For the growing number of Canadians who choose to – or must – continue working into their retirement years, managing their finances is becoming more complicated.
These clients must now navigate the complex world of juggling employment income at the same time they make decisions about pensions, retirement savings, government support programs – and take a range of new tax wrinkles into consideration. For these people, the services financial advisors and financial planners provide have become more crucial than at any other point in their lives.
According to the 2016 Canadian census, one of every five Canadians aged 65 and older was still working in 2015, the largest proportion since 1980. Furthermore, a Statistics Canada report published in 2018 showed that one in three Canadians aged 60 or older was working or looking for work.
“It’s a time in clients’ lives when they want to know more detail than they ever wanted to know before,” says Treena Nault, financial consultant at Investors Group Inc. in Winnipeg.
“You could continue to contribute to [your registered retirement savings plan and the Canada Pension Plan] if you haven’t maxed those out to increase your pension income,” she says. “And there are some who may take the CPP even though they’re still working. This is probably the most complex planning we do for a client.”
The tax implications related to pensions, retirement savings and continuing income, in particular, require hands-on professional advice. That’s because seniors who are still working or semi-retired can end up paying more in taxes than they need to, says Jamie Golombek, managing director, tax and estate planning, at CIBC Financial Planning & Advice in Toronto.
CIBC published the results of a poll this past January, which showed that 89 per cent of Canadians don’t fully know how retirement income is taxed. Only 44 per cent of survey participants knew about pension splitting, a provision for those with a spouse or partner that can provide tax savings of up to $3,000 annually.
So, seniors need help to consider all their sources of income, the tax implications and how to keep as much as possible, Mr. Golombek says.
“[Clients] might be receiving the Canada Pension Plan [and Old Age Security] benefits as well as a pension plan from an employer; and then, if they’re working past the age 71, there’s a forced minimum required withdrawal from [their registered retirement income funds],” says Mr. Golombek.
“All of that can push you into a higher income tax bracket than you were planning for,” he adds. “You certainly can get to higher [income tax] rates when you think about the clawback of various government benefits, whether it’s the guaranteed income supplement for lower-income Canadians or Old Age Security for higher-income retirees.”
Similarly, age-specific tax credits must be taken into account, says Mr. Golombek. For example, there is an age credit available for those who are older than 65 years of age, but it’s income tested; so, it declines if the recipient has too much income.
“You’re always going to be a little bit better off [if you continue working],” he says, “but it might be marginally better when you look at your effective tax rate in terms of what you’re losing in government benefits and what you’re paying in taxes on that incremental retirement income.”
As for semi-retired workers who are making the transition to freelance or contract work from a salaried position, they also face self-employment planning needs, including the need to save for that tax bill at the end of the year and for making regular contributions to a savings account or another instrument if there is leftover discretionary income.
“People are used to a steady stream of income and now their income fluctuates. Some months, it may be very good and other months it may be less,” says Chris Turchansky, president and executive vice-president, wealth, at ATB Financial in Edmonton. “The role of emergency savings or short-term savings to provide that consistent access to money is really important.”
Putting money aside for taxes and being aware that the tax bill is coming is also crucial, says Mr. Turchansky. “Too often, either it slips their mind or they haven’t planned for that. And at the end of the year, when they have a tax bill of $10,000 or whatever it is, they have to use credit to pay that.”
However, older workers who are under the age of 71 can still contribute to an RRSP – and that can be a great strategy to reduce the tax burden and maximize income-tested tax savings and credits.
In terms of investment strategies, conventional wisdom held that seniors should shift to more conservative investments as they age. However, that may no longer hold true – especially for those still working in these years.
“The reason to take less risk when you are retiring is you’re taking money out of the account,” says Ms. Nault. “[But] your runway’s still pretty long at 65. If you live until 90, you still have 25 years [of life remaining]. And if you want to keep up with inflation, you might want to keep up a moderate amount of risk.”
As a result, she adds, asset-management companies are providing more moderate risk investment funds aimed at the growing demographic who are at this stage of their life.