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Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Things Retirees Spend Too Much Money On
Watching your budget is especially important after you retire. Plan Your Retirement
If youve set yourself up financially well for retirement, congratulations! You can now reap the fruits of your career and be rewarded for your diligent efforts to save and invest. And while you should enjoy your retirement to the fullest extent possible, its not the time to simply toss prudent financial planning out the window.
Although its understandable that you may want to splurge once you finally hang up your work boots, without maintaining some financial discipline, that nest egg youve worked so hard to accumulate could run out long before you expect. If you desire something strongly in retirement, it can make you prone to overspending, something that should be avoided when youre living off a limited income.
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Starting The Conversation Ahead Of Time
Geraldine Macdonald, senior lecturer, Lawrence S. Bloomberg Faculty of Nursing, University of Toronto, age 62Helping to organize a conference on retirement sponsored by the Retired Academics and Librarians of the University of Toronto last April was an eye-opener for Jody Macdonald. Seventy-five members of the U of T faculty association signed up, and only three of those were planning to in 2014, she says. Some in attendance were on the younger end of the retirement scale and some were in their mid-to-late 60s. Everyones situation is unique, and individuals need to pay attention to details in the options for life insurance, health and disability benefits, she concluded. Dr. Macdonald with a 25-year-old daughter in graduate school says she wont be retiring soon herself. Every year I say Ive got five years, she laughs. But whatever date it is, shes determined to be well informed and, through both the faculty association and RALUT, to advocate for others.
Is My Retirement Date My Last Day Of Work
Depending on how your employer handles payroll, your retirement date is usually the day after your last day of work or the first day of the next month following the date you stop working.
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Retiring After Age : Ages 66 To 70
For many, the upper 60s is the golden mean of retirement timingyou’re old enough to have built up a nice financial reserve and young enough to enjoy your job-free years. The fact that you’ll get your full Social Security payment at age 66 to 67 can make a huge difference, especially if you’re relatively healthy and likely to have an average or longer-than-average retirement.
Waiting also gives you a few extra years to shore up your tax-advantaged investment accounts. Investors who are at least 50 years of age can make an annual catch-up contribution to their 401 or IRA. For 2021 and 2022, those 50 or older can contribute $7,000 to a traditional IRA or Roth IRA. If you use a 401 to save for retirement, you can defer up to $26,000 of your salary in 2021 after you reach the age of 50.
Also, waiting until you hit 65 means that you are eligible for Medicare, which is typically a fraction of the cost of individual insurance plans for older adults.
Normal retirement agethe age at which you receive full Social Security benefitsgradually increases to 67 for anyone born in 1960 or after.
When Is The Best Time To Retire
When do you plan to retire? A study by Statistics Canada showed that 45% of Canadians hoped to retire before the age of 65, 24% planed to retire at age 65 or later and 31% just did not know. Where do you fit into these statistics?
The bottom line is retirement can happen whenever you want it to happen. The answer is personal. Sometimes, there are what I call triggers to retirement:
Making Room For The Younger Generation
Deborah Poff, past president, Brandon University, age 65 Shortly after Deborah Poff announced that she would be leaving her position as president of Brandon University at the end of her five-year term, she reflected on how much work shed be doing when she officially retired at age 65. Major research projects including a novel and a book on ethics and leadership in the public service are brewing. I can continue to have the kind of career I want. I dont intend to work full time as a professor, but I will be a researcher and a grant holder, says Dr. Poff. She believes that every university must strive for balance in the age and stage of its faculty members, and she feels an obligation to move on. Younger folks need the opportunities, and universities need continual renewal.
When Should I Retire
The date you choose to begin your pension is up to you and can depend on a lot of factors, such as the health of you and your pension partner, your financial situation, the standard of living you want in retirement, and how long you want to continue working.
The amount of your monthly pension will be different depending on the date you choose to start your pension. Your selected date will determine your age at retirement and may impact your highest average salary and how much service youve accumulated in the Plan at retirement. These are key components that are used in the calculation of your pension. Your final monthly pension also depends on the pension option you choose.
Use theor the in the online portal, , to estimate how different retirement dates and pension options impact your monthly pension.
To find out more about retiring, read .
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Retirement Planning Between Age 45 And 55
Between ages 45 and 55 is the best possible time to plan for retirement. It can be helpful to plan for retirement before age 45 too, but the besttime to plan for retirement is 5-15 years before your expected retirement date.
Between age 45 and 55 youll have a better idea of what your retirement will look like. You can estimate retirement spending. You can calculate expected CPP, OAS and GIS benefits. Your personal savings have hopefully been growing for a while now and compound interest is probably doing a lot of the work.
Age 45+ is also the time that many households find themselves transitioning into a new financial phase, a phase that will look more like their retirement years. Your mortgage is hopefully close to being paid off. Your kids are probably getting ready to leave the house. Youre probably reaching your peak earning years. These changes usually mean additional cash flow becomes available, cash flow that can be put toward your retirement goal.
With extra cash flow becoming available between age 45 and 55 this is a good time to make sure youre saving enough for retirement . You can calculate expected benefits from CPP, OAS and GIS and make sure you have enough savings to close the gap.
Between age 45 and 55 retirement spending becomes easier to predict. Your spending habits are more predictable and youll have a much better idea of your desired lifestyle in retirement.
