Tax Season

5 financial planning tips for empty-nesters: It's time to save

Canadians who are over 50 should consider the last decade or so before their retirement an ideal time to save as much as possible and to make up for any unused RRSP contribution room, financial experts say.

‘Make hay when the sun shines’ and put away as much as possible, portfolio manager says

Canadians who are under 50 but haven’t yet retired should spend their final working years saving as much as possible, financial experts say. They are often at the peak of their career in terms of salary, and children are often finished their post-secondary studies. (iStock)

Although the road to retirement can generally be thought of as a marathon, for the over-50 crowd the last decade or two can seem more like a sprint. But that's not necessarily a bad thing.

People in their 50s are often at the highest capacity of their lives in terms of savings ability, because most are at the peak of their careers – and salary – and have a home that is either paid off or close to it.

Children have also most likely moved out and completed their post-secondary studies (although this appears to be changing for some, as young people who can't find jobs head back home and/or return to school for more training). So hopefully household costs have dropped and education bills are no longer a drain on the couple's finances.

Whether the nest is truly empty or not, this is the time to really accumulate your retirement nest egg in the final stretch of your career, according to financial experts.

"You can really make hay when the sun shines and catch up on that unused [RRSP] contribution room," says Toronto-based John De Goey, vice-president and associate portfolio manager at Burgeonvest Bick Securities Ltd.

Like most Canadians, those within a decade or two of retirement have probably built up a significant amount of room in their registered retirement savings plans (RRSP) and can reap large up-front savings by making tax-deductible contributions. This is especially true for those in higher tax brackets.

The over-50 crowd should also catch up on any room in their tax-free savings accounts, says Tina Di Vito, head of the BMO Retirement Institute and author of 52 Ways to Wreck Your Retirement.

"It’s important to take that extra cash flow and save it," she says.

Map out final workplace years

This is also the time to take a serious look at retirement plans. 

For those who are less financially savvy, it usually means meeting with a trusted professional adviser to map out the remaining working years, looking at how much has been saved and how much needs to be socked away to cover retirement needs.

Ian Black, a fee-only financial planner and portfolio manager at Macdonald, Shymko & Company Ltd. in Vancouver, says most people come in when they are five to 10 years from retirement – a timeframe he says is sometimes too short to comfortably deal with any major changes or shortfalls.

"We often hear they should have often come in 15 years [before they want to retire] to at least get the framework in place," he says.

The longer you wait, the less time you have to fix any potential problems with a financial plan. It is also important to regularly re-examine the plan to account for changes in the markets or your own financial situation, including losing a job or a sudden illness.

Balancing the portfolio

Retirement projections should be tilted towards conservative returns and a generous allowance for inflation and lifespan, Black notes.

Often this planning involves moving a portion of one’s portfolio towards more conservative investments, including guaranteed investment certificates (GICs) or bonds, because a person is less able to weather any sudden market downturns if they are only a few years from retirement.

"Your portfolio should slowly become conservative as you slowly age over time," says De Goey, who is the author of The Professional Advisor II. 

But the degree to which a person moves away from higher risk equities is entirely dependent on their own financial situation and retirement plans.

The near-term rate of inflation for over-50, under-60 Canadians is an important concern because they want the general rate of price increase to remain low so they generate larger inflation-adjusted returns, for example.

Discuss retirement plans

If there is a wide disparity in a couple’s income, spousal RRSP contributions are one way to further reduce the amount of tax the couple pays, increasing the amount of savings.

Inter-spousal loans can also be used to work towards harmonizing retirement income – thereby reducing the amount of tax that will be paid.

Another option for empty-nesters is to raise money by downgrading to a smaller house, Di Vito says. Children have often moved out by this point in a couple's life, so they can get a home that is more suitable to their own life stage and free up some money for living expenses.

The housing market in Canada is largely going strong, Di Vito notes, so downsizing offers a good way to extract some equity from your home, which can be added to retirement savings.

Di Vito also recommends having an honest conversation with your partner as you approach your ideal retirement age about the expectations for your "golden years." It’s time to discuss future plans, including potential trips or hobbies that could affect your required income. 

It’s worthwhile to be frank both with your partner and with your financial adviser. If projections aren’t matching up with expectations, a new plan is needed.

Sometimes this involves saving more money, staying in the workforce longer or even getting ready to find a part-time job during retirement.

Whatever the case, it's easier to tweak a retirement plan when you have a decade or two to work with than if the changes are left to the point where you're just a few years from retirement age.