You’ve probably seen the meme: “There’s no such thing as a perfect financial plan…”
But if one existed, it would probably look something like this.
During your working years, make a solemn vow that you will never have a cent of credit card debt. That one rule alone will put you ahead of most Canadians. Then follow these four principles:
- Take full advantage of every employer match in your workplace plan, but no more.
- Optimize RRSP contributions. Contribute enough to bring your income to the bottom of your highest tax bracket, or skip RRSPs altogether if you move into a higher bracket later.
- Maximize your TFSA every year, and if you have unused space, use my “TFSA snowball” method to catch up.
- Prioritize short-term goals, such as saving for a car, home renovations, parental leave, bucket list trips, or an early retirement fund, and focus your extra cash flow there.
Spread those short-term goals and one-time purchases over a reasonable amount of time. Financing a vehicle in 3-4 years? Fine. Constantly carrying two car loans for decades? Not ideal.
Unless you have a specific early retirement goal, regularly contributing to a non-registered account is generally a sign that you may need to take the reins. I often see retirees with more than enough money who are still struggling to spend. If you don’t want that to be you, start exercising those spending muscles now.
Buy term life insurance and set the end of the term to your retirement date or a few years later.
If possible, try to pay off your mortgage 3 to 5 years before retirement. This is often a key trigger point to increase retirement savings in your final working years, increase spending to desired levels in retirement, or even retire early if your finances are in good shape.
When it’s time to retire, make sure you’re retiring from something, not just something. Most of my clients want to maintain or even improve their lifestyle in retirement with more travel, hobbies, entertainment and helping their children or grandchildren.
Related: So you’re about to retire: the financial timeline for the first year (with real numbers)
Determine your base spending level, talk to a financial planner to determine your safe spending ceiling and make a wish list of one-time expenses such as vehicle replacements, major trips, home repairs and gifts. These things happen over a 30-year retirement period, so plan for them.
Simplify your finances. Consolidate accounts and financial institutions. Hold a single low-cost, low-risk asset allocation ETF combined with a HISA ETF for your 10% cash wedge (only in the accounts you draw from). Start building that wedge a few years before retirement by eliminating your DRIPs and converting new contributions to cash.
Then retire. If your plan is solid and the math works, resist the temptation of “one more year.” Submit your message and enjoy the next phase of your life.
Postpone CPP and OAS if you can. You get 122% more CPP by waiting until age 70 (and 36% more OAS), and you open a golden window to withdraw RRSPs, RRIFs, and LIRAs in a tax-efficient manner before those government benefits kick in.
Keep your TFSA for as long as possible. Think of it as a tax-free safety margin that you can count on for major expenses, gifts or your estate.
Remember, retirement expenses usually don’t fall off a cliff. Research shows that inflation tends to grow more slowly than inflation, rather than falling dramatically. Travel and dining may disappear, but spending will shift to convenience, generosity and healthcare.
Do-it-yourself investors should have a backup plan, perhaps a robo-advisor or a trusted advisor who can step in if cognitive decline or a health event makes self-management of investments difficult.
And please, don’t leave yourself in a bind trying to avoid probate fees. Adding children to titles can do more harm than good.
If you reach age 95 with a depleted RRIF, a healthy TFSA, and your house paid off, that’s about as close to the “perfect” financial plan as you can get.
Finally, remember that life does not move in a straight line. Goals change, circumstances change, etc. That’s why it’s called financial planning – it is an ongoing process that needs to be refined and recalibrated as often as necessary.
Now on to this week’s links…
This week’s summary:
Last week I wrote that investors were losing their nerve after a tough end to the stock market week.
Make sure you get your free ticket to the Canadian Financial Summit. The online financial conference will take place from October 22 to 25.
A 15-year dream to consolidate all our accounts in one place has finally been realized.
I’ve been banking with TD since I was 10 years old, and even started my DIY investing journey with TD Waterhouse, as it was known in the days of $29 transactions. That’s where I housed our children’s RRSP, TFSA, and RESP accounts for over a decade. When I quit my job in 2019, I also placed my pension in a LIRA with TD.
When Wealthsimple came out with its self-directed option in 2019, I decided to try it out and so I moved my RRSP and TFSA in-kind and took advantage of the trading platform without fees.
Wealthsimple was pretty bare bones at the time, with only RRSPs, TFSAs, and non-registered accounts. We needed to open a business investment account in 2020, so we did so with Questrade to check out Canada’s other low-cost brokerage platform.
When Wealthsimple expanded its line of DIY account types, I moved those accounts accordingly. First there was the LIRA a few years ago, then the RESP earlier this year. Finally, after a long wait, they launched self-directed business accounts and we moved the last of our investment accounts to the Wealthsimple platform (retrieving a whopping $5,600 in associated cash in the process).
But it wasn’t just the investment accounts. I haven’t visited a bank branch in years, so last month I took the bold step of closing the TD account I’ve had since I was 10 years old and moving our daily banking to Wealthsimple.
My wife did the same and moved her personal free account and cash back credit card from Tangerine to Wealthsimple.
Finally, we now use Wealthsimple’s new Visa Infinite card for our everyday spending (2% cashback on everything).
Look, it’s not a perfect platform and it’s not a one-size-fits-all. Clients should be aware that any activity that makes money for Wealthsimple (crypto, options, FX conversion, etc.) is likely to come at your expense – so avoid it and stick to what Wealthsimple does best. So far, so good.
Weekend reading:
Is it an achievable goal to stay mentally sharp as you age, or is it a pipe dream? Here it is how to maintain good cognitive health at any age.
Dimensional shares Three common investment mistakes for do-it-yourself investors.
Speaking of three mistakes: The Wealthy Barber David Chilton shares three life insurance mistakes he thinks you’ll find interesting (honest!):
Jason Heath explains how to withdraw from your RESP.
Unregistered accounts held individually can result in frozen funds and late payment fees. Learn how joint accounts can protect your family’s finances. But be careful:
“Some Canadians try to avoid inheritance by adding adult children as co-owners. On paper it seems like an easy solution. In practice, however, it often causes bigger problems.”
Is Warren Buffett Beating the Market? Robin Powell shares the statistical truth behind the Oracle’s record.
The constant real spending assumed by the 4% rule is not what the majority of retirees prefer. Indeed, most retirees want to bring forward their expenses.
The height of the real estate craze is behind us, but tumultuous, complicated times lie ahead. Being here 10 maps to explain where we are.
Finally, the doom spenders. Faced with an uncertain future, young Canadians are racking up more debt than ever before. Portrait of a generation in installments.
Have a nice weekend, everyone!
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