Although retirement often means the end of – or at least major changes to — one’s working life, it also brings some big financial changes as it becomes necessary for people to start living off their nest egg without turning it into a scrambled mess.

Hopefully, people approaching retirement have been able to save enough to live the lifestyle they envisioned for their "golden years." But not everyone manages to put aside enough, and others underestimate the cost of retirement living and effects of inflation.

Whether they have a good amount of savings or not, prospective retirees need to do some planning and careful management to get the most out of their retirement fund and make sure it doesn't run out prematurely.

Personal needs

Many people nearing retirement believe they have a clear picture of their financial goals and what they'll need in their golden years, but reality often doesn't entirely match the pre-conception.

A frank discussion with your financial adviser and your spouse is absolutely key when you are about to enter retirement, says Adrian Mastracci, a fee-only adviser with Vancouver-based KCM Wealth Management Inc.

"It’s not an easy, but one has to look at the entire picture and say, ‘What works for me? What am I trying to do? Where am I going?’" says Mastracci.

He adds that any hard-and-fast rule for the proper asset mix will ignore "personal needs." A plan has to be tailored to the individual investor's requirements and a couple's lifestyle.

Financial planning revisited

No plan covers all contingencies, and market conditions can shift tremendously and quickly, as we've seen in recent years.

As the years to retirement count down, it is important to regularly update your plans, Tina Di Vito, head of the BMO Retirement Institute and author of 52 Ways to Wreck Your Retirement, says. 

A typical 50-year-old Canadian worker in 2008 could expect to work for 16 more years. Fifteen years earlier, that same person would likely have had only 12½ years left before retirement.—Statistics Canada

Often it's simply a matter of adjusting your financial portfolio to balance its risk and return. But sometimes that means recognizing the unpleasant truth that you will need to delay your retirement to amass the required savings.

Indeed, Canadians on the whole have been staying in the workforce longer since the mid-1990s, according to Statistics Canada. A typical 50-year-old worker in 2008 could expect to work for 16 more years. Fifteen years earlier, that same person would likely have had only 12½ years left before retirement — a difference of 3½ years.

On the other hand, life expectancy in Canada has been on an upward trend.

Between 2006 and 2008, the average life span of a man and woman was 79 and 83, respectively.

"You could live another 30 years" after you retire, Brown points out, so plan to distribute your income accordingly.

Having an honest discussion about retirement also means adjusting expectations if the money just simply isn’t there to support it. It could mean delaying retirement or considering taking a part-time job to provide some extra income, Di Vito says.

Portfolio adjustments

A person’s portfolio will generally become more conservative over time, moving from riskier equities to safer vehicles like bonds as they near retirement age, for example.

But if there's no generous pension cheque coming in at regular intervals to replace a pay cheque, those savings still need to be set up in a way that allows them to continue producing a decent income over time.

"You can’t get too conservative, because then you’re taking on risk by not taking enough risk — meaning you’ll lose from taxes and inflation," says Ian Black, a fee-only financial planner and portfolio manager with Macdonald, Shymko & Company Ltd. in Vancouver.

Annuity ladder

The precise asset mix really depends on the individual, their amount of savings, pension income and what sort of lifestyle they want to live, he says. 

However, those entering retirement generally cannot afford to take huge losses in the stock market, because they have less time to make up for downturns. And if they need to sell equities to raise cash, they are entirely dependent on market conditions – low or high — at the time of sale.

As long as the market conditions are right, many people nearing or entering retirement opt to move their cash into a series of guaranteed investment certificates (GICs) or bonds in what is called an "annuity ladder."

In this strategy, a couple close to or at retirement age begins purchasing an annuity (an investment product that pays out a fixed amount of cash each year), until the combined payout from their fixed-income investments and their stock portfolio equals what they want in retirement income.

The plan should also be to work towards having similar retirement income through spousal RRSP contributions and inter-spousal loans. Canada Pension Plan income can also be split.

Beware the taxman's rules

The government also requires a person to withdraw a percentage of their RRSP money on an annual basis at the end of the year in which they reach the age 71, meaning a person’s income is again tied to market conditions if they are heavily invested in equities.

Once you hit that deadline, you have three choices: convert your RRSP into a registered retirement income fund (RRIF), buy an annuity, and/or withdraw it in cash or some combination thereof.

Now is also the time when you begin paying tax regularly on your RRSP investments as you are forced to pull money from them. This tax hit needs to be factored in to the amount of money a retired person or couple will draw from their savings each year.

Estate planning

And while it can be a touchy subject, those entering retirement should also make sure their estate is in order.

Although estate planning is critical at any stage of life, Black says maintaining and updating your will is essential as you enter your retirement years. He suggests reviewing it every two years or so.

Black also says you should consider naming as your executor someone who is considerably younger than you, possibly a son or daughter, as opposed to a sibling who is also either in, or about to reach, retirement.