Congratulations! You made it to retirement, and are living off of a combination of personal savings, company pension, and government benefits ...and here’s where most of the retirement income planning resources stop, as if retirement is a finish line instead of a milestone! 

Never fear, your neighbourhood design-thinking financial planner is here to pick up where many of the personal finance books left off (with the exception of a notable few, like Fred Vettese’s ). Over the past year, I’ve used Design Thinking to prompt you-centred planning around tough topics like cash flow, taxes, investing, disability as a business owner, estate planning, emergency preparedness, business building, and charitable giving.

I’ve helped you intentionally identify what will make you happy and fulfilled once you stop working, and spent time working through how to prepare your finances for this you-centred retirement. Today, I’m sharing a repeatable annual process for redesigning your retirement income as life, income tax, and investment returns unfold around you. 

Why is this annual process important? Because markets cycle, tax policies change, and your retirement income plan needs to adapt! You may have thirty or forty years of happy, active life ahead, and we want you to spend as little of it as possible worrying about your income, your portfolio, or your taxes. Just like with your furnace, your car, and your cat, a bit of time and money spent on regular maintenance keeps you warm, moving, and...well, whatever it is healthy cats do all day. 

Empathize

As always, step one is to empathize, or collect information about the world around you and your place in it. Start your retirement income plan for the year by asking some questions about what actually happened last year and what you think might happen in this one. Your professional advisory team (which includes your accountant, your portfolio manager, and your financial planner) should be able to help you with this: 

Year behind questions:

• How much did you spend last year? Did you have any new expenses that started or old expenses that stopped?

• How much did your investments earn last year across your total portfolio?

• If you have non-registered investments, what was the split between interest, dividends, realized and unrealized capital gains and losses, and/or return of capital? 

• Did any sources of income start or stop last year? 

• Were you surprised by last year’s tax bill? 

• Did you have any difficulty with your health? Did you find managing your finances more challenging than it used to be?

Year ahead questions:

• How much do you want to spend on regular lifestyle things in the upcoming year? 

• Are there any big purchases or expenses coming up (repairs, vacations)?

• How much will you receive from sources like your pension, annuity, Canada Pension Plan, and Old Age Security benefits? 

• How much do you have remaining in your retirement portfolio? How is it allocated?

• Do you expect to work at all in the upcoming year? How much are you likely to earn, and what does your employer deduct from your paycheque?

• Are there any important deadlines to watch out for coming up? For example: the age 70 deadline to apply for Canada Pension Plan and Old Age Security benefits, the age 71 deadline to convert your Registered Retirement Savings Plan to a Registered Retirement Income Fund, or the age 72 deadline to start withdrawals from your Registered Retirement Income Fund?

Define

I’ve been writing about Design Thinking for a whole year, so by now you probably know the drill: step two is to take what you learned in step one and use it to define the problem you’re solving this year, which is very likely to be some version of this question:

How much money do I need to live comfortably, where should I take it from, are there any strategies I can use to avoid tax or spending surprises this year, and am I still on track to live longer than my income will last?

Although this level of detail every year may sound like overkill, it is essential in those first confusing years of retirement, as you acclimate to spending your nest egg instead of building it. Over time, as you get more comfortable and start to put that first sensitive decade of retirement behind you, you might be able to relax on this routine a bit. In the meantime, here is the general framework: 

• Calculate the difference between what you’ll receive after tax from pensions, annuities, CPP, and/or OAS and how much you expect to spend on your regular lifestyle

• Estimate your tax bill for this year (you can use a free tool like TaxTips.ca if you don’t have a regular accountant). 

• Check your RRSP and TFSA contribution room, as well as any carried forward RRSP contributions that you may not have deducted yet

• Calculate how much you’ll likely be required to withdraw from your RRIF (your RRIF balance as of December 31st is multiplied by an age-based rate prescribed by the government)

• If you have a spouse or common law partner, calculate how much of your qualified pension income you can split between you

• Check the minimum and maximum thresholds for income-tested benefits (like Old Age Security, the Guaranteed Income Supplement, the Allowance, and the Allowance for the Survivor)

• Calculate how much you will need to withdraw from your portfolio to pay your taxes and spend the amount you want

Ideate

If you already have a retirement income plan in place, the ideate stage, otherwise known as the throw spaghetti at the wall without even checking to see if it sticks phase, might not be as necessary for you. Although you and your financial planner (and your accountant too, if you’ve got one) shouldn’t limit yourselves to a past plan, you might be able to avoid much of the ideation mess because you did most of the spaghetti throwing already. 

