Choosing when to retire a balancing act
At what age should you retire?
Retiring early means less income and more years to make savings last. Delaying retirement can increase your standard of retirement lifestyle. You have to make a trade-off.
Ideally, most people prefer to retire while they are healthy enough to enjoy leisure and travel. Certainly, the offer of a large, lump-sum severance package can make the decision to retire before 60 irresistible.
If your older spouse has already retired, you may want to end your working career, too. However, poor health may leave you no choice.
The real test is whether you will have enough income from pensions and savings to afford to retire comfortably.
Check out the financial calculators at www.independentfinancial.on.ca. I recommend the retirement planning calculators at www.seclonlogic.com and www.mawer.com to determine the age you can afford to quit work.
Alternatively, you can use these same calculators to solve the problem of how much to save and how big your nest egg has to be if you already know when you want to retire.
To see how long you might live take the longevity test at www.northwesternmutual.com/games/longevity. Do not underestimate your life expectancy. In fact, you are wise to base your income projections on the lifespan of the spouse with the longer life expectancy.
If want to retire early but you are already in your fifties, resist the urge to shoot for a 20 percent return on your investments. Borrowing to invest in high-flying technology stocks can be dangerous to your wealth. Remember Aesop’s fable about the Tortoise and the Hare.
When should you begin to draw CPP benefits? Most people who retire early start at age 60 despite the 30 percent reduction. If you think of the pre-65 payments as a loan advance, and the reduction in the post-64 CPP benefits as repaying the advance, the effective loan interest rate that the government charges is quite reasonable.
Many people (especially those who work for large employers) belong to defined benefit pension plans that are designed to pay a higher level of benefits before 65. Even if your pension is integrated with CPP, you need not wait until 65 to start drawing from the CPP.
Should you accept the offer of an extra bridge benefit to fill the income gap prior to the start of Old Age Security at 65? I have heard some refer to the OAS bridge benefit as a “mafia loan” because you face a sharp reduction in benefits when you reach 65. The longer you live, the longer the “repayments” continue which effectively makes the “loan” more expensive.
Should you accept the traditional company pension annuity? Or, should you transfer your pension account into a Locked-In Retirement Account (LIRA)? Nearly all pension plans now offer the LIRA option (also called a “transfer value” option). Sometimes the LIRA option is only available prior to age 50.
I recall a phone conversation last winter with a distressed retiree who, in 1998, started with a $600,000 LIRA that he had converted to an LRIF to generate cash flow. His LRIF was invested in a nicely diversified portfolio of shares in profitable, blue-chip companies. Unfortunately, the market value had fallen to $450,000.
He wondered what he was doing wrong. He had no previous experience with stock market investments. Given the quality of his value-oriented portfolio I think he simply had to learn to be patient. Still, he wished he had selected the standard annuity option or else balanced his stocks with a larger weighting in bonds.
When should you transfer your RRSP into a Registered Retirement Income Fund (RRIF)? How much should you withdraw from your RRIF each year?
To help you answer these questions find a qualified financial advisor
at www.cfp-ca.org or www.cafp.org. When you have found a qualified,
trustworthy planner, ask for a computer printout illustrating your retirement
income projection.