By Gordon Pape, Editor and Publisher
According to a Statistics Canada study, more than two million Canadians will turn age 65 between now and 2030. From a financial perspective, many of these people don’t know what they’re getting into.
A recent survey commission by wealth management company Mackenzie Investments found that a large number of people have limited or no knowledge about the facts of life as they relate to managing their money in retirement.
These include such key issues as how the Canada Pension Plan works, making the transition from an RRSP to a RRIF, and the taxation issues older people face.
The study was conducted by Pollara Strategic Insights with an online sample of 1,518 adult Canadians and was conducted between September 18 and 20th. Results are considered accurate to within ±2.5 percentage points, 19 times out of 20.
“It really surprised me to see how unprepared many Canadians are for retirement,” said Carol Bezaire, Vice-President, Tax, Estate & Strategic Philanthropy for Mackenzie.
“It’s a particularly important time for Canada’s Boomers,” she said. “Not only are they having to learn a whole new set of rules as they approach retirement, but many are also managing the complexity of inheriting significant sums as the world goes through the largest transfer of wealth in history.”
Here are some of the key findings from the survey.
RRSPs to RRIFs.
Just over half the respondents (52 per cent) said they were not very or not at all familiar with the process of converting an RRSP to a RRIF. This goes beyond the mechanics – the law requires that a Registered Retirement Savings Plan be cashed in or moved into an annuity or Registered Retirement Income Fund by Dec. 31 of the year you turn 71. Most people choose the RRIF.
“This is such a critical area,” says Ms. Bezaire. “It goes well beyond a change in the plan’s name. You need a different investment approach.”
During the RRSP years, the emphasis is on accumulating assets to draw on once you retire. When you switch to a RRIF, the focus is more on preserving what you have and managing cash flow.
“That means you should take a close look at your asset mix and see if it needs to be adjusted,” she said. “If you’re too exposed to the stock market, take some action. And that’s not just with your RRIF. Look at all your investments. It’s a new phase in your life.”
Canada Pension Plan.
Just under half the respondents expressed uncertainty about how the CPP works and when to start drawing income from it. There’s a 10-year time frame to make a claim. The full CPP benefit can be taken at age 65 but you can start as early as age 60. If you do, your pension will be reduced by a 0.6 per cent for each month prior to your 65th birthday. Alternatively, you can wait until age 70 and earn a bonus of 0.7 per cent a month to a maximum of 42 per cent if you start at 70 or later.
“Each person has to decide the best time to start,” says Ms. Bezaire. “There’s no one age that fits all. If you need the money, take it. If not, then wait.”
Taxation.
About half those surveyed said they had little or no knowledge about how they would be taxed in retirement. This is a critical area, because there are special rules for older Canadians that do not apply to younger people.
These include pension income splitting, which could save a couple several hundred dollars a year in taxes; the Old Age Security clawback which could tax away some or all of your OAS; and pension tax credits.
“Be especially wary of holding dividend paying stocks in a non-registered account,” she advises. “The gross-up amount is added to your income, even though it’s money you never receive. The result could be to push you over the income limit for OAS and activate the clawback.”
Some of her other tips to upcoming retirees include:
- Plan for unexpected expenses – Unexpected and uninsured medical costs, such as hearing aids or dental care will put a big hole in a budget.
- Use a TFSA – You can’t contribute to a RRIF, but you can continue to add to a Tax-Free Savings Account all your life.
- Look for other sources of income – You may be surprised at how much income potential you have in retirement. For example, more people are buying income properties to supplement their income. Others are taking part-time jobs to keep busy and earn extra money.
- Do some research – There are many websites that offer calculators and other tools to help plan retirement. Ms. Bezaire says the CPP website is excellent. Mackenzie Investments has some useful calculators on its website as does GetSmarterAboutMoney.ca, which is run by the Ontario Securities Commission.
- Get advice – Don’t try to do it all yourself, she suggests. Find a financial advisor who is knowledgeable in this field and make use of his or her services to create a retirement plan that will carry you through the rest of your life.
This article was originally published in The Toronto Star on November 24, 2019.