Canadians are retiring into a cost of living crisis, but smart tax management can help
Solutions for rising costs
Jones says he has seen many Canadians delaying retirement as a result of higher living costs. He notes, though, that working later in life or switching to part-time work can actually help with the transition to retirement. In addition to supplementing any retirement income, some kind of continued work can provide the small social connections and daily purpose that working adds to the lives of so many people. He notes that the loss of these aspects of work can be very challenging for some retirees.
In addition to extending their working years or revising lifestyle expectations, retirees are using other solutions to manage daily costs. That includes taking on debt. The Fidelity Retirement Report found that 22 per cent of Canadians are retiring with a mortgage. In addition, Jones sees some Canadians increasing credit card use, or leveraging their homes into additional cash flow. While he doesn’t write off the use of debt, he emphasizes the need to understand that many of these solutions create additional servicing costs down the road. Short-term debt needs to be taken on with a view towards consolidating down the road.
There is also the possibility of using strong market gains to support current cost of living issues. The challenges there are around psychology and tax. Pulling from strong investments early can be difficult for investors to stomach, as they know they’re giving up potential future returns. At the same time, selling those investments can generate high tax bills, which need to be considered.
Decumulating in a cost of living crisis
Those tax issues can be particularly acute, Jones says, for DIY investors who are now entering retirement. While the process of accumulation isn’t exactly easy, many investors have followed the core principles of diversification and risk management on their own to arrive at their stated retirement goal. Jones notes that these DIY investors now have to face the much more complex process of decumulation, working out where they will draw their retirement income from and when. Those investors, he says, are particularly vulnerable to tax leakage if they accidentally pull too much income in a given year or end up triggering OAS clawbacks. It’s in that decumulation stage, he says, where advisors can really make a difference.
Advisors looking at the rising cost of living for their clients have a host of financial planning tools they can use to make the rate of inflation manageable for their clients. They can also take advantage of strong markets right now, coaching clients around the psychological issues that come with selling securities and ensuring that those capital gains are balanced by the tactical sale of investments at a loss. All of those decisions need to be weighed against the client’s current tax bracket to ensure they don’t end up paying more tax than necessary.
