How to transition to retirement

Here’s a checklist of exactly what you need to do as you start counting down towards one of the biggest changes of your life



From the November 2014 issue of the magazine.

(Illustration by Pete Ryan)

(Illustration by Pete Ryan)

A lot changes the day you say goodbye to your colleagues and leave work for the last time. Suddenly, you go from building up your nest egg to drawing it down. As a result, you need to rethink the whole way you manage your finances. Call it the Big Transition.

To prepare properly for retirement, you should start getting ready at least five years before the big date. It’s all about envisioning the lifestyle you want while making sure you have enough reliable income to fund it. And the transition doesn’t end when you do retire. You’ll need to keep adjusting your lifestyle and financial plan as you go, especially during the next five or so years. With the quality of your retirement on the line, it pays to plan carefully. Here’s our outline for managing the Big Transition.

In the last few years before you stop working, you need to gradually define your retirement goals, including when it will start and roughly how much it will cost. And you need to ensure you can afford it, perhaps the most daunting question of all. “The biggest issue for my clients is they’re worried they won’t have enough,” says Annie Kvick, a certified financial planner with Money Coaches Canada in North Vancouver.

If your finances are a bit short, the good news is you still have options—provided you deal with the shortfall while you’re still working. “If you’ve got an inkling that you cannot sustain this level of spending, you’ve got to deal with this now,” says Lee Anne Davies, a retirement educator with Agenomics.

You can make adjustments by pulling on three levers: save more, work longer or spend less in retirement. Working longer can improve your finances dramatically because it not only gives you more time to build savings, but also allows you to nudge up the payout rates on government benefits and your withdrawal rates on savings. “How much longer we work is a big determinant,” says Fred Vettese, chief actuary at Morneau Shepell and co-author of The Real Retirement. As an example, a single 65-year-old earning $65,000 a year with a nest egg of $300,000 should be able to increase his or her retirement income by roughly one-third by working just three extra years. (See “Getting Paid to Wait” in the September/October 2014 issue for more.)

If you don’t want to keep your nose to the grindstone full time, contract or part-time work might fill the gap. “Working part-time fits well with what people nearing retirement want to do, since almost nobody wants to keep working the big grind for long hours five days a week,” says Vettese, who is himself working a reduced workweek.

Your other two options—saving more while working or spending less in retirement—are closely related. At this point you only have a few years to save, but that can make a big difference. If you have an average-paying job or better, you’ve paid off your mortgage and other debts, and your kids are self-supporting, you should be able to save at least 20% to 35% of your income. That discipline will also help prepare you for reducing expenses in retirement.

Figuring out how much you’ll need in retirement is often the most difficult question. It’s easy to think we need $1 million in savings and loads of income, but don’t get misled. You can usually live comfortably on a lot less. (See “How much do you really need?) While rules of thumb can help, you should get a handle on how you spend your money now, considering major categories like utilities, clothing, groceries, eating out, entertainment, transportation and travel. Then look at what will change after you retire, dropping work-related costs but adding new expenses, such as travel and recreation. What activities are most important? Identify basic necessities versus the nice-to-haves. Then zero in on the priorities among the nice-to-haves. “It’s not about following a budget,” says Kvick. “It’s making sure we have our priorities straight so we know what we want to do in life, and then coming up with a plan. If you do that, you’ll probably find you don’t need $1 million. You may not even need $500,000.”

Conserve your assets

As you approach your retirement date, you should make sure you have a conservative mix of stocks and bonds or GICs. Once you’re retired, most experts say your fixed-income allocation should make up at least 40% of your total portfolio—possibly as much as 60% or 70%—with the rest in stocks. It also helps to pick investments within each category that are relatively resilient in downturns, such as blue-chip stocks and reliable dividend payers. You may want to avoid more volatile investments such as cyclical stocks, commodities and commodity stocks, growth stocks, and high-yield bonds.

You also need to be mindful of the potential risk of rising interest rates and inflation, so don’t go too heavy on vulnerable investments—particularly long-term bonds, real-estate investment trusts (REITs) and utility stocks, which tend to fall in value when interest rates rise.

