A large number of Canadians may not have a financial plan in placekzenon/Getty Images/iStockphoto
The big transition is fast approaching: You're at the tail end of a long, successful career, your kids have moved out of the house and you're starting to contemplate what life is going to look like in retirement.
But do you have a long-term plan in place?
According to the 2015 BlackRock Canada Investor Pulse survey, which asked 2,000 Canadians for their thoughts on their financial futures, only half of Canadians aged 55-64 said they know how much money they will need in retirement. As well, despite the fact that many Canadians are in the dark about their future financial needs, of all survey respondents (aged 25-74), only 38 per cent currently use a financial adviser.
In those crucial last few years leading up to retirement, it may be a good idea for investors to sit down with a trusted adviser to discuss what their retirement will look like and whether they have the necessary funds to support it, says Pat Chiefalo, managing director and head of iShares Canadian Product at BlackRock Asset Management Canada Limited.
For Canadians close to retirement age, some of the main concerns are debt repayment, maxing out their portfolio and ensuring that they have a healthy retirement. This is also the time for many investors to rebalance their portfolios, says Mr. Chiefalo.
"Fixed income investments will certainly be, or become, a growing part of a retirement portfolio," he says.
Here are some of the top priorities to keep in mind when investors are approaching their transition to retirement:
1. Debt repayment
Gordon Pape, publisher of BuildingWealth.ca and author of several books on retirement, says that Canadians who are close to retirement might want to focus on paying down debt, if they still have it.
"It's highly dangerous to go into retirement with debt," he says. Mortgages should be paid off or people should consider downsizing to a smaller, more affordable home. You don't want to be in the situation of having a half-decent pension plan and a big mortgage, says Mr. Pape, because your retirement savings will be used to pay off the mortgage, leaving you very little to live on.
Your home could also become a source of retirement income, he says. By downsizing your home, you could net enough to put some towards your retirement and still have equity in your home should you need it later on.
2. RRSPs, TFSAs and pensions
This is a good time to ramp up your savings before you stop working, which means putting away as much as possible in a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
For lower-income Canadians, a TFSA might be the better choice because they won't have to pay taxes when they withdraw their money, while higher-income Canadians might want to max out their RRSPs to help lower their income tax bracket while they're working.
3. Spending
Part of retirement planning is figuring out how much you're going to spend each year. Canadians are living longer – according to a report last year from Canada's Chief Actuary, life expectancy for someone who is currently 60 years old is 85 for men, and 87 for women. As a result, investors probably need to factor in increased health costs to ensure that their money could potentially last for decades.
There are many online retirement calculators that can help you determine how much income you'll have in retirement (like the retirement income calculator provided by BlackRock), additionally a financial adviser may be able to help you get a better sense of your annual bills, spending and income.
4. Shifting portfolio
At this stage in life, most Canadians are looking to preserve their savings. This could be done by rebalancing their portfolio to focus on more fixed income investments like guaranteed income certificates (GICs) or bonds. The thing to remember, says Mr. Chiefalo, is while these kinds of products help protect your money from market turmoil, there isn't that much opportunity for growth. However, there are options for those who want their portfolio to stay safe and also grow.
5. Growth
Just because you're retired doesn't mean your portfolio is also retired. It may be a good idea to incorporate some growth into your portfolio to help bring in income and to help keep up with inflation, says Mr. Chiefalo. One way of doing that is through exchange traded funds (ETFs).
Mr. Chiefalo suggests fixed income ETFs for those who are close to retirement for several reasons. "With low transaction costs, low management fees and immediate diversification, they offer extremely compelling value to our clients."
In terms of growth, Mr. Chiefalo points out that minimum volatility ETFs may reduce the volatility that comes with equities while potentially maintaining the returns you can get with them. "We are aiming to capture the majority of the upside of equity returns, while reducing the downside participation. These are great tools for investors more acutely concerned with risk, yet still requiring the growth potential of equities."