Retirement income ideation, when done right, is where you might brainstorm strategies like:

• Taking advantage of an unusually high or low income year 

• Crystallizing capital gains or losses

• Charitable donations

• Making changes to your regular spending

• Adjusting your asset allocation

Prototype

Finally, you’ve made it to prototyping! This is where you draft your plan for the coming year, and you write it down to avoid Mr. Confusion, Mrs. Panic, and their terrible, ugly baby: Little Miss Horrible Decisions. 

In your plan for the coming year, you want to make sure that your long-term plans are still being served while you take advantage of short-term tax optimization strategies. For example, you may withdraw more from your RRSP or RRIF than is strictly necessary in order to reduce the account balance before minimum withdrawals start increasing rapidly as you age. 

If it doesn’t already, your retirement income plan should include a cash flow infrastructure that creates ultra-visible boundaries around your desired spending for the year. You need to give yourself permission to spend the amount you’ve determined is safe, while building in an early-warning system that tells you you’re spending more than you wanted to...before it becomes a problem. 

This plan should have your tax payments built into it, either via voluntary withholding on your Canada Pension Plan and Old Age Security benefits, or quarterly installments for those of us who paid more than $3,000 in income tax last year. 

The last - and arguably, most important - thing you need to do in this stage is to explain it to your partner, kids, POA, and/or executor, ideally in writing. Taking the time to articulate your thought process, expectations, and actual experience helps them if you are suddenly incapacitated, and helps them even more if your cognitive abilities start to decline and they want to know when to step in and offer help. You may even want to build a regular cognitive test into your annual conversations with these important people.

Test

The testing phase in this case is really straightforward: live your life! In the first few years of repeating this process annually, you may want to check in at the six month mark (or even quarterly) to note anything that you want to pay attention to or incorporate in next year’s plan. 

Annual retirement income maintenance is one of the best gifts you can give yourself as you move out of the savings life and into the spending life, whatever that may look like for you. If you don’t experience a thrill of nerdy joy in looking at this to-do list every year, and get overwhelmed at the thought of redesigning your retirement income every year, please reach out. I can’t think of anything I’d rather do.

(This article is reposted with the permission of the author. It was originally published here.)

Let me introduce you to my three imaginary friends: Rory, Amy, and Rose. Earning only $35,000 a year at most, each has managed to sock away 5% of that income every year, and by age 67 have each accumulated $210,000 in savings.

At retirement, all three will have the same income: $6,624 in Old Age Security benefits, $9,500 from the Canada Pension Plan, and minimum RRIF withdrawals starting at $9,135 a year*.

For those still counting, Rory, Amy, and Rose each will receive $25,259 and pay $1,562 in income taxes.

Rory and Amy get married. Their combined household income after taxes is now $47,394. Rose is alone, with $23,697 a year. And it is a truth universally acknowledged that the same standard of living is cheaper to buy for a couple than it is for a single person.

Houses cost the same whether one person or two people are buying them, cooking at home for two isn’t twice the cost as cooking at home for one, and a car that gets you from point A to point B won’t cost you double depending on if the passenger seat is occupied or not.

I think we’d all agree that in comparison to Rory and Amy’s $3,949, Rose’s monthly total income of $1,974 is going to be very difficult to live on.

This situation – while technically fair, since for the same amount of savings each person receives the same amount of income – doesn’t strike me as equitable. By treating every individual exactly the same, our retirement programs are either rewarding the choice to create a permanent household with someone else or penalizing the choice not to, depending on which side of the floor you happen to be arguing from.

(It’s here that I’m compelled to state that I don’t have an answer for this that is both fair and equitable, and I doubt anyone else does either.)

