Early retirement 101: what retiring early means for your investment strategy
The majority of Canadians (70%) don’t have a financial plan in place for retirement.
As an education member, you might consider OTPP or OMERS to be your main plan when it comes to funding the ‘after school’ years.
But what happens if you retire before reaching your 85 or 90 factor?
Since retirement tends to come earlier for education members than the average Canadian (age 59 versus 64), retiring at an even younger age has its own set of financial implications.
For example, not reaching your qualifying factor means potentially having a pension income gap.
Since government programs, such as CPP, wouldn’t be an option until one month after your 60th birthday, you would need to have additional financial resources in your arsenal to fill that gap in the interim. For many of you, investing over the years has been a pre-emptive way to minimize potential blips in your retirement cash flow. However, once you actually hit retirement, you need to have the right strategy in place to start effectively drawing from those investments.
The first thing you’ll want to consider when developing that strategy is aiming to have no more than two or three investment accounts.
This means one RRSP, one TFSA, and one non-registered account (of course, there may be reasons why you’ll have more of one account, for example, a Spousal RRSP).
In the beginning of your career, it’s easy to get caught up in the whole ‘more is more’ mentality when it comes to saving and investing (i.e. “the more investment/saving accounts I open, the more money I’ll have down the road”). Many banks even incentivize clients to open multiple accounts in exchange for reducing or eliminating certain types of fees. However, the more investment accounts you have, the more work it will be to assess overall allocation and plan for withdrawals come retirement.
That’s where streamlining your investment accounts will help to simplify your life.
After all, your main financial goal for retirement should be to make things as easy and stress-free as possible. “That’s why it’s so important to speak with a financial planner anytime there’s a major life change,” states Karen Hubbard, Regional Vice-President—Client Advisory Services at Educators Financial Group. “If you’re a pre-retiree, this is particularly important as you’ll need to determine your cash needs over the next few years (in line with your current situation and future goals). Leveraging the expertise of a financial planner, especially one with educator-specific insight, can help you to develop a tax-efficient withdrawal strategy. This will ensure a smoother financial transition into the next chapter of your life.”
You’ll also want to make sure you’re drawing from the right investment account, at the right time.
Educators Certified Financial Planner Lisa Raponi goes on to explain.
“In your retirement years, prior to receiving any government pensions (e.g. CPP/OAS), it may be wise to start drawing down more of your RRSPs. Then ease up on those withdrawals once CPP/OAS finally kicks in.”
In addition to filling any pension income gaps during early retirement, there is also another good reason to start withdrawing from your RRSP prior to age 72 (the age when you have to start taking from your RRSPs by converting to a Registered Retirement Income Fund).
“RRIF withdrawals are fully taxable,” continues Lisa. “So, if you have lower retirement income in your late 50s/early 60s (before CPP/OAS kick in), but a higher income in your 70s, you could end up paying more lifetime tax by deferring your RRIF withdrawals until you turn 72. Delayed RRSP conversion could lead to you being pushed into a higher tax bracket, or even having your Old Age Security reduced (or outright eliminated through OAS clawback) if your income ends up being too high.
Next, review your portfolio and revise your asset mix to suit your specific needs in retirement.
“Of course everyone’s needs will be different,” says Lisa. “However, the general rule to keep in mind is the closer you get to using the investment, the more your focus should shift away from ‘growth’ to being more ‘preservation-oriented’ (in order to provide more stabilization). In the end, whether it’s maximizing your investment strategy or minimizing your pension income gap, it’s all about learning how to use your financial resources strategically in retirement.”
That’s where Educators Financial Group can help.
Since we understand how your pay structure works during your working years (pay grid) and in retirement (pension), we can ensure you’ve got the right investment strategy in place at every stage of your life.
Let’s chat about early retirement: have an Educators financial specialist contact you
And be sure to check out more articles in our Early Retirement 101 series:
The importance of being financially and emotionally ready
The 85/90 – can you retire before reaching it
How to narrow the pension income gap
Try our new Pension Income Gap Calculator
What are your retirement goals – travel, gardening, time with your grandkids? As an education member you’ve worked hard for your pension, but will it be enough?