Top 3 Areas Retirees Struggle at the Beginning of Retirement
Most working Canadians look forward to retirement. The day that they can turn in their laptop, work tools, and security access cards and transition into a life of relaxation and free time is one that gets most people excited.
And for good reason. Retirees typically have more time to live life on their terms with way more time to do it without work getting in the way.
But, the transition from working life into retirement isn't always perfectly smooth. Having had a front row seat to a lot of new retirements, I have had a chance to see what works well for people and areas where they struggle.
Here is a list of the 3 biggest areas where I've seen new retirees struggle.
1. Fulfillment and Purpose
Finding fulfillment and purpose is something that I have seen a lot of people struggle with as they enter retirement. For many people, having a job gives them structure, a sense of accomplishment, a network of friends, and it keeps them busy. Retirees suddenly finding themselves with a lot of unstructured free time can feel uneasy and stressed out.
I encourage you to spend some time with your spouse and loved ones planning out how you are going to fill your time once you are retired. This activity can be as simple as sitting with your loved ones and writing down a list of things you want to do in retirement. For many people this list includes vacations, hobbies, projects, and physical activities.
I also encourage people to take a retirement "test drive". This is where they take a multi-week vacation and treat it like they will treat retirement. For example if someone says that their plan is to golf, play pickleball, walk, and volunteer at their church - I recommend that they spend a couple of weeks doing that steadily for a few weeks before they retire. Think of it as a "try before you buy" on your retirement. See how you feel doing those activities steadily for a couple of weeks. How did it go? What would you do differently? It is a great way to avoid "buyers remorse" on your retirement when the big day does finally arrive.
2. Getting Used to A New Way of Getting Paid
Most working Canadians receive a paycheque from their employer every 2 weeks. In the majority of cases, the employer deducts the appropriate amount of taxes from their paycheques and remits it on their behalf to the CRA. If they are regular contributors to retirement accounts like RRSP's, they typically expect to receive a small income tax refund every spring.
But in retirement things can start to get more complicated.
The retiree's income may now be coming from several different sources such as a RRIF, Old Age Security benefits, Canada Pension Plan payments, a Private Pension, and other taxable accounts. What used to be a simple tax filing with a single T4 from your employer and an RRSP contribution receipt may now require collecting and submitting 5-8 slips or more per retiree.
To make things more complicated and stressful, you may have a tax bill to settle in the spring when you file your tax return for the previous year. If your tax remittances for the year are not enough to cover your entire tax obligation, you will have a balance owing when you file your return.
Canada Pension Plan benefits, Old Age Security benefits, and RRIF minimum withdrawals are all taxable as income in the year they are withdrawn. But none of them require the retiree to pay tax in advance to the CRA - also called a remittance. And for retirees who have non-registered investment accounts that earn income like dividends and interest - those accounts don't require regular tax remittances either. At tax time, when all of those slips are loaded into their accountant's tax software, there is a good chance that the retiree is going to have a tax bill to pay.
Let's take a look at a case study for a single 65 year old retiree in Ontario who retired at the end of 2023. Using the Tax Tips income tax calculator we can estimate their tax bill assuming that they received $7,000 in OAS benefits, $10,000 in CPP benefits, $20,000 in RRIF Minimum withdrawals, and $10,000 in interest income from their non-registered investment account - totalling $47,000 of income for the year.
The total amount of taxes owing in 2024 on that income would be around $5,300. But none of the income that they received technically has to have taxes remitted from it to the CRA during the year. Said differently, that retiree was not required to make any "pre-payments" of tax in advance to the CRA during the year. They don't owe any more total tax than their neighbour who earned $47,000 from their job and had their payments automatically remitted to the CRA by their employer. But, it is a rude surprise when that retiree gets the tax bill from the CRA in the springtime.
The best defence against these surprises is setting your expectations in advance that income and taxes for the first couple of years are going to feel different. If you are working with an advisor they should be able help you map out how much income you need, the best places to draw that income from, and how much should be voluntarily remitted to the CRA during the year to avoid tax surprises in the spring.
3. Being Able to Keep Things Simple with Investments
It is common for retirees to feel the need to change things up with their investments as they enter retirement. This is understandable. After all, the portfolio now needs to be used for retirement income. It is not just a pile that they are adding to with their savings anymore.
But sometimes these positive intentions can come with ideas that are counterproductive or even downright harmful to the retirees' portfolio. Here is a short list of potentially damaging ideas that I have encountered:
- Switching from a balanced stock/bond portfolio to all GIC's and Conservative cash investments to protect the portfolio from volatility
- Adding things like REIT's, Dividend paying individual stocks, and Mortgage investments for their seemingly low-risk/high-yield potential
- Creating excessive and elobrate bucket systems that hold a lot of cash and do not rebalance efficiently
Many retirees are surprised to hear that they can draw sustainable income from their humble low-cost and regularly-rebalanced index fund portfolio without having to layer in these complicated strategies.
That is not to say that the balanced portfolio is the only solution. Cash for emergencies and near-term large purchases is certainly a good idea. Layering in annuities from a life insurance company to guarantee that your baseline spending needs are taken care of is also prudent. But totally rewriting the philosophy at the beginning of retirement is generally not necessary.
Retirement is an exciting time, but it can bring its struggles. I hope that understanding some of them can help you plan to minimize their impact.
If you have any questions, please don't hesitate to reach out any time.
All the best!
Mark
Photo by Marc Najera on Unsplash