2011 may be remembered for a number of reasons, but one of them almost certainly will be for being the year in which the first wave of Canadian baby boomers turned 65 and officially became senior citizens.
This year, an estimated 344,000 boomers turned 65 and for the first time in the country’s history seniors will outnumber children.
This transition into the golden years will create a whole range of new financial and lifestyle challenges that retirement newbies will have to deal with.
One of the biggest and most obvious is the financial impact that comes from full or partial retirement and how to juggle all income sources in order to create an income that will sustain you in your retirement.
“This is an issue that people should address before they retire, but don’t always,” said Dave Ablett, director of tax and retirement planning with Investors Group.
“You’ve got to look at all income sources and at your expenses. Financial planners recommend people do this at the various stages in life, but definitely as they approach retirement.”
What you’re really trying to do is to replace your work income with savings income.
Most Canadians use a combination of four sources of income in retirement. These include government sources such as the Canada Pension Plan/Quebec Pension Plan, old age security and guaranteed income supplement, employer pensions, RRSPs, and other personal assets and savings such as tax-free savings accounts (TFSA) and non-registered investments.
As well, boomers are expected to receive an estimated $1 trillion in inheritance money over the next 20 years. According to the BMO Retirement Institute, about 25 per cent of boomers say they will be relying more heavily than expected on their inheritance to reach their financial goals due to the recent economic crisis.
A lot of seniors also will be boosting their retirement income from selling their homes and downsizing to a smaller house or a condominium, and from the sale of the cottage or other real estate assets.
The federal government is recognizing that many Canadians may not be financially prepared for retirement and may need to continue to work, and has made it easier for workers with defined benefit pension plans to collect part of their pensions while working part time. The majority of Canadians who likely will need to work in retirement will come from the private sector, particularly the self-employed, professionals and those who have no pension plans.
The silent killer of income, particularly for seniors who might be on fixed income, is inflation. Inflation is expected to stay low between two and three per cent over the long term, but even an average inflation rate of two per cent can reduce the purchasing power of $1,000 now to just $667 in 20 years.
New retirees then must look at all their expenses. Many expenses such as transportation costs to and from work, a second car, savings for retirement, home maintenance and other costs, may disappear in retirement. However, with more time to spare in retirement, other costs such as spending on hobbies or travel may rise.
“You’ve got to determine what expenses are fixed and which are variable and then create a steady source of income to cover those expenses,” Ablett said.
A lot of seniors may still be able to continue to save in their retirement through their TFSA, which doesn’t have to be terminated like an RRSP and which also can be transferred to a beneficiary, tax-free.
“For some people who don’t need the TFSA for their own use and for income, may want to use it for a charitable donation to create a tax credit which can be used to offset other income.
Regardless, transitioning into retirement requires some careful thought, planning and choices on how you want to live in this stage of your life.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.