How to Live on Retirement Income in Canada in 2022

Planning Your Retirement Income

Are you in your forties or fifties? Then it’s about time you gave your retirement planning a thought. It is a multistep process that evolves over time and it is never too early to begin. For a comfortable, secure, and fun-filled retirement, you will need to build a financial buffer that will see you through your golden years. Start by thinking about your retirement goals and set a timeline to meet them.

Study the types of retirement accounts that will help you raise and save the money that you will need to invest and enable to grow. There are five steps that everyone should follow, irrespective of their age, to build a great retirement plan. It should include determining time horizons, estimating expenses, calculating required after-tax returns, assessing risk tolerance, and doing estate planning.

The sooner you start your retirement planning, the more you will be able to take advantage of the power of compounding. Moreover, young investors can afford to take more risk with their investments than those closer to retirement who need to be very conservative. Since retirement plans evolve over the years, portfolios should be rebalanced and estate plans should be updated as needed.

• Estimating Your Time Horizon

Start with your current age and expected retirement date. If you are young and have more than 30 years until retirement, you can invest in riskier ventures, such as stocks. Moreover, you should get returns that outpace inflation so you can sustain your purchasing power during retirement. A small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years!

The closer you are to retirement, the more your portfolio should be focused on income, the preservation of capital, and a higher allocation in less risky securities, such as bonds. Break up your retirement plan into multiple components. A multistage retirement plan must integrate various time horizons along with the corresponding liquidity needs to determine the optimal allocation strategy.

You should also be rebalancing your portfolio over time as your time horizon changes. You might not think that saving a few bucks here and there in your 20s means much, but the power of compounding will make it worth much more by the time you need it.

• Determining Retirement Expenditures

You should have realistic expectations about post-retirement spending habits. It will help you define the required size of a retirement portfolio. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of their pre-retirement expenditures.

Such assumptions prove wrong if the mortgage has not been paid off, if unforeseen medical expenses occur when retirees splurge on travel or other bucket-list goals in the initial post-retirement years as they have more time to travel, go sightseeing, shop, and engage in other expensive activities, the cost of living increasing every year, especially healthcare expenses, people living longer and wanting to thrive in retirement. Therefore, if retirees need more income for a longer time, they will need to save and invest accordingly. Accurate retirement spending goals help in the planning process as more spending in the future requires additional savings today.

Your withdrawal rate is an important factor. Accurately estimate your post-retirement expenses to decide how much you withdraw each year and how you invest your account. Understating your expenditures will mean you will outlive your portfolio, and overstating would mean not living your desired lifestyle in retirement. Consider your longevity as well when planning for retirement so you don’t outlast your savings because the average life span of individuals is increasing. Update your plan yearly to make sure that you are keeping track of your savings.

• Calculating Post-Tax Deduction Rate of Investment Returns

Calculate the post-tax real rate of returns to assess the viability of the portfolio producing the needed income. A required rate of return over 10% before taxes is usually an unrealistic expectation, even for long-term investing. This return threshold goes down as you age because low-risk retirement portfolios are mostly composed of low-yielding fixed-income securities. Determining your tax status when you start withdrawing funds is a critical part of the retirement planning process.

• Assessing Risk Tolerance versus Investment Goals

A balanced portfolio comprising risk aversion and return objectives is the most significant step in retirement planning. You must ensure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. When the market declines, buy! Don’t sell!

• Staying on Top of Estate Planning

Ideally, a proper estate plan, life insurance coverage, and tax planning ensure that your assets are distributed properly. Risk tolerance depends on many factors, including financial goals, income, and age. A golden rule of thumb is to save 15% of your gross annual earnings. Savings would ideally begin in your 20s and last throughout your working years. Age 65 is considered early retirement, while you can start collecting Social Security retirement benefits as early as 62.

But you would receive full benefits if you collect them at full retirement age instead. You need to strike a balance between realistic return expectations and a desired standard of living. So, focus on creating a flexible portfolio that can be updated regularly according to changing market conditions and retirement objectives.