So what’s a singleton to do? Shack up for money? Hardly.

The truth is that short of making more money in your working years, retiring later, or marrying for money, there’s not much a singleton can do to bring his or her income in line with a couple of similar means, but forgoing RRSPs altogether in favour of TFSAs might make that income last longer by maximizing income-tested benefits like the Guaranteed Income Supplement.

Normally I’m not one to advocate cut-off-your-nose-to-spite-your-face strategies that reduce one kind of income to increase another, but lower-income singletons (and couples, for that matter) would be well-advised to calculate – at least roughly – the benefit they’re receiving from an up-front tax deduction for RRSP contributions against the reduction in GIS eligibility once those contributions are withdrawn and are counted as part of their income, which in turn has a big impact on how long their own savings will last overall.

Let’s go back to our friend Rose to illustrate my point. Her annual income of $23,697 is too much to qualify for the Guaranteed Income Supplement, even though her Old Age Security benefit isn’t included in the calculation.

If, however, her $9,135 RRIF withdrawal was instead a withdrawal from her TFSA, not only would she pay no income tax, she’d also receive a $3,608 GIS benefit.

Still counting? That means in real income she’ll receive $28,867 annually – or, if we want to compare apples to apples – to get the same amount of income as in the previous example, she’d only need to withdraw $3,965 from her own savings – $5,170 less than if she were withdrawing from a RRIF instead of a TFSA.

The math works for Rory and Amy too, just not as dramatically. Following the same strategy as Rose would allow them to withdraw $3,484 a year less and have the same income as they would if they were withdrawing from RRIFs.

Now, as with any kind of financial advice, this might not apply to you. In fact, if you’re reading a personal finance blog, it might not even be news to you. But it’s worth sitting down and doing the math as it applies to your own situation, and worth telling your friends about.

RRSPs aren’t the only answer for retirement savings, and – in some, particularly for singles – they might even be the wrong answer.

*This is the point at which – if I were a more dramatic woman, that is – I would be shouting “GET THEE TO AN ANNUITY!”

What is the difference between “automatic” and “automated” finances? How are the retirement planning rules and tools different if you’ve been earning a lower than average income? Why is there all this administration… and all these taxes… when your spouse passes away? These questions and more are answered in November’s round up of my Top Three favourite reads. If you’re still thirsty for more information, don’t hesitate to dig into this month’s full list, which includes a hilarious eulogy for the 60/40 portfolio, how financial bloggers make money from affiliate marketing, and so much more. Scroll down for articles that will keep your brain working and your money on track this month.

Low Income Retirement Planning

From Owen Winkelmolen

“Low-income retirement planning requires a very different set of tools than your average retirement plan and this can sometimes lead to trouble when a soon-to-be low-income retiree gets advice that has been tailored for someone with a much higher income.”

Read the full article here.

Automatic vs Automated Finances – A distinction that makes a big difference

From Doris Belland

“When your finances become automatic, it’s like turning on the auto-pilot switch. You go through your days unconsciously behaving in the way you always have without much thought about how much you’re spending, or without regularly reviewing where your money has gone. One year flows into the next as you maintain your financial status quo, with the net result being an awakening five to ten years later when you realize you’re no closer to your goals, or worse.”

Read the full article here. 

What To Do When Your Spouse Dies Before You

Part One, Administration & Part Two, Taxes

From Marc Goodfield

A detailed look at what to do when your spouse passes away.

Read part one here and part two here.

You can read this month's entire list below:

A Eulogy for the 60/40 Portfolio | Ben Carlson

“60/40 is survived by its immediate family — wife, asset allocation, and children Vanguard, rebalancing and comprehensive investment planning. Distant relatives include crypto, pot stocks, and technology IPOs but they were all left out of the will.”

When is the same return not the same return? | Greg Davies

“If a portfolio falls and you’re not watching, did it really fall for you?”

Robo advisors are paying bloggers with affiliate marketing | Bernadette Berdychowski

This article references US companies and US laws, but the issue with blogger and affiliate marketing is similar here in Canada:

“As a result of these arrangements, [affiliate marketers] will financially benefit from referring users to Personal Capital, which results in a conflict of interest as they are potentially making that referral for money and not because they believe a valuable service is being offered.”