Your portfolio should generate a reliable cash flow, so you don’t need to sell stocks during market downturns. You should be able to meet much of your income needs through interest and dividends, but that probably won’t be enough. One approach is to ensure your savings account has enough cash to cover one year’s worth of expenses. Then you create a bond or GIC ladder for two to four years (or longer), so you have bonds or GICs maturing in time to meet each year’s cash flow needs. “Ensuring a sustainable income in the first few years of retirement makes for a very comfortable starting point,” says Daryl Diamond, of Diamond Retirement Planning Ltd., author of Your Retirement Income Blueprint.

After retirement, there’s another major investment category to consider alongside stocks and fixed income: annuities. They provide reliable cash for life and are generally well suited to healthy middle-class retirees without employer pensions who are concerned about outliving their money. Annuities complement stocks and bonds and therefore help to diversify your portfolio. They generally provide a higher payout that is assured for life, but you lose access to the capital and nothing is left for your heirs after you die (although there is usually a period during which payouts are guaranteed). Withdrawals from a stock and bond portfolio aren’t 100% guaranteed to last (even when done conservatively), but you can still get at your capital, and if you plan properly and keep your withdrawals to less than 4% of your initial portfolio size each year, chances are there will be a pot of money left for your heirs.

One good strategy is to do both: you can fund your retirement from your own portfolio, but also purchase an annuity to provide cash flow for non-discretionary expenses that aren’t covered by government and employer pensions. That ensures you can at least meet basic needs, even if there is a nasty market crash. Many experts now recommend buying annuities gradually in your early 70s, but it can also make sense to start annuitizing in your mid to late 60s if you want to play it even safer.

Tap government benefits

You also need to figure out when to start your Canada Pension Plan and Old Age Security benefits. You can start CPP between age 60 and 70, and OAS between 65 and 70 (that’s transitioning to age 67 to 72). You get a smaller payout for longer if you start these benefits early, or a larger payout for a shorter period if you defer them. The adjustment factors are designed to provide no major financial advantage or disadvantage if you have average life expectancy. However, personal factors can impact the decision, such as if you have good reason to think you’ll either die young or live to an exceptionally ripe age.

Most Canadians start collecting these benefits immediately after they retire, as soon as they are eligible. In my view, that’s usually a good strategy for most middle-class Canadians without employer pensions. It’s a way to provide the first layer of reliable income in retirement.

It can also be a reasonable strategy if you are wealthy or have a generous employer pension, but in those cases the optimal approach can be complicated by the specific payout pattern of the pension or by complex tax and estate issues. Low-income Canadians, meanwhile, need to consider how their CPP income would affect other government benefits. For example, if you think you will be eligible for the Guaranteed Income Supplement at age 65, choosing an early CPP start date will mean your income will be lower and should increase your GIS benefit entitlement.

Many employer pensions have generous early retirement benefits with a “bridge benefit,” in which case your total monthly payout is actually higher before age 65 than after. The idea of the bridge benefit is to pay early retirees the equivalent of a typical CPP pension prior to age 65 so you’ll get a smooth amount of income before and after you start collecting the government benefit. In that case, if you retire early, you may be generally best off following the assumptions of the pension plan and wait until 65 to start CPP.

Draw down savings

If you have both large RRSPs and large non-registered accounts, you may be in a quandary of where to draw from first. The traditional view of many advisers is to unwind non-registered accounts first, but in my view you’re usually better off with a balanced approach to withdrawals. “The conventional belief does not generally work best in today’s environment,” says Diamond, who has looked at this question in depth.

There’s a trade-off to consider. It’s true that deferring RRSP withdrawals allows you to keep sheltering investment gains until later. However, if you keep doing this, you’re eventually forced to make mandated withdrawals from your untouched RRSPs at much higher levels after you turn 71. The progressive nature of the tax system means that those higher income levels result in much higher taxes and can result in clawbacks of OAS and other seniors’ benefits. In the case of couples, this will often get even worse after the death of one spouse, as the RRSPs are combined for the surviving spouse and the mandated withdrawals become much greater. “If we can smooth out the amount from registered and non-registered accounts, you can avoid income spikes later that cause you to pay taxes at much higher rates,” argues Diamond.

Pull it all together

In the last few years before retirement, you’ll need to figure out the right balance between the size of your savings, how long you work, and how much you can spend in retirement. When you actually do retire, you’ll need to combine cash flow from government pensions, employer pensions, and your own portfolio to provide reliable, steady, tax-efficient income that fully meets your needs. That will help you complete the Big Transition, and smoothly slide into a fulfilling and comfortable retirement.