However, if you are on the verge of retirement and foresee a fixed monthly income that might not be adequate, it might be time to reassess. Here is how you can live an economical retirement life.

• Sticking to a Budget

With the maximum monthly Canada Pension Plan benefit for retirees at just CAD$1,203.15, you may have to adopt a more thrifty budget in retirement. Regardless of how much you earn, keeping track of your spending and spending less than you bring in are all good financial practices. Your primary monthly expenses in retirement will likely be healthcare, housing costs, travel, and transportation. Keep your other costs low to help offset these.

• Planning for Healthcare Costs

Most retirees estimate their post-retirement medical care costs to be about one-third of the actual costs incurred. Needless to say, it’s plain wishful thinking. Curtail these estimated costs by adopting a healthy lifestyle before retirement. Make a point to exercise, eat healthily, quit smoking, limit your drinks, and take care of any nagging injuries or issues.

Once you retire, be realistic about any long-term issues or illnesses you might have to deal with and include them in your budget. Open a Health Savings Account (HSA) if you are enrolled in a high deductible health plan and purchase long-term care insurance as soon as you can, as with age come various ailments.

• Cutting Your Housing Costs

According to the Social Security Office of Retirement and Disability Policy, approximately one-third of retirees’ spending goes toward housing costs. So, pay off your mortgages if you have any, before retirement to do away with the extra burden. Downsize your living situation. Consider selling your home and moving to a smaller house or condo.

You’ll save money on property taxes, maintenance, and utilities. Moreover, you will have a smaller distance to negotiate in older years when moving from one part of the house to another. If you have two cars, retirement is the perfect time to whittle that down to one since it will save money on gas, insurance, and maintenance.

• Pacing Your Expenditure to Last Longer

If your retirement account boasts of a healthy balance, you may be tempted to spend more all at once. Guard against this by giving yourself a set pay-check monthly or biweekly. It can help you stick to your budget, even in retirement. With better global life expectancy statistics nowadays, that’s all the more reason to pace yourself so that you may not outlive your money.

• Moving to a Lower Cost Area

Spending your retirement years in an area with a high cost of living can deplete your retirement savings. Consider moving to a city or an area with a lower cost of living, as now your work need not be a consideration anymore for living in a high cost of the living city. Only ensure that there are good medical facilities nearby since you will be needing these more as you age.

Cities like Laval, Regina, London, Prince George, Saint John, Lethbridge, Winnipeg, Windsor, Quebec City, Sherbrooke, Saskatoon, Nanaimo, Niagara Falls, Kingston, Montreal, Kitchener, Edmonton, Kelowna, and Halifax, are some affordable options for you to consider.

• Refrain From Eating Out

You may not be realizing this, but on average, we spend a tidy sum eating out at restaurants, cafes, food courts, etc. So, if you need to cut costs, you may curtail dining out, which will benefit not your retirement budget but health as well. Home-cooked meals are a healthier option. And don’t they say, the money saved is money earned!

• Hiring a Financial Advisor

Financial advisors help you ensure whether you are on track to meet your long-term financial goals. It’s not too late if you are already retired or nearing retirement age to hire a financial advisor for a one-time meeting to help you decide when to file for Social Security, how to structure retirement account withdrawals, and if you’re financially ready to retire!

• Reassessing Your Insurance Needs

You may not need life insurance once you retire. For, its purpose is to match your income to support your dependents in the event of your passing. But if you are living on your retirement saving or other retirement income, like Social Security, you may not need a life insurance policy. Instead, it is better to buy health or Medicare insurance to meet your hospital bills as your ailments increase.

• Taking Advantage of Senior Discounts

Senior discounts can help save precious dollars in your retirement budget. Hundreds of restaurants offer senior discounts, from Dunkin’ Donuts to Applebee’s to Uno Pizzeria and Grill. Apart from these, there are senior discounts at grocery stores, retailers, and even on travel expenses, like hotels, airline tickets, and car rentals.