Planning Retirement For When Its Convenient For You
An important non-financial consideration for a retirement date relates to travel and holidays. If someone really likes a particular season of the year, they may want to retire before it begins. A cottage owner might want to retire by the spring. Certain holidays might also impact when someone retires so they can enjoy a particular holiday season as a retiree.
In summary, Laf, your question is a good one because there are reasons to retire at certain times of the year. Tax may be a factor for some people, but there are plenty of other considerations for those who can control their retirement date.
Jason Heath is a fee-only, advice-only Certified Financial Planner at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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Other Exceptions To Consider
In some cases, your retirement date may be decided for you based on extenuating circumstances. If you develop a debilitating illness, for example, you may be forced into retirement if you can no longer perform your duties. Workers can also be nudged into retirement ahead of schedule through downsizing if their job is eliminated.
Thinking about these kinds of what-if scenarios can help you build some contingency plans into your retirement plan. Keep in mind that there may also be different rules and requirements for retirement dates if you work for the government versus a private sector employer.
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Pension Plans And Iras
If retiring before age 65, some individuals, such as federal employees, can withdraw retirement plan savings at age 55 and at age 59½ all employees can withdraw money from their qualified plans and IRAs without an IRS penalty for early withdrawal. Individuals who delay retirement must start required minimum distributions, RMDs, from retirement plans by age 72.
According to Fidelity Investments, individuals retiring at age 65 should aim to have 12x their pre-retirement salary saved and plan an annual withdrawal rate throughout retirement of 4.2%.
Retirement Planning At Age 70
Age 70 is almost too late to start planning for retirement. This is because at age 71 youre required to convert RRSPs into RRIFs and LIRAs into LIFs. After this conversion takes place youre stuck with mandated minimum withdrawals .
This conversion takes away a lot of flexibility in your retirement plan. Its still possible to plan for retirement at age 70, but your options are more limited, so its better to start earlier.
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Starting A Retirement Plan
The best time to start planning for retirement is yesterday, and the next best time is right now. If you havent started saving yet, its not too late to begin building retirement wealth.
An obvious way to do this is to start contributing to your employers retirement plan at work. This might be a 401 plan, 403, or 457 plan depending on where you work. You may also have the option to save in a Simplified Employee Pension IRA or SIMPLE IRA if you work for a smaller business. Any of these options could help you set aside money for retirement on a tax-advantaged basis.
If you dont have a workplace retirement plan, you can still save through an IRA. Traditional and Roth IRAs offer different types of tax benefits the former allows for tax-deductible contributions while latter offers tax-free qualified distributions. You could also open a SEP IRA if youre self-employed, which offers higher annual contribution limits.
If you decide to start any of these retirement plans, it may be helpful to use a retirement calculator to determine how much you need to save each month to reach your goals. Checking in regularly can help you see whether you are on track to retire or if you need to adjust your contributions or investment targets.
And If You Cant Choose The Date You Retire
Despite all this, in over 35% of cases you dont get to choose when you retire, whether its because your employer is going through tough times and needs to let some employees go, because you have someone in the family whos ill and needs your help, or because your own health is causing you to slow down. That could mean your retirement is not what you thought it would be. If you cant choose when to retire, youll need to make sure you can retire and determine if you have the means to do so, as you may have some life changing decisions to make.
Choosing when to retire isnt as hard as you might think and you do have options. All you need to do is take the time to make the choices that are best for you so you can live the retirement life you want to live.
Be strategic! It is totally possible to stay active and get the most out of your new free time while you transfer your knowledge to the next generation of workers.
Retiring takes some thought, and you need to make sure you get the retirement you want, whether its at a cottage on a lake, in the backyard gardening, building things with your grandkids or crossing the country in an RV!
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Taxes In Retirement: What You Need To Plan For And How To Minimize Taxes
Another key concern in retirement is taxes. Here’s what you need to know:
- Social Security: Your Social Security income may be taxed if your income crosses a certain threshold.
- Traditional IRAs and 401 accounts: The traditional forms of these retirement savings accounts let you contribute money on a pre-tax basis, shrinking your taxable income in the year of contribution. In exchange for that upfront tax break, your withdrawals in retirement will be treated as taxable income.
- Roth IRAs and Roth 401 accounts: These accounts offer no upfront tax break, but if you play by the rules, you can withdraw money from them in retirement — tax-free. That’s because you were already taxed on the funds you contributed.
- Investment income: Your other investments face taxes, too. Short-term capital gains are taxed at your ordinary income tax rate, while long-term capital gains get taxed at 0% or 15%. Dividend income from most stocks held for more than 60 days is generally taxed at 0% or 15%, as well.
- Interest income: Most interest income is treated as ordinary income and is subject to taxation. Treasury bonds and bills only face federal taxes, while corporate bonds are generally taxable at the federal, state, and local levels. Municipal bonds tend to be tax-free.
Retiring At Age 65 Or Earlier
The original rules surrounding Social Security benefits established age 65 as the retirement age when workers could receive unreduced retirement benefits. In 2022, the Social Security full retirement age is 66 for those born between 1943 and 1959, and 67 for anyone born in 1960 or later.
An individual’s retirement savings, health benefits, and social security commonly dictate the best time to stop working and vary by age.
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