We can all admit that retirement can be a huge shock and eye-opening experience for people.  Diving into retirement headfirst is like diving into a lake without checking the temperature. The shock factor could instantly make you regret your decision. Even though we know that we should plan for retirement and get our ducks in a row, people continue to put off retirement planning until it is too late. If you are nearing or even thinking of retirement, here are three things you need to know before you take the plunge.

Enjoy retirement and don’t run out of money

Knowing how much you can comfortably withdraw each year without running out of money cannot be emphasized enough. This comes in two forms: living a lifestyle that costs more than you can afford or being so fearful of running out of money that you don’t live the lifestyle you want. First, let’s talk about living a lifestyle higher than you can afford. Withdrawing too much money too fast can result in outliving your money, which has huge end-of-life impacts resulting from higher medical costs as you age and the cost of a retirement home or nursing care. The flip side of the coin is living a frugal retirement out of fear that your money will run out. You have worked hard to save money. The last thing you want to do is to worry about how much you have left, living a retirement that is less than what you expected. Knowing exactly how much you can take out to ensure the money lasts and having the retirement lifestyle you want are equally important.

Delaying government assistance by a year can increase your retirement income

Most people are quick to apply for their CPP (Canada Pension Plan) and OAS (Old Age Security) when they retire, with the idea that they must take these things right away. However, CPP and OAS have a larger impact on your retirement than you might think. Both are guaranteed incomes that are not subject to market conditions and should increase over time, subject to the consumer price index. You should give some thought as to when is the right time to take this money – you can take the CPP early (e.g. at age 60), take CPP and OAS at age 65, or delay both until age 70. Taking CPP early will result in less money than if you had taken it at age 65 but taking it early could help lower taxes in retirement if you have sufficient cash flow from your personal investments to cover the income difference. Delaying both CPP and OAS until 70 will result in more income that can help provide for costs later in retirement if your investments aren’t enough. The important thing is to find a balance between taxes, potential OAS clawbacks, and lowering the risk of market fluctuations on retirement income.  

Don’t let the taxman control your retirement

When you work, your taxes are handled for you. But in retirement, you are on your own. It can be a large shock when that first tax year comes around and you most likely owe income taxes. You need to know how much income tax you could be paying, and you also need to put this money aside to ensure that you can cover these expenses. This is where knowing how much to take from your taxable accounts and your non-taxable accounts can have a huge impact.

Is that everything?

In retirement, there are many things to think about, such as how the markets impact your savings and what is your end-of-life plan. Knowing these three things before you decide to retire can help ensure things run a little more smoothly. It is like dipping your toes in prior to jumping in the lake. While it won’t remove the shock of retirement, it does help you to know what’s coming and adjust to the change.