• Continuing to Work

Retirement does not mean you have to stop working! Consider taking on a part-time job to make extra cash or even put off retirement for a few years. While working a part-time job during retirement or putting off retirement altogether may not be your idea of spending your golden years, there are upsides. For one, experts have found that working longer may have certain health benefits and makes you feel younger.

Irrespective of your current situation, be realistic about whether your finances will allow you to retire comfortably or maintain your pre-retirement standard of living. Whether you have saved a comfortable amount or are counting on Social Security, living on a fixed income during retirement might require you to limit your spending. Thus, it is necessary to segregate your wants and needs.

For many seniors, finding the way of life they desire within their budget can be challenging. However, retirement can be more affordable than you think. There are several senior living options available, and most offer services, amenities, and wellness benefits. So, consider the total costs and how they compare to other housing options.

Cost of Living in a Retirement Home

Nearly two-thirds of senior living communities charge an entrance fee to their residents. The cost of move-in fees varies from community to community, from modest to extravagant. Joining a retirement community is, therefore, a significant financial commitment. Seniors thus need to strike a balance between cost and quality of life.

Moving into a senior living community means being free from financial concerns like property taxes, home insurance, utilities, and maintenance. In a retirement home, these expenses are covered under a monthly service charge, which generally includes a meal plan, transportation, access to health and wellness facilities, vocational classes, shared community spaces, and much more. The price varies depending on location, apartment size, and the services you’ll need.

Financial Tips for Planning Senior Living in Retirement Homes

Many people are caught off guard by the unseen costs involved in moving to a retirement home. Financial planning for a senior living requires forethought, time, and preparation. You need a recurring source of income to pay your monthly fees in a retirement home. It could come from fixed deposit interests or a property you have rented out. Here are some tips to help you.

• Consulting a Financial Advisor

They can help you meet your financial goals and save money by creating financial plans such as savings, budgets, and tax strategies and advice on tough decisions like using reverse mortgages or selling a life insurance policy.

• Availing MEDICARE Benefits

Medicare can also help cover the costs associated with Assisted Living. To qualify for Medicare, several requirements must be met, and these requirements vary from state to state. The costs attributed to skilled nursing and emergency response systems may also be covered. Room and board are not covered by Medicare, which generally accounts for roughly half of the costs of Assisted Living.

• Understanding the Price for Your Level of Care

So “how much does senior living cost?” is the moot question. Understanding entrance rates, monthly fees, and the levels of care offered in a retirement community can help you narrow your search and budget for the future. The cost of senior living varies according to the level of care you need and personalized accommodations such as health care and assistance with activities of daily living (ADLs). While touring communities, it’s important to inquire about the below costs regarding your level of care: 

Community Fee: This covers the cost of the move-in process and preparing the apartment home. For many Independent Living communities, this cost may also give residents priority access to higher levels of care offered.

Care: For Assisted Living and Memory Care, care may be included in rent or structured as an a la carte cost based on how often and what type of care is needed. Be sure to understand what is included and what may be an additional charge.

Services: Services such as housekeeping and laundry are often but not always included in rent. The services themselves along with the frequency may vary across different levels of care, so be sure to ask what is included in your monthly rent.

• Considering Senior Tax Breaks

The Senior Tax Credit is a federal policy that can be applied to your tax returns if you are 65 and up or have a disability.

Age Amount: If you are 65 years or older at the end of the tax year, you can claim a non-refundable tax credit towards your federal taxes. In order to qualify, your net income must be less than $89,422, and the amount you may claim varies depending on your income. For your 2021 tax return, the age amount is $7,713. Moreover, there are benefits under Pension Income Amount, Disability Tax Credit, Home Accessibility Tax Credit, Province Specific Tax Credit, Old Age Security Pension, RRSP Income, etc., that you can avail of.

• Take Advantage of Free Resources

These include Canada Pension Plan, Guaranteed Income Supplement, Old Age Security, and Services for veterans to name a few. Ask your financial advisor about these and avail the benefits if you are eligible.