5 Reasons you should take early RRSP withdrawals | Jason Heath

“Remember that RRSPs are tax deferral mechanisms, but the goal shouldn’t be maximum deferral all the time.”

How to Donate or Recycle Your Lego Bricks | Boone Ashworth

Not according to my kids, but yes.

“Got too many Lego pieces scattered throughout the house?”

Learn to Get Better at Transitions | Avivah Wittenberg-Cox

"Everyone...is struggling to let go of what was (identity, community, colleagues, and competencies) to embrace what’s next (as yet unknown, undefined, and ambiguous). There is a mixture of fear (Who am I?) and excitement (I am SO ready for a change), confusion (What do I want?) and certainty (Time to move on).

Because more of us are living longer, healthier lives, we’ll face more of these moments of liminality...No matter where we are in our own journeys, we could all get better at the skill of transitioning."

Finance Topics That Make Your Head Hurt | Ben Carlson

“What makes you think you’re better at predicting the path of interest rates than all of the macro hedge fund managers, professional bond managers and economists who collectively do a less than stellar job of predicting the direction of rates?”

When our retirement income planning clients tell us they’ve read Retirement Income for Life, or one of Fred Vettese’s other books on retiring in Canada, I usually get very excited. 

No, it’s not because I’m a huge book nerd and love talking to people who’ve read the same stuff I have (although I am and I do). 

I get excited when clients read books like this because it means two very specific things: 

First, it means that they’re taking retirement seriously and are likely to be engaged in the process. They’re just like eager students who have done the homework and are ready to learn - an educator’s dream. 

Second, it means they’ve got at least a basic grasp of some of the harder concepts that come with retirement income planning, like: 

• What the merits of deferring Canada Pension Plan benefits might be 

• The value of protecting against the worst-case investment scenario before trying to reach for the best-case investment scenario

• What annuities are and how they might fit into a plan (and when)

• The importance of planning for survivors and not just couples

There’s plenty of information on saving up for retirement, but precious little evidence-based information on spending them (outside of academia, that is). As a Canadian actuary, Vettese focuses solely on designing a decumulation strategy with the highest probability of success. Pre-retirees who understand at least the basic concepts are much more likely to execute them than people whose first (and second through fifth) response to the idea of an annuity are “NO WAY!”

I do wish that a book with the subtitle “Getting More Without Saving More” had devoted more than a single paragraph (on page 16, if you’re looking) to people who will retire with a low income. If “most, if not all of your retirement income will come from defined benefit sources like CPP, OAS, and other government income programs” you need a smart decumulation strategy as much as your higher income counterparts do...you just need an entirely opposite strategy to the one described in this book. 

A final quibble with an otherwise excellent book is the ease with which spending less from one year to the next is offered as a strategy for systematic withdrawal plans. On paper, reducing spending by a couple of hundred bucks a month may seem like a relatively straightforward exercise, especially if you put the work into identifying your minimum comfortable spending level as well as your nice-to-have desired spending level. In real life, however, changes to spending can be difficult to execute unless there’s a well-developed infrastructure in place.

Who should read it?

Anyone who does not have a defined benefit pension plan and is within five years of retirement should read this book, and any financial planners, accountants, and investment salespeople who ever advise clients on retirement income should crack it open too.

Who shouldn’t read it? 

If you are going to have a low income in retirement (think somewhere around or below $19,000 per year as a single person or $25,000 as a couple), this book is the literal opposite of the advice you should follow. Put it down and back away slowly! Instead, check out the Retiring on a Low Income resources from John Stapleton.

If you only have time to read one chapter:

Chapter 11 on deferring Canada Pension Plan benefits is a must-read (with a big caveat that it doesn’t apply to people who will retire on a low income).  

