It’s one thing to plan for retirement. It’s quite another to adjust to it when it actually happens.
No longer are you just concerned about whether you have enough money to last decades.
You need to figure out a plan to use those savings—along with a workplace pension (hopefully), Canada Pension Plan (CPP) and Old Age Security (OAS)–to replace your workplace paycheque.
That’s not to mention you are often making a huge shift in lifestyle that can leave you feeling, at least at first, a little lost.
All in all, it’s often the first two years of retirement that can be most challenging both financially and socially.
With that in mind, if you’re retiring soon, here are some things to mull over.
Expect big changes
Whether it’s your lifestyle—as in not going to work anymore, and having a ton of free time instead—or your finances, the first two years of retirement are likely to feel a lot different than your life as a worker. Of course, planning is important, particularly for your finances. But best laid plans aside, a good way to deal with this potentially big shift in mindset, lifestyle and finances is to embrace the journey, seeing it as a new adventure. In short, try to be optimistic. After all, research shows that optimism leads to positive outcomes for retirees—most notably they live longer on average. Of course, nothing bolsters a positive attitude like having a good plan to rely on to guide you through an uncertain new phase in life.
From saving to spending (carefully)
The big change financially, particularly with respect to planning, is that newly retired individuals must move from accumulating assets to de-accumulating those assets. Basically, you’ve spent decades investing for the future. Now, the future has arrived and you must unwind all that capital to build a steady stream of income. It’s not just a change in thinking, but planning too. Individuals need a retirement income plan that sets out a different portfolio allocation than the one used to build wealth. One important consideration, for example, is setting aside enough liquid assets—sometimes referred to as a cash wedge—in your portfolio to fund those first two to three years of retirement. And then the plan, of course, must devise a road map to fill that wedge over time from other investments, which must provide some growth so your money keeps ahead of inflation in the long-term.
Plan, budget, repeat
Ideally, you’ve got a retirement income plan and budget ready to go before retiring. The budget—a plan for what you expect to spend from fixed expenses like property taxes to discretionary ones like vacations—should guide the retirement income plan. That said, the retirement income plan might guide what you can spend, as it can help develop a forecast of sustainable cash flows from your investments and other resources over several decades. What’s important is to understand that both must work together and both will change potentially early in retirement. You may find after tracking your costs for a year or two that your income exceeds expenses, or vice versa. Either way, tweaking is likely required.
Have a leisure and social agenda
Income and budgeting are just two—albeit key–elements of retirement. Another biggie is how you will fill your time. Arguably, this is just as important as having an income plan and a budget because the activities you are going to do may involve… money. While most people expect to spend less because they’re not paying for work clothes, parking, etc., others may spend more because they want to travel extensively at least early on in retirement and other fun activities. As well, it’s important to consider social circles once work is done. For many, work was their social network. To fill that void, think about what hobbies you currently have and how your involvement, along with costs, may increase. As well, you may want to consider taking up new activities–like learning a new language or musical instrument, both of which are associated with better brain health, research shows. What’s also important is participating in activities from golf to book clubs to woodwork to build social relationships to replace those through work that may be lost after retiring.
Consider dipping a toe back into the labour pool
For some the life of leisure is fulfilling enough in retirement. Others struggle to find meaning, or perhaps, their finances are too close for their comfort. Regardless of reasons, you may find yourself still wanting to work. Statistics Canada data show many retirees do desire to keep working at least part-time so long as it’s not too stressful. Work, of course, has its benefits. Notably, from a financial perspective, it can help navigating those first few years of money management that much easier. As well, more income early on and less use of savings means more savings long-term that can come in handy later in retirement when costs may increase due to long-term care needs. As well, some research shows that working later in life has health benefits. If working isn’t your thing, consider volunteering. Studies also show volunteering pays wellness dividends. Not to mention, both working and volunteering will replace that social network that goes missing after stopping full-time work in your previous career.
Get some help solving the retirement puzzle
For many, the most stressful aspect of retirement is piecing together what feels like a complicated financial puzzle. It used to be when you retired that you had CPP, OAS, a workplace defined benefit pension and some savings. And away you went. Today, people have RRSPs, TFSAs (tax-free savings accounts), group RRSPs, non-registered investments, and locked-in retirement accounts (LIRAs) from previous employment over their careers. There are many moving parts to say the least. And how you piece these together can mean the difference between exceeding your retirement income goals or not having enough money 10 years into retirement. Make no mistake, the first two years of retirement are critical. The sequence of returns from your portfolio, paired with spending patterns, can have meaningful long-term impacts on cash flows—for better and for worse. Too much risk in the portfolio paired with a steep market decline could lead to much less money in your retirement wallet for many retirement years to come. All these considerations call for getting professional guidance to build a retirement income plan and design an accompanying, resilient investment portfolio that generates tax-efficient income to fund those first two years. And of course, that investment set-up should also provide long-term capital growth so your money keeps pace, or even better outpaces, inflation.
That way, you’ll have the money you need for the entire span of retirement—however long that may turn out to be.
