One of the hardest aspects of retirement planning is managing cash flows. In your working years, you’ve likely had relatively consistent pay cheques every few weeks. You’ve had years of practice in lining up your expenses and saving for big purchases and rainy days. When you retire however, you may find some growing pains in adapting to new income streams.
Your pension payment day may be different than your CPP payment day, which may be different than your RRIF payment day! Add in the tax complexity of some retirement accounts and all of a sudden, a lump sum expense, like a vacation, vehicle purchase or home renovation may just catch you off guard. Here are a few pointers on how you can plan to make retirement
expenses a little more seamless:
1. Avoid lump sums from registered accounts. When you make unplanned withdrawals from a registered account, like an RRSP, you can wind up doing a lot of damage to your retirement plans. This is due to the tax nature of these accounts. If you need, say, $10,000 in your bank account, you’ll need to redeem $12,500 from an RRSP to get there. RRSPs have withholding tax applied based on the dollar value redeemed (in this case 20%), necessitating larger up-front withdrawals than some other account types. This erodes the capital you have working in your favour and can quickly add up in a harmful way.
2. Build up tax-advantaged savings. Having a big pool of money in tax-advantaged accounts, like a Tax Free Savings Account (TFSA), is a great tool for managing retirement cash flows. When you redeem from a TFSA, there is no withholding tax nor income tax triggered. This tax treatment makes these accounts ideal for accessing in emergencies or planned expenditures.
3. Keep access to low-cost debt sources. Having no debt in retirement is great, but if it comes down to paying 20% or 30% in tax to CRA or 3% interest on a home equity line of credit, I’ll take the interest cost any day! Leave open unused home equity lines of credit (if the fees are low or non-existent) or open one up before you retire. If you’ve already retired, you may find it harder to pass a lender’s underwriting standards than in your working years.
4. Budget in some wiggle room. Don’t plan for your retirement income taps to just barely cover your monthly cost of living. Everyone encounters home repairs, holiday shopping and surprise expenses that creep up out of the blue. Be sure to add in some buffer so you don’t feel like you’re living “pay cheque-to-pay cheque” in your golden years!
By planning ahead for the expected and unexpected costs of life, you can help ensure your retirement budget is in good hands. No one wants to be worried about scrimping and saving for the next big thing when you’re on a fixed income, so the time to plan is while you’re still working!
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