Have you retired too early?
Retired Canadians aged 50 and over are finding that unanticipated costs, health issues and higher than expected tax bills are their biggest surprises in retirement, finds a new CIBC poll. Complicating the situation for these retired Canadians is that many left the workforce before they expected to, putting pressure on their retirement income and leaving many wishing they had started planning sooner.
Key poll findings:
- Retired Canadians who faced surprises upon retirement say they were most surprised by higher spending and unexpected costs (30 per cent) including repairs and renovations, financial support for children/grandchildren/parents and costs of long-term care; health issues (24 per cent); and, a higher tax bill (15 per cent).
- Compounding the issue, nearly half of retired Canadians (48 per cent) stopped working earlier than expected. Reasons they retired earlier include:
- 33 per cent due to an unexpected health issue
- 22 per cent were asked to retire by their employer
- In hindsight, retired Canadians with retirement regrets say they wish they’d started planning sooner (38 per cent), saved more outside of their RRSP (38 per cent), and would’ve retired later (22 per cent).
Taxes can impact retirement cash flow Before 2009, when Tax Free-Savings Plans (TFSA) were introduced, Registered Retirement Savings Plans (RRSP) were among the few tax-efficient retirement savings vehicle. The poll indicates that some retirees bulked up on their RRSP savings, and are now facing a surprising tax bill as they convert their RRSP income into Registered Retirement Income Funds (RRIFs). As a result, some may also experience claw-backs on income-tested government benefits, which could have been avoided with earlier planning.
“Making the transition from saving for retirement to funding retirement can be complicated,” says Mr. Nicholson. “Whether you retire earlier, later or not at all, it’s important to work with an advisor to understand how your income will be taxed at different stages of retirement, and ensure you’re not leaving any of your hard earned money on the table.”
Tax tips for fewer retirement surprises:
- Create your retirement plan – Getting a sense of your retirement goals and what they will cost you is the first step to building a tax-efficient retirement plan. Your retirement plan is personal to your goals and income needs, so speak to an advisor to help you build the plan that’s right for you.
- Maximize tax-advantaged savings as you near retirement – Now is the time to accelerate your savings by maximizing your RRSP and TFSA contributions. Not only will your savings grow without tax within these plans, when you withdraw funds in retirement you’ll likely do so at a lower income so you’ll pay fewer taxes (with an RRSP) or no tax at all (with a TFSA).
- Withdraw RRSP funds strategically – and re-invest in a TFSA – Although funds can remain in your RRSP until age 71, consider how early withdrawals may help to reduce your overall tax bill in retirement. Use the CIBC Retirement Calculator to understand how all of your income sources (benefits, pensions, savings) work together, and identify where you may be able to top up income at lower marginal rates. For added savings, consider re-contributing after-tax RRSP withdrawals to your TFSA, to continue tax-sheltered growth.
- Retiring early? Time your withdrawals to maximize your benefits: If you’re retiring early or entering semi-retirement, speak to an advisor about the benefits of using your savings or delaying your CPP/QPP benefits to fit your income needs for retirement.
CIBC Retirement Surprises Poll Disclaimer: From February 6 to 9, 2017 an online survey was conducted among 662 retired Canadians over the age of 50 who are Angus Reid Forum panellists. The sample outgo was balanced on age, gender and region to Census Canada. For comparison purposes, a probability sample of this size has a margin of error of +/- 3.8%, 19 times out of 20.
SOURCE CIBC – Consumer Research and Advice