LL.M. Fisc., F.Pl.
Although retirement may still seem a long way off, it’s never too soon to prepare for it. Because when you reach that stage of life, you will ask yourself a host of questions to which, I hope, you will already have the answers:
- Have I saved enough? Are my financial affairs in order?
- How to plan the succession of my business? What income will I get from my retirement plan?
The recipe for a successful retirement is the same as that for all the important moments of life: you must be informed, reflect, consider different scenarios and choose the best one. Improvising never produces good results in such matters. So what are the key factors to consider?
- Take the time to prepare for your retirement. After all, this stage of your life could last several decades. The time you put into preparing for it will be amply compensated by the peace of mind and financial stability you will achieve.
- Be sure to have a good financial advisor. In Canada, 62% of pensioners who have a financial advisor believe they have enough savings, versus 38% who did not seek advice.
- Make a realistic budget. Keep in mind the 70% rule and estimate your cost of living in the years to come. This exercise will enable you to determine how much savings you will need to retire.
- Update your balance sheet of assets and liabilities (liquid and non-liquid). This picture of your net worth will show you the optimization opportunities available to you.
- Set up a financial plan. This plan will establish your income sources, your decumulation plan and your optimization strategies. You will know exactly which amounts will be available and when, and how much your tax bill will be.
An active countdown
Now let’s put these principles into practice. Ideally, you have already consulted a financial planner to guide you through the different steps of the financial planning process. If you haven’t, here is a brief overview of the planning factors to consider ten, five and one year before your retirement.
Ten years before retirement
- Make a financial plan and determine the savings needed to achieve your financial goals.
- The last ten years before retirement are generally the most lucrative. Take advantage of this time to maximize your RRSP contributions and, consequently, your tax deductions.
- If you still have debts and loans, set up a repayment plan to completely free yourself of your financial obligations before retirement.
- At this stage, your children (if you have any) may be of CÉGEP or university age. If it’s not too late, maximize your registered education savings plans (RESPs). Otherwise, make a disbursement plan for these RESPs. Did you know that you can cash the contributions made without having to give the amounts to your children?
- You’re in business? Analyze whether it would be worthwhile to incorporate your practice. If your practice is already incorporated and its value has increased, you could consider an estate freeze and transfer the future increase in value of the business to the members of your family and gradually integrate them into the business decisions.
Five years before retirement
- Redo your financial plan. Make sure you are still on track to achieve your financial goals. If you have to adjust your savings plan, do it now.
- At this stage, your debts may be paid off and your children (if you have any) may be financially independent. Take advantage of these reductions in your expenses to increase your savings and to use any unused TFSA contribution room.
- Review your investment portfolio. Make sure its risk level suits you. At this stage, you want to avoid financial losses that could delay your retirement.
- Review your will. Your financial situation has evolved and your children have grown up. Consult a notary to ensure that your will provisions are aligned with your current wishes.
- Also reconsider your insurance protection. Your needs may have changed with the changes in your professional and personal situation. Assess your current needs to ensure that your insurance contracts accurately reflect your new reality.
- If you are in business, start to build a business transfer plan. Make sure your business is “purified,” i.e. that the assets that are not actively used in the business are transferred to a management company.
One year before retirement
- Last adjustments to your retirement plan. Your financial goals should be achieved, or almost.
- Establish a decumulation plan to determine from which accounts your withdrawals will be made as well as the amounts you will have to withdraw. Make sure the risk level of these different accounts is consistent with your decumulation strategy.
- Contact your pension plan to obtain all the details on the income you will receive or the assets you will be entitled to in retirement.
- Three months before retirement: apply for your retirement pension under the Québec Pension Plan. Note that, according to the advice of your financial planner, you could defer the start of your pension payments, or opt to receive them before age 65.
- When you are 64 years old, the federal government will send you the necessary documents to apply for your Old Age Security pension. The pension will begin at age 65, but you can ask for a deferral to age 70 in order to increase the pension.
- If you sell your business, consult:
- a business appraiser to determine its fair value
- a lawyer to draw up the sale-purchase contracts
- an accountant to file the income tax returns reporting the transaction
Do not underestimate the complexity of the sale of your business!
Lastly, and this is one of the most important points (although greatly underestimated), prepare yourself psychologically for the transition to retirement. Take the time to adapt mentally to what I hope will be a very enjoyable stage of life.
If you are looking for expert advice to prepare for your retirement, contact your Professionals’ Financial advisor. He knows you well and he knows your professional situation. With his skills and his experience, he will give you the support you need to set up a well thought out retirement plan that will meet your expectations
Alexandre Hunault, LL.M. Fisc., F.Pl.