Chuck Groot Financial Consulting

The last 10 years before retirement are critical! Technically, they should be your highest-earning years and lowest family costs, unless you still have children at home.

In an article found in Investopedia, “a 2019 GOBankingRates.com study found that 64% of workers surveyed had less than $10,000 saved toward retirement. Worse yet, nearly 40% of workers surveyed age 55 and older reported no retirement savings. Some of the folks in that group may have a pension to rely on, but most are financially unprepared to exit the workforce.”

What can you do to plan for retirement?

1. Eliminate as much of your debt as possible.

Statistics Canada tells us that over 35% are burdened by debt. The crazy part is that having higher education and those who are divorced have been positively linked to having more debt, go figure.

Forbes shares with us that more Americans today than ever before have to work during their retirement. That is because they are carrying much more debt. The Federal Reserve data on debt shows us the following:

• $9,593 for ages 18–23
• $78,396 for those 24–39
• $135,841 for 40–55
• $96,984 for 56–74
• $40,925 for those 75 and older

The debt for those in their sixties has increased by 471% and those in their seventies by 543%!

The biggest culprit is credit card debt. You should pay off the credit card with the highest interest rate first. Use the snowball technique: Make a list of all your debt with the amount you owe and the interest rate you are paying. Make the minimum payments necessary, except the one with the highest interest. Pay as much as you can on that one.

Consider making balloon payments on your mortgage and knock that debt down as well. I believe that mortgage rates are the lowest in decades, and if you need to use the equity in your house to pay off other debt, you should consider it. Pay of car loans, credit cards—anything that has a higher interest rate than your mortgage. Then use the money that you would normally pay your debts with and put it towards increasing your mortgage payments. There is one caveat: If you can make more money safely with investments or dividends, then do it. Use the money you make to pay down the mortgage.

2. Your retirement and tax-free accounts are your friend and should be used to create your financial foundation.

The U.S. Department of Labor has a good explanation of various retirement plans available in the States.

The ERISA or Employee Retirement Security Act has two plans: a defined benefit plan and a defined contribution plan. The first one guarantees a specific monthly payment, while the second one, although it doesn’t promise a set value, has both the employer and employee contributing to it.

An individual retirement account (IRA) is as titled—a vehicle to give you tax advantages when you put money into a retirement account. There are several types of IRAs, and you can see all of their parameters at Investopedia. The Reader’s Digest version is below. If one of these plans interests you, discuss it fully with your tax accountant and financial advisor. There are subtle pros and cons for each plan.

1. Traditional IRA allows you to direct pre-tax money into an account to grow tax-deferred. But, yes, you must pay the piper somewhere, and it is when you take out the money. The thought is when you are retired, you will be in a lower tax bracket and your tax rate will be lower. You can put as much as 100% of your income into it, but there are limits that apply.
2. A Roth IRA is a vehicle that lets you withdraw a qualified amount on a tax-free basis. Although it is similar to a traditional IRA, the difference is that with a traditional IRA, you fund it with pre-tax dollars, and a Roth IRA is funded with after-tax dollars. These contributions are not tax-deductible. When you withdraw Roth IRAs, the money is tax-free.
3. Employers can create a Simplified Employee Pension (SEP) for their employees. They then make a tax-deductible contribution for their employees. This is perfect for self-employed people or small companies. It acts just like a traditional IRA, and the contributions can vary as to availability. Employees determine how the money is to be invested.
4. SIMPLE IRA, meaning Savings Incentive Match Plan for Employees, is a great vehicle for companies with 100 or less employees. There is lots of flexibility. The employer can match the employee contribution up to 3% of the employee's salary or a non-elective 2% contribution. The employee can invest up to $13,500 as of 2021.

In Canada, there are several plans that can be used for your retirement. You can research it fully in the retirement planning section of the Government of Canada website. There are several pension plans and retirement plans available to you.

1. Everyone who works must contribute, along with their employer, to the Canada Pension Plan (CPP). You can start receiving it at 60 or delay it to 70 years of age, with the average being 65. The longer you keep it, the more you will receive.
2. Old Age Security or OAS is a monthly payment we all receive when we turn 65. You can receive it later, and then the benefits will increase when you do accept it.
3. There are employer-sponsored retirement and pension plans. Generally, the employer invests money into a group RRSP, and often the employee contributes as well. These funds can be managed by large pension funds, put into mutual funds, or company shares.
4. You can also have a personal RRSP, where you invest in a variety of investment vehicles from GICs to aggressive stocks. By investing in your personal RRSP, you receive a tax credit receipt, which you apply to your income tax to reduce your tax commitment. There is a limit to the amount you can contribute to your RRSP, which is typically 18% of your earned income, less than what is put into your company pension plan. As soon as you take money out of your RRSP, it is taxable at the rate of your current taxable position. There are some special conditions that you can exercise, but it is best to research RRSPs fully.

3. Determine at what age you are going to retire.

By doing this you can make and start acting on a plan. Like the old saying goes, if you don’t know where you are going, how will you know when you are there? We can’t hide our heads in the sand; we are all getting older and need to be prepared for the next stage of our lives or at least know when we will be able to start the next stage.

4. Start looking at a basic expenditure list.

What do you want to do? Are there trips you want to take? Things you want to see? How about starting a new hobby? This is, of course, up and above our general daily expenditures.

Here is a chart to help you create an expenditure list.

Family Monthly Income and Expense Calculator
	You	Partner/Spouse
Income
Monthly take-home pay
CPP
OAS
Pension 1
Pension 2
RRIF
Dividends
Other
Total	0	0
Expenses
Alimony
Car insurance
Car maintenance
Car payment/lease
Car repairs
Cell phone
Charity
Clothing
Coffee/Snacks
Credit card payment 1
Credit card payment 2
Credit card payment 3
Education
Electricity
Emergency Fund
Entertainment
Fast Food
Food
Gas
Gifts
Guests/Parties
Gym membership
Hair/nails
Hobbies
House insurance
Household repairs
Insurance Critical Illness
Insurance disability
Insurance Health
Insurance Life
Insurance Long-term care
Internet/Cable
Liquor
Mortgage
Other loan 1
Other Loan 2
Personal Items
Pets
Property Tax
Rent
RESP
Restaurant
RRSP
Savings
Student Loan
Subscriptions
TFSA
Travel
Vacation/trips
Water
Other
Total Expense	0	0
Net plus/minus	0	0
Family plus/minus	0

 

5. Your next priority is to make some smart investing moves.

Maximize your tax-free savings account, judiciously use your RRSP, look at creating an annuity, and talk to a reputable financial planner. It might be a good idea to look into long-term care insurance as well.

6. If you haven’t already, put a will, trust, or estate plan in place.

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