This is a great chapter because it does three things at once: 

• It articulates the basic CPP program for people who don’t know much about it

• It explains you shouldn’t worry that CPP is going to go bankrupt just because you heard the same thing about US Social Security (you might be surprised how often that comes up, accompanied by a request to leave CPP calculations out of retirement plans altogether)

• It provides evidence-based reasoning for delaying CPP for most people

If you only have time to read one paragraph:

“How a question is asked can fundamentally change our decision even though the basic underlying facts that are presented to us are the same.  The framing effect has some major implications for retirement planning. Over time, we develop strong feelings about certain concepts, institutions or products. Some we perceive as intrinsically good and others as equally bad. If your financial advisor asked if you want to buy an annuity or defer CPP without explaining the impact in detail, your answer would almost certainly be no. Alternatively, if she asks if you are prepared to make use of all the available tools to achieve your financial goals, your answer might be different.”

(Chapter 17: A Recap of the Five Enhancements, pages 151-152)

If you only have time to read one sentence:

“If all [your] planner is doing is helping you set your asset mix, the exercise is practically a waste of time.” 

(Chapter 13: Fine-Tuning the Asset Mix, page 117)

(This article is reposted with the permission of the author. It was originally published here.)

I know, I know. Budgets just sound like Remedial Personal Finance, don’t they? Everyone knows you’re supposed to budget, so what’s the point of another 800 words or so on the topic, right?

There’s even a vague feeling that once you reach a certain point – either of knowledge, or income, or net worth – budgeting is kind of beneath you. It’s so remedial that the cool kids don’t do it, and I’m here to look over my librarian glasses and tell you that the cool kids are wrong.

But first, in true librarian fashion, let’s define the terms. When I talk about budgeting, or planned spending, or cash flow, I’m really talking about three separate but related things: tracking your transactions, clarifying your limits, and projecting your trends.

Not to get too timey-wimey on you, but that’s the past, the present, and the future, all rolled up in one neat little concept. Nice.

Budgets

Budgeting is – in this expanded and much more useful definition – not at all about putting limits on yourself, especially not limits that some random stranger on the internet, however wide their readership or juicy their television deal, wagged their finger at you about.

It’s the tool you use to figure out your own limits according to your own values, and – like the proverbial Swiss Army Knife – some people need and use one part of the tool more than the others. (I prefer the corkscrew, but I assume you knew that already.)

Each one of these aspects of budgeting feeds into the next one: tracking your income and expenses helps you clarify your limits, projecting the results of your tracking helps you see where you’re going and what levers you can pull to make the most difference if you don’t like the direction, and knowing where you’re headed gives you the motivation to keep within those agreed-upon limits.

Now, you can live your whole life without ever looking back on how you’ve spent your money, or worrying about how much you have left to spend at any one time, or wondering what all this spending will look like in the future. Plenty of people do, with varying degrees of success.

Those most successful are those who, by dint of much hard work or incredible good luck, have a very wide margin of error and enjoy the relatively rare situation of more income than their natural spending habits can use. Those with very slim margins are incredibly vulnerable and – no surprise here – least likely to thrive without structured spending.

In fact, I’d venture to say that everyone reading this can be split into one of three broad categories: those of you with a very small difference between what comes in every month and what goes right back out, those of you with a very large difference between your income and your expenses, and those of you in the middle. (Hey, I didn’t say it was going to be rocket science.)

For those with very slim margins, it should be readily apparent that the immediate need is to know how much you have available to spend at any one time. Without a good overview of where your money goes over time and what that means for your future, though, you’ll have a tough time making that margin grow, especially if your circumstances also make it difficult to increase your income.

As margins get bigger, the “how much do I have left” part of budgeting starts to fade in importance compared to using your past and current spending in order to forecast (and shape) your future spending. If you have more than enough money to meet your needs every month, what’s it doing for you other than giving you an excuse to Not Budget?

Here’s the over-arching truth, though, and the number one reason why the cool kids who don’t budget are wrong: margins change. Circumstances change. Jobs, dividend cheques, interest rates, your health, the health of your marriage…there are any number of events or combinations thereof that can turn your financial life around pretty quickly, for good or ill.

Budgeting is a skill that you have to practice, a data set that you have to maintain, and a system that you have to adjust so that it fits you and your circumstances as closely as possible. None of these things happen overnight, and the very worst time to start is in the middle of a crisis. Get cracking.