frame is your financial plan. This frame provides stability and helps protect your retirement picture. Make sure your retirement has a solid frame that includes the important financial considerations listed below. Examine these and you’ll have a handle on your retirement needs. Then you’ll be in an excellent position to plan the retirement lifestyle you want.
Cash Flow
It’s important to understand not only how much you’ll spend in retirement, but where your money will come from. Think about whether the income you expect to receive during retirement will be enough to meet your expenditures. Don’t forget to take into account everyday financial needs, along with major expenses such as travel.
The cash available to meet your expenses may depend on steady income streams such as pensions, as well as income generated by your RSPs and other investments.
Investments
Because investments will likely provide much of your retirement income — especially if you can’t rely on a workplace pension plan — it’s critical to know exactly how your investment portfolio is progressing and where it will take you in the future.
How much will you have by the time you retire? How much annual income will your retirement savings provide? Are your RSPs and the investments you hold outside of registered plans enough for a long and comfortable retirement? When making calculations, remember that your money may have to last decades in a time of increasing life expectancy.
Taxation
The less tax you pay, the more money goes into your pocket to finance retirement. That’s why a tax-effective strategy for using retirement funds is so important. Tax factors can affect how you structure your income in retirement, as well as how you invest before retirement.
Different types of investments are taxed differently. When you convert your RSP to a Retirement Income Fund (RIF) you pay income taxes on the money you withdraw every year. What’s left in the plan will continue to grow sheltered from tax.
If you purchase an annuity with RSP funds, annuity payments will be taxed as income in the year they are received. And if you withdraw a large lump sum from your RSP, you’ll lose a big chunk in taxes in the year of withdrawal.
Non-registered investments are taxed differently, depending on whether you earn capital gains, dividend income or interest.
Contingencies
Life can be unpredictable. And when you retire, what you can’t predict can be costly. Having a contingency plan will help you manage the impact that unexpected life changes can have on your retirement. Think about what would happen if you or your spouse were to face a long-term illness and expenses associated with home medical care or a long-term care facility. What if your spouse dies? What if you die, leaving your spouse alone? Or what about the possibility of divorce?
These developments and others can change your financial picture in retirement. You can plan for the unexpected — for example, by saving more for retirement or by purchasing appropriate insurance products.
Retirement Resources
- Use our online planning tool to build your retirement picture and discover the potential financial implications.
- Discuss your retirement picture with a BMO investment professional and develop an action plan to address any financial implications.
