There is a misconception that retirement happens at age 65. People always gauge their retirement based on their age, not the value of their investments. Turning age 65 does not mean you can or should retire. What dictates if and when you can retire is the value of your investments and income streams. Retirement is not an end date but a lifestyle decision. Having the right amount of investments and income streams will determine your retirement lifestyle.

Retirement is different than your working years, as now you are in charge of everything. There are multiple sources of income, taxation on those sources, investing to maintain the levels, and ensuring the money lasts. The choices you make will impact your retirement more than you would expect. Understanding the impacts will give you the ability to feel comfortable in your retirement and rest easy knowing you should not fall into financial difficulty.

How do I know I am able to retire?

Retirement will depend on how much money you have saved in addition to other sources of income such as Canadian Pension Plan (CPP), Old Age Security (OAS), and pensions. How do you figure out if you have enough money to retire? To figure out if you are able to retire, you need to figure out your annual expenses in retirement. This would include your fixed costs (heat, hydro, etc), variable expenses (food, gas, etc), and fun money (trips, hobbies, etc). Once you have this number determined, subtract your CPP and OAS, and pension payments. The shortfall amount is what you need to cover annually from your investments. Negating any investment returns, take that number and multiply it by 30 (age 65 – 95) and that is how much you need to have saved before retiring. This number is a rough number that excludes multiple factors that can impact your true final investment number. Decisions regarding how the money will be invested, the type of accounts, and how fast you withdraw will cause this value to go up or down

Investing in retirement

When you retire the method in which you invest your money will impact how long the money will last. Investing in higher-risk funds might seem like a good idea to generate income throughout retirement, but this can have large negative impacts. In retirement, you are withdrawing the capital from your investments, which will offset your investment returns. For example, if you withdraw 4% from your investments, and your return is 5%, your investments grew by 1%. What happens if the return on your investments is negative? If your returns lose 5%, in addition to your 4% withdrawal, your investments are now down 9%. For the investment to regain the losses, it has to work twice as hard, meaning you will need to see returns of 10% or more. Too many of these negative returns over retirement and the money will run out faster than you expected. The investment style in retirement will be impacted based on your needs and the amount of money saved prior to retirement. Not having enough capital will result in needing to take on extra risks, or living a retirement lifestyle less than expected.

Taxation in retirement

When deciding how much to withdraw from your investments you need to think about the tax implications of doing so. If you are utilizing your RRSP/RRIF as your primary source of income in retirement, you have to take into consideration the taxes on these withdrawals. For example, if you need $5,000 a month, you will actually need to withdraw $5,500 as 10% is withheld for tax purposes. In addition to that, come tax time depending on the total taxable income you might have to pay more to the government. Each account will have its own taxation implications, which will also need to be thought of when determining when to withdraw amounts from where. Your TFSA is 100% tax-free which can be beneficial for funding your retirement. Determining how much to withdraw from your TFSA versus your RRSP/RRIF or which one to draw down first will impact your annual tax amounts. The more taxes you have to pay annually, the faster you will deplete your capital and your retirement lifestyle.

Other benefits

Most people immediately take their CPP benefit upon retiring, but you do have the option to delay your collection which can help your retirement. CPP is a guaranteed income stream when compared to your personal investments. If you are able to delay collection for a year or more, this can help maintain your personal investment levels longer. Taking up a side job or activity can also help fund your retirement. Many people want to keep busy in retirement and enjoy working, or wish to continue to work for pleasure. This income can help retirement and will help keep your income levels higher.

In conclusion

Start to gauge your retirement based on your income level rather than your age. Rather than state I can retire at 60, 65, or 70, state I can retire once I have $1,000,000, $1,500,000 or $2,000,000 of investments for example. The value of your investments and income streams will indicate the type of retirement you can have and when you can retire. The choices you make now in your working years will determine your retirement lifestyle. There are many moving parts in retirement that need to all be considered when looking at your retirement. Talk to your financial planner to build a financial plan now that will ensure you can retire now only when you want but how you want.