8 comments on “How to transition to retirement

  1. I fine your information was very informative, my wife and I are retired, unfortunately we did not build any saving for retirement but we manage to live very comfortable with our government pension, we still have a mortgage, we give to charity, and still take our vacation. As you have said with some adjustment it can work. Thanks.


  2. good points to start at least 5 years before you retire, 10 years would be idea, to prepare your mind that you will have all the time, to do what you want , but its also a lot of time of what to do with it. unfortunately people wait till the last minute to think about retirement and what to do , after working 40 or more years, they have been working to live, then they retired and don’t know how to live and end up dying in 5years. For 40 years you get up and the day passes as you worked to amass you worldly wealth, building a family but,you forget how to life, and those vacations were what you think is living happily. but when you retires, what to do with your day? Now, you don’t have a working work schedule, you don’t get up at 7am, worked till 5pm , go home have dinner, watch tv, with the family,then relax a bit, then go to bed, and start all over again tomorrow, year in and year out. What to do?, what to do? Sure you can travel, if you have the money, but sooner, or later the money will run low or old age, will come and hunt you, that body will not work like you were 18 years, you could be wheel chair bound, now what? You worked all your life, and now you don’t what to do? the answer is in your mind, you have to go back into your child hood., When you were 4years old, you were living , alive, no worries, eat when you are hungry, play, run, and every things is taken care of by your parent. The world is your oyster, you get up when you want and explore the world, every blade of grass is different , you stopped for no reason, only to admire an ant crossing your path, or pick an flower apart, then tried to put it together again. You lose track of time, no urgent matters to deal with, just living. It has been a while when you were 4 years old, but if you try you can find your 4 years old, then you will live life, in your retirement , and not work to live , And you will live a long life.


    • Well said Larry!


  3. Excellent article and advice. Should be required reading for all pre and post retirees!


  4. Retiring is a completely different mindset. I often meet clients who do not spend their savings as they have conditioned themselves its always for later on. Well now is “later on” so we figure out what they can do to fill their time and make some memories. Sequence of returns also becomes more important than average returns when you are withdrawing. It still shocks me how many 65 years olds are all in equities, no cash on hand and would have to sell for income in a down market.
    I subscribe to the Jon Chevreau Findependence outlook on life.
    Kathy @ Your Net Worth Manager. Fee only financial planner.


  5. We have absolutely no mortgage or debt, our TFSAs are maxed out, and we have approximately $500K in investments and RRSPs, plus the equity of our house. I’m retiring (to my new career, dog walking mayb!) at the end of the year, with a pension about half of what I’m making now. My spouse is retiring in November of next year with a full pension. We’re relatively healthy (will be more so once we don’t have to spend 2 hours a day in the car to and from work), have toys and no kids, but you are so right! This is a huge life change, and I’m having nightmares. Living in Canada we won’t worry too much about health costs eating away at our nest egg. Aside from what common sense has already pointed to, what should we guard against? We are extremely conservative financially, and are do it ourselfers around the home. We both know how very fortunate we are, but I’m worried about what’s around the corner. We both feel our situation is too good to be true, where are the pitfalls?

    Thanks for this opportunity!


    • As an insurance adviser and risk management consultant. We would look at the ways to fund a recovery god forbid you had a critical illness.
      you wouldn’t want to make a lump sum withdrawal from an RRSP of 160k to net the 100 k you need for recovery and treatment. Shift the liability to an insurance company. You can even purchase a Critical illness insurance plan with 100% return of the premiums down the road if you stay healthy.
      insurance is almost always a tax free benefit because you are paying with after tax dollars.
      Another option would be using a secured line of credit on your home to fund these health care costs.
      also look into long term care insurance with sunlife or desjardin they have the best plans. This type of insurance pays you to live in your home if you are unable to complete the necessary duties of life on your own, eating, toileting, dressing, continence, the money gets paid to you whether or not you use it to pay for a nurse or home modifications etc.

      Find an Insurance agent like myself that focuses on clients nearing or in retirement as insurance companies have safer investment products and are sometimes guaranteed helping you sleep better at night!


  6. Great information. I wish I had this information years ago. It would have changed a lot of decisions I made in my life around money. Another book I would also suggest to read as you prepare for retirement is “Life Expectancy: It’s Never Too Late to Change Your Game Plan” by William Keiper. This book helps you consider and plan for how you are going to live the rest of your life.


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