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Retirement savings

December 03, 2018

Retirement planning: How to be ready to live to 100

Average lifespans – and retirements – are getting longer. Here’s how to be prepared for years of post-work life, no matter how old you are now.

According to Statistics Canada figures from the 2016 census, Canadian children born that year can expect to live to 82. That’s a quarter-century longer than an ancestor born in 1920. And also according to the 2016 census, the 100-and-up set is the fastest-growing age group in Canada: At 8,230, their numbers surged 41% from 2011.

Many people planning for their retirement, however, have not yet caught up to this upward trend in longevity.

“Most people don’t think they’ll live to age 90, let alone 100,” says Tracy MacNeil, a Dartmouth, Nova Scotia-based Sun Life Financial advisor.

So how can you realistically fund a long, happy, and secure retirement?

These simple, practical tips can help – whether you’re 30 or 75.

Young savers and investors: TFSAs are your secret weapon

If retirement is still decades off, you already have a big advantage: time.

“If you’re younger, I’d say to save early and often, because you’ll have compounding on your side,” MacNeil says. “Even if it’s just $25 a month, get at it.”

Pay particular attention to your tax-free savings account (TFSA), which lets your investments grow tax-free. You can put up to $5,500 in your TFSA for 2018 (the limit is going up to $6,000 for 2019) and carry unused contribution room forward. Which is to say, if you haven’t set up a TFSA yet and you were at least 18 in 2009 when TFSAs were introduced, you could contribute up to $57,500 in your account in 2018.

That means 20- and 30-somethings who begin saving now could have TFSAs worth well into six figures by the time they clock out of the workforce. This will earn them the sort of flexibility  today’s retirees can only dream about.

“TFSAs are a source of tax-free funds you can draw on to supplement other taxable income in retirement, such as Canada Pension Plan (CPP) and Old Age Security (OAS) payments, as well as registered retirement income funds (RRIFs),” MacNeil says. “That can also help manage your tax bracket.”

If you’re not sure how much risk you’re comfortable with or what kinds of investments should be in your portfolio, reach out to an advisor.

Remember the OAS clawback, rethink RRIFs when you’re close to retirement

Be sure to keep an eye on the OAS clawback. OAS is a government-funded pension you can choose to start receiving between the ages of 65 and 70, which – subject to some conditions – will pay you for the rest of your life. Like CPP/QPP, OAS is treated as taxable income; unlike CPP/QPP, the amount you get is affected by your other income. But rather than paying you on a decreasing scale according to your income, as you might suppose would happen, OAS payments go out in full to everyone – but you must give the government back a percentage, once your annual income passes a certain threshold. The percentage you pay back – the clawback – rises with your income until you have to repay the entire OAS amount.

Let’s say you’re 72 and had $85,000 of income in 2018. Perhaps it was from a combination of CPP, a company pension and income from what used to be your RRSP (once you converted it to a RRIF and began withdrawals, or used some of it to buy an annuity). Under OAS rules, you’d have to repay 15% of the difference between your income and $75,910 (the threshold at which the clawback starts for 2018).

In this scenario, you would have to repay $1,363.50 of your OAS.

To help lessen the chances of that happening, you could focus on drawing on TFSA funds in retirement, because TFSA withdrawals don’t count as income and so don’t trigger the OAS clawback. You may also consider spreading out your RRSP funds differently.

Many wait until the last possible moment – the end of the year they turn 71 – to convert their RRSPs to RRIFs, MacNeil says. But you can actually convert all or part of your RRSP into a RRIF at any time. Once you do, you have to withdraw a minimum percentage of your RRIF every year. This figure rises as you get older: At 71, it’s 5.28%. Beyond age 95 it rises to 20%. And the bigger your RRSP and then your RRIF is to begin with, the bigger the dollar amount you will have to withdraw each year, so the higher your taxable income will be.

“If you started saving young and left your RRSP compounding and growing, beginning your withdrawals at 71 could affect your OAS, particularly in later years,” MacNeil explains. “In that case, it might make sense to draw down a bit of your RRSP earlier.”

Another way to make sure your money lasts as long as you live is to buy a life annuity from an insurance company. In exchange for paying the insurer a lump-sum amount of money, you get a guaranteed payment for the rest of your life.

Make extra money in retirement

Once you retire, there are plenty of ways to generate extra income or to stay in your home longer. You could rent out a room or a basement apartment to a student, for example.

“I’m also seeing more people retire from their careers and find jobs they’re interested in, such as someone who’s passionate about running working part-time at a running store,” MacNeil recounts. “This can be a great way to make extra cash to pay for travel, for example, and stay connected to the things you love.”

Consider long-term care insurance well before you retire

Finally, long-term care insurance becomes increasingly vital as lifespans lengthen. We may be living longer, but those extra years may not be healthy years.

This coverage gives you a tax-free benefit payment to help offset the cost of care when you can no longer look after yourself – in your own home, a retirement residence or a long-term-care facility. It helps ensure that health-care expenses don’t drain your savings too quickly.

One thing you don’t want to do? Leave this step until you retire.

“Most people don’t think about long-term care insurance till they’re in their 60s and by then it might be prohibitively expensive,” MacNeil says. “If you’re younger, you could pay a much lower premium. And there are plenty of other options you can put in place, such as inflation protection [on the benefit you receive].”

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